Tunisia - Tourism Infrastructure Project

T04~~ RpF4 ET REi( R1- ROpf-sDFS RESTRICTED FILE COPy Yv1TVtN Report No. PT-5a This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE TOURISM INFRASTRUCTURE PROJECT TUNISIA May 30, 1972 Tourism Projects Department  Currency Equivalents Units of Weights and Measures: Metric Currency Unit = Dinar = 1000 millimes Metric: British/US Equivalents US$ 1 = D o.483 D 1 = US$ 2.07 1 m = 3.28 ft. D 1 million = US$ 2,070,000 1 m2 = 10.76 sq. ft. M 1 = D 0.150 1km 0.62 mi. D 1 = DM 6.67 1 km2 = 0.386 sq. mi. D 1 million = DM 6,670,000 1 m ton = 0.981 g ton (DM Conversion at Central Rates) 1.1 US sh ton 1 hectare = 2.5 acres Principal Abbreviations and Acronyms Used COFITOUR: Compagnie Financie're et Touristique OGTT : Commissariat Gnderal du Tourisme et du Thermalisme ONTT : Office National du Tourisme et du Thermalisme SNI : Socie'te Nationale d'Investissements SONEDE : Socie'te Nationale d'Exploitation et de Distribution des Eaux STEG : Societe Tunisienne de l'Electricite et du Gaz P.T.T. : Ministere des Postes, T5eldphones et Telegrammes H.A.R. : Direction de l'Hydraulique et des Amenagements Ruraux (Ministry of Agriculture) KfW : Kreditanstalt fuer Wiederaufbau BCEOM : Bureau Central d'Etudes pour l'Equipement d'Outre-Mer SCET : Societe6 Centrale pour 1'Equipement Touristique Fiscal Year January 1 - December 31  TUNISIA APPRAISAL OF THE TOURIK IXFRASTRUCTURE PROJECT TABLE OF CONTENTS Page No. SUMMARY i-iii 1. INTRODUCTION 1 2. BACKGROUND 1 A. The Economy 1 B. The Sector 2 3. THE PROJECT 6 A. Background 6 B. Description 8 Infrastructure Works 8 Physical Planning 10 C. Cost Estimates 11 Cost Estimates 11 Allocation of Funds 13 Financing 14 Procurement 14 Disbursements 15 D. Execution 15 E. Organization for Operation 17 4. HOTEL DEVELOPMENT 18 5. JUSTIFICATION 22 A. Market Justification 22 Prospects for the Development of the Market 22 Occupancy Rates 23 B. Economic Justification 23 Rates of Return 2 C. Balance of Payments and Employment Effects 2 6. FINANCIAL ASPECTS 25 7. RECCMMENDATIONS 27 This report is based on the findings of a project appraisal mission consisting of Messrs. Odone, Athanassoglou, Boyd, Delvaux, Kulski (Consultant), Menezes Prevost, Ringskog, Sear, Soges, and Thys. While in Tunisia, Mr. Saad El-Fishawy assisted the mission in legal matters. Desk evaluation of the telecommunication component of the project was made by Mr. Bassole.  -2- Table of Contents (Cont'd.) Page No. STATISTICAL APPENDIX Tables 1 - 18 30 CHARTS Chart No. Schedule of Construction, Expenditure and Disbursements 1 Organization Chart of the Project Unit 2 ANNEXES ONTT 1 Description of Project Zones 2 Highways 3 Water Supply Component 4 Sewerage and Water Pollution Abatement Component 5 Electric Power Ccmponent 6 Telecommunication Works 7 Economic Justification 8 MAPS Map No. Tunisia Tourism Project Zones 3747 Tunis North Project Zone - Land Use 3748R Tunis South Project Zone - Land Use 3749R Hammamet Project Zone - Land Use 375QR Sousse Project Zone - Land Use 375IR Djerba Project Zone - Land Use 3752R Zarzis Project Zone - Land Use 3753R Tunis North Project Zone - Sewerage and Water Pollution Abatement Works 3859 Tunis South Project Zone - Sewerage and Water Pollution Abatement Works 3860 Hammamet Project Zone - Sewerage and Water Pollution Abatement Works 3861 Sousse Project Zone - Sewerage and Water Pollution Abatement Works 3862 Djerba Project Zone - Sewerage and Water Pollution Abatement Works 3863 Zarzis Project Zone - Sewerage and Water Pollution Abatement Works 3864  TUNISIA APPRAISAL CF THE TOURIS INFRASTRUCTURE PROJECT SUMARY i. This report appraises a project to provide infrastructure for six tourism zones located on Tunisia's 1000 kn coastline (Map No. 37h7). The infrastructure package which includes roads, water, sewerage, electricity and telecommunications, is Tunisia's first tourism infrastructure project. submitted to the World Bank Group for financing. It complements the Group's financing of hotels and other accommodation facilities in Tunisia which has been carried out through two channels: the Compagnie Financiere et Touris- tique (COFITOUR), created in 1969 with the help of IFC financing of US$9.9 million, and the Societe Nationale d'Inmestissements (SNI) which over the last four years has relent US$14.5 million in Bank funds for hotel construction. it. International tourism has developed impressively in Tunisia in the last decade. Increasing at an annual growth rate of 30% -- a performance unmatched by any other Mediterranean country -- foreign visitor arrivals rose from 46,ooo to 64o.0oo between 1961 and 1971. During the same period, gross foreign exchange earnings from tourism increased from US$3 million to an estimated US$110 million, and are now the largest single item on the receipt side of Tunisia's balance of payments. iii. Systematically overshooting the targets set by various national development plans, Tunisia's accommodation capacity increased at an annual rate of 26% over the last decade -- from 4,000 beds in 1961 to about 43,000 in 1971. With the low wages and prices prevailing in the country, and yearly bed occupancy rates generally high, the Tunisian hotel industry is in a good position to compete with its Mediterranean rivals. iv. The public sector, actively if not always effectively, supported tourism's performance during the 60's. Goverment action ranged from provi- sion of incentives and hotel financing to promotion and assistance to investors in obtaining hotel sites. The Goverment has recently taken a series of steps to reinforce the sector and has advanced to 1980 the 1,500,000 foreign visitor arrivals target, originally set for 1985. This target, which implies an average annual growth rate of about 9%, seems reasonable -- in the light of past trends, outlook for the development of the potential market, and Tunisia's comparative advantages. v. The six project zones, selected by the Government as the most suit- able areas for hotel development, together account for a large proportion of the country's accommodation capacity and foreign visitor traffic. Although differing greatly as to natural setting and man-made tourism attractions, they have in common outstanding beaches and clear coastal waters, excellent for swimming, fishing and boating, and a fine climate, characterized by mild winters and pleasantly warm summers. For these reasons, they are likely to remain the principal destinations of foreign visitors to Tunisia.  - ii - vi. The development of infrastructure has fallen behind the fast growth of accommodation in the six project zones -- with the infrastructure backlog progressively worsening, from north to south. Traffic congestion is becoming frequent in the peak season, inadequate sewerage services are causing pollu- tion of beaches, and water ia increasingly in short supply in Djerba and Zarzis. vii. Due to lack of proper physical planning and building control, the development of accommodation has thus far proceeded haphazardly in the six tourism zones. "Ribbon" development has predominated, requiring excessive beach surfaces. Often no space has been allocated for green belts or parks between hotels. viii. The project is a package of infrastructure works comprising roads, water, sewerage, electricity and telecommunications to be implemented in the six zones, within a carefully designed physical framework. The proposed works would serve a two-fold purpose: the elimination of current infrastructural backlogs, and the provision of a sound basis for further development of accommo- dation in the six zones. The infrastructures considered in the project are of two kinds: major infrastructures serving zones or sub-zones, and minor infra- structural connections (branchements) for individual hotels. Major infrastruc- tures are scaled to reflect least-cost solutions to meet demand at least through 1981. Minor infrastructures are those required by both existing hotels and hotels to be built during the project implementation period (1973-1976). ix. Consultant*' studies estimate that together the zones will accommo- date at "saturation point" a maximum of 1741,000 hotel beds. The saturation limit for the six zones and each zone individually has been established according to internationally-accepted standards for beach-use and building density. Each zone will have its own pattern of hotel development, based on a proper balance of accommodation standards and the quality of tourism resources with anticipated market preferences. The locations of both superstructure and infrastructure are well chosen and the "nuclear" type of development proposed for prospective accommodations is at once more economical and more attractive than the "ribbon" development prevailing heretofore. x. The favorable outlook for the development of the market, combined with the prospect of greater external economies and more profitable operations implied by the infrastructure improvements resulting from the project, should be an effective stimulus for future hotel investment in the six project zones. In addition, the Goverruent has agreed to streamline and improve the existing hotel investment incentive system, to enforce stricter control on prices of land and to expand hotel training programs. xi. The project is estimated to cost US$5.o million equivalent, includ- ing contingencies. Contracts for construction and equipment would be awarded after international competititve bidding. Small civil works contracts, totalling no more than about US$7.0 million equivalent would be locally adver- tised. The foreign exchange component of the total cost of the project would  - iii - depend upon the outcome of international bidding. Assuming that Tunisian contractors win about 50% of the bids (in value terms) for major roads, sewerage and water works, which seems likely the foreign exchange component of the total project cost would be 56% or US$30.8 million. The proposed Bank loan and IDA credit would total US$24 million. Another US$12.4 million would be made available through German bilateral assistance. These funds combined are expected to cover all foreign exchange costs plus 23.1% of local costs. The balance of the required financing of US$18.6 million equiv- alent would be provided by the Tunisian Government. xii. In addition to improving the infrastructural services for existing hotels (and for the local population), the implementation of the project would provide the basis for the construction of 43,000 additional beds by 1981, as well as for the expansion of other tourism facilities such as shops and restaurants. The economic evaluation of the project has thus been made in terms of this larger program of investments. Net benefits would essen- tially be measured by additional expenditures of visitors to the six project zones, less the cost of operating the facilities. With an estimated economic life of the program of investments of 25 years, the internal economic return on the whole program would be 16%. Separate rates of return were calculated for each of the tourism zones. These rates range between 11% and 19%. Net foreign exchange earnings are estimated at US$14 million in 1975 and US$97 million in 1981 when the program is expected to be in full operation. xiii. The "Office National du Tourisme et du Thermalisme" (ONTT) would be the "mattre d'ouvrages" of the project and as such would have the overall responsibility for the implementation of the proposed works. It would admin- ister the project funds, provide for disbursements, and coordinate the activity of the various government agencies which would be in charge of the execution of the individual project components; the Ministry of Public Works for roads, the Ministry of Agriculture for sewerage, the Ministry of Post and Teleconmu- nication for teleconmunication, SONEDE for water and STEG for electricity. Upon completion of works, the individual infrastructure elements would be entrusted to the respective agencies for operation. xiv. The project is suitable for a Bank loan of US$14 million for a term of 25 years, including five years' grace, and an IDA credit of US$10 million. The borrower would be the Government of Tunisia.  I  TUNISIA APPRAISAL OF THE TOURISM INFRASTRUCTURE PROJECT 1. INTRODUCTION 1.01 In 1968, the Tunisian Government indicated interest in obtaining Bank financing for tourism infrastructure. A Bank indentification mission, early in 1969, recommended that the Government prepare studies for pre- selected littoral areas. In 1970, with Italian bilateral assistance, the Tunisian Government contracted Italconsult (an Italian consulting firm) to prepare master plans for seven coastal areas: Tunis North, Tunis South, Hammamet, Sousse, Djerba, Zarzis and Kerkennah. These plans were completed late in the spring of 1971. 1.02 Subsequent Bank missions discarded Kerkennah, where lack of basic infrastructures would have rendered tourism development too costly, and requested that in the remaining zones, feasibility studies be undertaken for individual infrastructure elements of the project: sewerage, water, roads, electricity and telecommunications. These studies were concluded in time for a Bank appraisal mission to visit Tunisia in November 1971. 1.03 Due to the complexity of the proposed works, which involve and affect the whole tourism sector, the project required about three years of preparation. For the same reason, an unusually large number of Bank staff participated in evaluating the project. The appraisal mission itself, consisting of Messrs. Odone, Athanassoglou, Boyd, Delvaux, Kulaki (Consult- ant), Menezes, Prevost, Ringskog, Soges and Thys, completed its field work in December 1971. Mr. Sear had earlier evaluated the electricity component of the project. A desk evaluation of the telecommunication component of the project was made by Mr. Bassole. While in Tunisia, Mr. Saad El-Fishavy assisted the appraisal mission in legal matters. 1.0 This would be the first financing of tourism infrastructure by the Bank/IDA in Tunisia. 2. BACKGROUND A. The Economy 2.01 An analysis of Tunisia's economy appeared in the report "tCurrent Economic Position and Prospects of Tunisia" (EKA-38a) dated August 18, 1971. 2.02 Although Tunisia possesses good development opportunities, the growth in real output over the last decade averaged only 3.4% per year. Recent growth was adversely affected by severe droughts in 1966 and 1967, disastrous floods in 1969, and excessive government involvement in important sectors of the economy. Mining and tourism grew rapidly, however, the former  -2- benefiting from recently discovered oil deposits, and the latter from its intrinsic potential and as the only sector truly open to private ini- tiative (Table 1). With a major change in government policy in 1970, leading to the opening of other sectors to free enterprise, the flow of private capital to tourism seems to have slowed down temporarily. 2.03 The growth of the economy has been accompanied by a widening def- icit on merchandise account. Earnings from tourism have increasingly filled this gap and are now the largest single source of foreign exchange. With good prospects for fast development, tourism should continue to strengthen the balance of payments and help to provide employment for the large labor surplus. Moreover, since hotel investments tend to follow the territorial distribution of tourism assets, most of which are found outside urban areas and in the poorer, southern provinces of the country, the sector could increasingly contribute towards alleviating regional disparities in income and employment. B. The Sector 2.04 Centrally situated between the Eastern and Western basins of the Mediterranean, Tunisia is the nearest point of the African continent to the hub of the European tourist market in the London-Frankfurt-Paris triangle. The country's 1,050 km of coastline has some of the finest beaches of the Mediterranean with a pleasant climate prevailing for the greater part of the year. Enhancing these natural tourist assets, evidence of Tunisia's cultural past abounds throughout the country: Phoenician ruins dating from the period when Carthage was a major maritime power, Ronan aqueducts, temples, and coliseums, Byzantine-inspired mosques, Turkish fortifications along the old Barbary coast and, in all Tunisian towns, ancient Arab "souks" where a variety of imaginative handicrafts are offered. Over the past decade, this wealth of tourism resources has attracted a rapidly increasing number of foreign visitors. 2.05 Between 1961 and 1971, foreign-visitor arrivals in Tunisia in- creased at an annual rate of 30%, rising from 46,0o0 to 640,000 (Table 2) -- a performance unmatched by any other Mediterranean country. Although con- tinuous throughout that period, the growth of foreign tourism demand was slowed down in 1969 and 1970 by a combination of political uncertainty, floods and cholera. The average growth rate of arrivals for those two years,was only 11.5%. The growth trend regained impetus in 1971, however, when foreign- visitor arrivals rose by 50% over the 1970 level. International tourism demand developed even more quickly in terms of bednights, with foreign visitors' length of stay increasing steadily over the same decade to the present average of about 10 days. Because of Tunisia's low per capital income, the development of domestic tourism demand was much slower. The number of domestic tourist bednights as a percentage of total hotel bednights has rapidly declined -- from 27% in 1963 to 7% in 1970.  -3- 2.06 The principal tourist-generating market for Tunisia is Western Europe, which in 1970 accounted for 80% of total foreign arrivals; Germarny, France and the U.K. are the three top suppliers within this market (Table 3). As Tunisia lies on the opposite side of the Mediterranean Sea from Europe, about 75% of its visitors arrived by air -- the majority at Tunis-Carthage Airport and the remainder at Djerba and Monastir Airports. 2.07 According to the results of a sample survey undertaken by the "Compagnie Financiere et Touristique" (CCFITOUR) from May to August 1971, beach-oriented and climate-seeking vacationers (as opposed to business traffic) form the majority of Tunisia's foreign visitors. COFITOUR's find- ings are confirmed by the high percentage of foreign visitors travelling to Tunisia on charter flights or with inclusive-tour groups, and by the concen- tration of tourism traffic in the aummer months, when more than 60% of total foreign-visitor bednights were registered (Table 4). 2.08 Although the cost of accommodation and services is lower in Tunisia than in other Mediterranean destinations, the relatively high cost of air travel (even via charter flights) from Western Europe makes a vacation in Tunisia more expensive than in areas which can be reached by car or train (para. 5.03). Foreign visitors to Tunisia have higher incomes than those going to, say, Spain, Yugoslavia or Italy's Adriatic Riviera. Indeed, COFITOUR's survey indicates that only 7% of foreigners visiting Tunisia in the 1971 May-August season were blue-collar workers, the remainder being professionals or white-collar workers. 2.09 Systematically overshooting the targets set by various national development plans, Tunisia's accommodation capacity expanded at an annual rate of 26% over the last decade -- from 4,000 hotel beds in 1961 to about 462000 in 1971 (Table 5). The capacity created during that period, and almost entirely (95%) attributable to private investments, is in the main composed of first-class and tourist-category hotels along the coast (Table 6). Some tourist villages were built between 1961 and 1971, but their proportion to total accommodation capacity remains at the low level of about 17%. Supple- mentaray accommodations (rooms in private homes, camping sites, etc.), which make up a substantial share of other Mediterranean countries' tourism supply, are generally lacking in Tunisia. 2.10 On the whole, the prospects for the Tunisian hotel industry are favorable. With the low wage and price levels prevailing in the country, the industry is in a good position to compete with its Mediterranean rivals. Full board rates range from US$7 in tourist-category to US$20 in deluxe hotels, and in the summer months occupancy levels are generally above 80% (Tables 7 and 8) -- thus supporting the hypothesis of a considerable volume of unsatisfied demand. The Tunisian hotel industry is also benefiting from the economies of scale brought about by the continuous enlargement of the average hotel, i.e. from 56 to 187 beds in the period considered (Table 5).  4~~~~~~ At present, one-and two-year old hotels, facing the usual difficulties of the run-in period, account for a high 32% of Tunisia's total accommodation capacity. As this proportion declines in future, both the occupancy and profitability of the Tunisian hotel industry should further improve. 2.11 The rapid expansion of Tunisia's accommodation capacity has result- ed in a shortage of trained personnel and in declining standards of service, particularly during the peak summer months. The present gap between supply and demand is bound to widen -- unless hotel training programs now under way are substantially expanded. 2.12 The tourism sector has contributed more and more significantly to Tunisia's economy. Between 1961 and 1971, earnings from tourism climbed from US$3 million to an estimated US$110 million. The steady increase in the average daily expenditure by foreign visitors -- which rose from US$9 in 1961 to US$17 in 1971 -- explains why foreign exchange earnings from tourism grew even faster than foreign-visitor bednights. Accounting for 22% of total receipts from the export of goods and services, foreign exchange earnings from tourism are now the single most important source of foreign exchange for Tunisia (Table 9). With regard to labor, a recent survey shows that in 1971 about 13,000 people were employed by the hotel industry -- about 1% of the total in employment. These figures give only a partial picture of the impact of tourism development on employment, however, since hotels represent only a part of the tourist sector. Moreover, it does not take into account the indirect employment effects in other sectors ascribable to tourism demand. 2.13 The public sector actively, if not always effectively, supported tourism's development during the 60's. Over this period, the original struc- ture of the governmental organization responsible for tourism changed from semi-governmental agency level (the 'Commissariat General du Tourisme et du Thermalisme", or CGTT) to ministerial status, and thence (in 1970) to that of an autonomus body (the "Office National du Tourisme et du Thermalisme", or ONTT) under the supervision of the Ministry for the Economy. The adminis- trative structure of ONTT is more fully described in Annex 1. 2.14 To promote Tunisia's image on the international tourism market, ONTT and its predecessors have supported the joint efforts of the country's hotel industry and travel agencies by opening tourist bureaus in several European capitals. In 1970, ONTT's advertising and promotional expenditures amounted to US$700,000, or 20% of its total operating budget; by the end of 1971 this expen- diture had increased to nearly US$1 million. 2.15 Over the years, the government has instituted a number of incentives for tourism investments. These incentives include: (i) outright payments (through ONTT) for minor infrastruc- tures, linking up hotel sites with the main infrastruc- ture systems;  - 5 (ii) duty exemption for imported materials required for hotel construction; (iii) interest rebates on hotel loans of up to 3% on commercial interest rates (which are at present around 9%); and (iv) a five-year exemption from the tax on profits. The Tunisian hotel investment incentive system shows a number of weaknesses stemming from the haphazard manner in which the benefits have been established -- one at a time, without an overall and rational design. In the first place, it is doubtful whether the various incentives, taken together, are commensurate with actual need or whether the objective of sustained flows of private hotel investments could not be achieved with a different "mix" of incentives, entail- ing less risk of resource misallocation and/or a lesser cost to the Government. In the second place, investment incentives are granted too indiscriminately -- to all hotels irrespective of their location and/or type. Thirdly, the multi- plicity of laws and regulations regarding hotel investment incentives is such as to render the benefits unclear to potential investors and difficult to administer for Tunisian authorities. 2.16 The Tunisian Government also assists tourism investors in obtaining hotel sites. All land transfers within the country are subject by law to the approval of regional Governors; a land owner's refusal to sell at a price and for a purpose recommended by one of these regional authorities entails the prospect of the risk of his being prevented from selling his land for any other purpose. The public sector has thus been able to ensure the availability of coastal land for hotel development at reasonable prices (about US$1 per mi2). It is questionable, however, whether this indirect, and somewhat empirical method of land control would work in future as increasing demand heightens the competition for coastal sites. 2.17 The "Soci4te" Nationale d'Investissements" (SNI) and the "Compagnie Financi6re et Touristique" (COFITOUR) have taken the lead in hotel credit, and together have thus far provided total financing of about US$30 million to some 40 hotel projects. Both institutions derive their funds from the public and private sectors in Tunisia, as well as from international sources such as the World Bank Group, with whom they are associated. Funds available for hotel lending have thus far been adequate. The repayment period of Tunisian hotel loans (10 to 12 years), however, is too short; it is markedly below the average life of hotels and inconsistent with the loan terms (15 to 25 years) offered by hotel credit institutions in such other Mediterranean countries as Italy, Greece and Morocco. 2.18 The Government has recently reasserted its interest in tourism development. The transformation of the Ministry of Tourism into the ONTT has proven timely. Combining greater flexibility in decision-naking, financing and personnel recruitment with good leadership at both top and intermediate  -6- levels, the new organization is far better equipped to perform the multiple tasks imposed by the continuous expansion of the sector. On November 2, 1971, the Council of Ministers approved a series of measures providing, inter alia, for the doubling of Tunis-Carthage Airport's terminal building capacity, for the exemption from customs duties of cars and buses to be used as tourist conveyances, and for reduced gasoline prices for "motorized" forei,gn visitors. On April 19, 1972, the Council of Ministers approved a draft-lawL/ establish- ing (i) the concept of priority tourism development zones (the practical definition of the tourism zones' boundaries is left to subsequent implement- ing decrees); (ii) the principle that hotel development in these zones would take place according to master plans and (iii) a public real estate corpora- tion (Agence Foncikre Publique) with the primary task of facilitating land transfers from present owners to hotel investors. 2.19 Spurred by the 1971 tourism boom, Tunisian authorities have advanced to 1980 the 1,500,000 foreign-visitor arrivals target originally set for 1985. According to these revised projections, foreign-visitor arrivals should increase at an annual rate of about 9%. The prospects for the further expansion of the tourism supplier market are favorable, and Tunisia's tourism potential is still far from being fully realized. The implementation of the project would sub- stantially improve conditions for investors and visitors alike. Assuming vigorous govermental policies, tourism sector growth should attain or even exceed official projections. 3. THE PROJECT A. Background 3.01 The six project zones, selected by the Government as priority tour- ism development zones in terms of the draft-law referred to in para. 2.18, represent the bulk of the Tunisian tourism sector. With approximately 170 kn of coastline, they take up about 58% of the country's accommodation capacity and foreign-visitor traffic. Although differing greatly as to natural setting and man-made tourism attractions, the six project zones have in common fine beaches and clear coastal waters, excellent for swimming, fishing and boating, as well as a good climate, characterized by mild winters and pleasantly warm summers. Given Tunisia's latitude, temperatures in the six project zones as a whole compare favorably with those prevailing in major northern Mediterranean resorts (Table 10), allowing for a longer tourism season. A comparative profile of the six tourism zones, which are more fully described in Annex 2, is shown below: 1/ Draft-law on land-use, building activities and land transfers in the tour- ism zones ("Projet de Loi relative 'a l'amenagement des zones touristiques et aux transactions immobilieres ' l'int6rieur de ces zones").  -7- Table I Comparative Profile of the Six Project Zones tl) (2) (3) (4) (5) (6) Average Accommodation Existing (4) as Occupancy Capacity at Accommodation a % Index of Area Coastline Saturation i Capacities of Hotels 1971 (ha) L. (beds) (beds) ( 3) (K. Tunis N. 2,575 18.5 10,000 1,462 14.6) _ 33 Tunis S. 4,750 26.0 20,000 1,538 7.7) Hammamet 8,000 31.0 50,000 12,363 24.7 48 Sousse 4,475 30.0 40',00 4,841 12.1 61 Djerba 9,600 42.0 30,000 4,538 15.1) - 58 Zarzis 7,100 22.5 24,000 1.504 6.3) Total 36,500 170.0 174,000 26,246 51.0 a/ See para. 3.11 3.02 The development of infrastructure in the six project zones has generally lagged behind the development of accommodation capacity. The infra- structural backlog is particularly evident with respect to roads, sewage and water facilities and is progressively worsening from North to South. Expanded motor traffic is making increasingly heavy demands on the road network of the six project zones; furthermore, many towns are gradually losing their original charm because heavy traffic is routed through their center, resulting in noise and air pollution. As a rule, hotels have been obliged to provide for their own sewage disposal needs through individual septic tanks, while for hotels located in the vicinity of urban centers, additional nuisance was caused by the discharge of untreated sewage effluent from municipal sewers along nearby shores. Scarcity of water is a problem particularly in the Djerba and Zarsis zones; unless water capacity is expanded, these zones will cease to grow despite their outstanding tourist resources.  -8- 3.03 Due to the lack of proper physical planning and building controls, the development of accomrnodation in the project zones has thus far progressed haphazardly. In most coastal areas, hotels were built in a single row close to the water -- a type of development requiring beach and building surfaces which are out of proportion to the number of tourists actually accommodated. Often no space was allocated for green belts and parks between hotels, as modern ecological and resort development standards would have required. Furthermore, the distances involved in this ribbon-type development have induced hotel owners to create individual shopping and recreational facili- ties for their guests, whereas "shared facilities" would have been a more economic way to meet these requirements. B. Description 3.4 The project is a package of infrastructures comprising roads, water, sewerage, electricity and telecommunications to be implemented in the six zones, within a carefully designed physical framework. The project also includes studies for expanding current hotel training plans and a program for promoting hotel investors' interest in the project zones. Infrastructure Works 3.o5 The proposed works would serve a two-fold purpose: the elimination of current infrastructure backlogs leading to the improvement of existing hotel services in the six zones, and the provision of a basis for further hotel development in these areas. The infrastructures considered in the project are of two kinds, major infrastructures serving zones or sub-zones, and minor infra- structure connections (branchements) for individual hotels. Major infrastruc- tures are scaled to reflect least-cost solutions; they will have sufficient capacity to meet demand at least through 1981 in all project zones except for water demand in Djerba-Zarzis, which will be met by works under the present project only up to 1979. Minor infrastructures are those required by both existing hotels and hotels to be built during the project implementation period (1973-1976). Minor infrastructures needed by hotels built in the period 1976- 1981, as well as desalination plants possibly required in Djerba and Zarzis after 1979, could be the object of a second infrastructure project in Tunisia. 3.06 The road component consists of improvement to, or the construction of, about 113 km of main roads, including two major bridges, and about 83 km of minor access roads. The main highways are those linking project zones with either the national road network or with airports, or which ensure improved communication between various activity centers within each zone. The minor access roads are those connecting specific hotels and tourist facili- - ties with the road network. The roads in the project run through generally flat or gently rolling terrain and pose no major engineering problems. For this reason, appraisal of the road component of the project was based on  -9- preliminary engineering, rather than on final engineering as normal Bank practice requires. Alignments have been carefully selected to blend harmoniously with the landscape and, whenever possible, to provide pan- oramic views. They have been planned in such a way as to bypass towns such as Hergla, Taguerness, Aghir and Houmt Souk -- freeing the center of these towns from heavy traffic, noise and air pollution. The road component of the project is described more fully in Annex 3. 3.07 Tunisia's national water authority, the "Societe Nationale d'Exploi- tation et de Distribution des Eaux" (SOITDE) is at present increasing the capacity of the major sources of supply for the regions in Which the project zones are situated: this national water program is being implemented with Bank and IDA financial assistance (Loan 581-TUN and Credit 209-TUN). The resultant additional capacity will smffice to meet the water demands of the Tunis North, Tunis South, Hanmamet and Sousse project zones, until 1981. In Djerba and Zarzis, however, the expanded water capacity is rapidly being absorbed by existing demand. Works for the completion of the second pipeline supplying these two zones -- originally scheduled under the last phase of the national water program -- have thus been included in the tourism project. The project will also provide, for all six zones, trunk distribution mains and other distribution branches, as well as the construction of reservoirs, and lines to connect hotels with the distribution systems. The water component of the project -- which also includes a feasibility study for the installation of desalination plants in Djerba and Zarsis after 1979 -- is described more fully in Annex 4. 3.08 The implementation of the sewerage component of the project will provide for collection and treatment of all sewage flows from the hotel zones themselves and from municipal sewerage networks (Maps Nos. 3859-3864) -- thus freeing all bathing beaches in each project zone from sewage pollution. Methods for treatment and disposal of sewage have been already selected in most instances. A final choice, however, remains to be made for the treatment of sewage effluent from the Sousse area, namely whether this sewage would be treated in a stabilization pond or disposed of through a sea outfall. It is recommended as a condition of the loan and credit that the final choice between these alternate methods be subject to Bank approval. The sewerage component of the project would include consultants' services as well as train- ing programs for the staff who are to operate the facilities. The sewage component of the project -- which also includes a feasibility study for treat- ment and disposal of greater Tunis sewage -- is described more fully in Annex 5. 3.09 In Tunisia, electric power for public use is provided by the "Societe Tunisienne de l'Electricitd et du Gaz" (STEG), an autonomous government-owned entity created in 1962. The Bank made a power loan of US$12.0 million to STEG last April, to finance works which would extend high voltage transmission lines to all regions of the country, including some of the six tourism zones. The power component of the tourism project would thus be limited to extensions  - 10 - from the high voltage transmission lines to the medium and low-voltage system and the installation of transformer stations at individual hotels within each project zone. The electric power component of the project is described more fully in Annex 6. 3.10 Telecommunications in Tunisia come under the jurisdiction of the Ministry of Post and Teleccmmunication (P.T.T.). The telecommunications component of the project consists of the installation of telephone and telex equipment in individual hotels and expansion of local public exchanges to take care of the additional loads. The improved local telecommunications services will be connected to Tunisia's national network of open-wire carrier circuits, cables and radio relay links with switching facilities which, by the end of 1972, should be 95% automatic. The telecommunications component of the project is described more fully in Annex 7. Physical Planning 3.11 The preparation of the project and of its related feasibility studies on roads, sewerage and water has been based on Italconsult's master plans (para. 1.01). On the whole, the proposals put forth in these plans (Maps Nos. 3748-3753) reflect awareness of the problems inherent in the project zones, and sensitivity to the Tunisian landscape. The analysis of the physical aspects and tourism assets of the six project zones is accurate. The saturation limits for the six zones and each zone individually have been established according to internationally-accepted standards for beach-use (ranging from 12 to 24 m2 per bather) and building density. The six zones combined will accommodate at "saturation point" a maximum of 1741,000 hotel beds, of various types and categories. Each zone will have its own pattern of hotel develop- ment, providing less of one category and type of hotel accommodation and more of another. The particular "mix" for each zone and each year has been based on the desire to achieve an appropriate balance of accommodation standards and quality of tourism resources with anticipated market preferences. The locations of both infrastructures and superstructures are well chosen and the "nuclear" type of development proposed for prospective accommodations is at once more economical and more attractive than the "ribbon-like" development prevailing thus far along the Tunisian coast. 3.12 Despite its merits, the physical planning framework provided by Italconsult's studies is rather general. The scale used (1:25,000) precludes detailed reconnaissance, the zoning and land-use plans do not take into account property boundaries, and recommended building codes are in a schematic form. Detailed master plans (scale 1:2000/5000) are needed to provide a more effective instrument for the orderly development of tourism in the project zones. These plans, which are to be closely coordinated with the final engineering for roads and sewerage (para. 3.27), should (i) provide a more precise definition of the areas to be devoted to hotel development, urban expansion, infrastructures and public use (squares, parks, gardens, etc.); (ii) propose building codes and zoning ordinances which will include density  - 11 - indices, bulk, height, architectural style, and minimal distances between building structures in each zone and sub-zone; and (iii) recommend ways to preserve and upgrade the environment, and control pollution and beach erosion. In consultation with the Bank, the Government has prepared the Terms of Reference and selected two consulting firms (Italconsult and SCET) for undertaking the detailed master plans. The related contract would be signed before loan and credit effectiveness. Actual enforcement of the detailed master plans would begin not later than three years from the date of signature of the loan and credit. To make enforcement possible the six zones would be defined by a decree as priority tourism development zones (para. 2.18) and the issuing of this decree would be a condition of loan and credit effectiveness. C. Cost Estimates Cost Estimates 3.13 The estimated total cost and foreign exchange component of the project by project zone and major categories of expenditure are given in Table 11 and are summarized in Table II. 3.14 Construction costs have increased by approximately 5% per year since 1962. As it is prudent to assume that the increase will continue at the same rate, appropriate provision has been made for such increases in the costs of infrastructure works during the construction period. At present only feasibility studies exist for the various components of the project and related cost estimates are subject to change when more detailed studies are completed. Accordingly, physical contingencies provided are unusually high. This provision ranges between 9% and 20%, reflecting the varying states of preparation for each type of infrastructure. The details of allowances pro- vided for price increases and physical contingencies are shown in Table 12. The total provision for contingencies would amount to 29.6% of base line costs, or 22.9% of total project cost. 3.15 Most building materials needed for project implementation are produced locally, while most of the equipment will have to be imported. The foreign exchange component of the total project cost would depend upon the outcome of international bidding. Assuming, as is likely, that Tunisian contractors would win about 50% of the bids (in value terms) for major road, sewerage and water works, the foreign exchange component of the total project cost would be 56% or US$30.8 million.  - 12 - Table II Summary of Estimated Costs % of Tunisian Dinars US Dollars Base (millions) (millions) Line Local Foreign Total Local Forei n Total Costs 1. Tunis-North Zone Land Acquisition .02 - .02 .05 - .05 0.1 Constr. & Equip. .48 .54 1.02 .99 1.13 2.12 5.0 Prof. Services .04 .07 .11 .08 .15 .23 0.5 2. Tunis-South Zone Land Acquisition .02 - .02 .05 - .05 0.1 Constr. & Equip .48 .56 1.04 1.00 1.15 2.15 5.1 Prof. Services .04 .08 .12 .08 .16 .24 0.6 3. Hammamet Zone Land Acquisition .02 - .02 .05 - .05 0.1 Constr. & Equip. 1.76 2.06 3.82 3.65 4.26 7.91 18.6 Prof. Services .11 .23 .34 .22 .47 .69 1.6 4. Sousse Zone Land Acquisition .02 - .02 .05 - .05 0.1 Constr. & Equip. 2.10 2.45 4.55 4.34 5.07 9.41 22.2 Prof. Services .17 .36 .53 .35 .74 1.09 2.6 5. D.jerba Zone Land Acquisition .29 - .29 .60 - .60 1.4 Constr. & Equip. 1.94 2.26 4.20 -4.01 4.68 8.69 20.5 Prof. Services .11 .24 .35 .23 .49 .72 1.7 6. Zarzis Zone Land Aoquisition .10 - .10 .20 - .20 0.5 Constr. & Equip. .87 1.01 1.88 1.80 2.10 3.90 9.2 Prof. Services .06 .12 .18 .12 .25 .37 0.9 7. Project Admin. .27 .67 .94 .55 1.140 1.95 14.6 8. Planning Services .10 .72 .82 .20 1.50 1.70 4.0 9. Promotional Expenses .13 .13 - .26 .26 0.6 Base Line Costs 9.00 11.50 20.50 18.62 23.81 42.43 100.0 10. Contingencies Physical Increase 1.31 1.59 2.90 2.72 3.28 6.00 14.1 Price Increase 1.39 1.78 3.17 2.88 3.69 6.57 15.5 TOTAL PROJECT COST: 11.70 14.87 26.57 214.22 30.78 55.00  - 13 - Allocation of Funds 3.16 The funds provided by the project will be allocated to each zone and each infrastructure component as shown below: Table III Estimated Cost by Zone and ComponentW (US$ million) Tunis N. Tanis S. Ham. Sousse D.Jerba Zarzis Total Sewerage .98 1.05 5.69 6.49 1.52 .90 16.63 30.2 Water .23 .34 .29 2.41 3.69 1.22 8.18 14.9 Roads 1.16 1.36 1.79 2.30 4.67 3.04 14.32 26.0 Electricity .50 .31 2.42 1.90 1.65 .50 7.28 13.2 Telecommuni- cations .26 .15 1.14 .78 .82 .07 3.22 5.9 Land Acquisition .05 .05 .05 .05 .60 .20 1.00 1.8 Proj. Unit & Planning .23 .23 1.24 .84 .90 .67 4.11 7.5 Promotion .02 .02 .07 .06 .06 .03 .26 0.5 Total 4 3.51 12.69 14.83 13.91 6.63 55.00 loo.o % 6.2 6.4 23.1 27.0 25.3 12.0 100.0 a/ Derived from Table 11. This distribution essentially reflects (i) the extent of the backlog in each zone and for each type of infrastructure and (ii) the projected growth of accommodation capacity (Table V) in the individual zones. 3.17 The distribution of project funds will favor the less developed Djerba and Sousse project zones which have poor infrastructures, but a large develop- ment potential; these zones combined would take up more than half of the project funds. The Tunis North and Tunis South project zones, where a scarcity of land limits development prospects, have a better infrastructure system; they would thus absorb only about 13% of the project investments. 3.18 Not surprisingly, a substantial share of the project funds will go for sewage works, the most neglected infrastructure in the past and the most essential to environmental preservation. Road works, which will be spread  -114- rather evenly amongst project zones and which will be increasingly needed as motorized tourism develops, will account for the second largest share of the project funds. As for water works, they will be concentrated in the southern project zones -- where the scarcity of water capacity is a primary obstacle to tourism development. Financing 3.19 The project would be financed with Bank, IDA, German (KfW) and Tunisian funds, in the following amounts and proportions: Table IV Financing by Source Total Foreign Exch. Costs Local Costs US$ EAuivalent % US$ EAuivalent % US$ Eauivalent % Bank 14.0 ) )) 24.0 43.6 20.3 65.9 3.7 15.3 IDA 10.0 ) Germarn 12.14-/ 22.6 10.5 34.1 1.9 7.8 Tunisia 18.6 33.8 - - 18.6 76.9 Total 55.0 100.0 30.8 100.0 24.2 100.0 a/ German funds would be primarily concentrated in the Djerba-Zarzis zones. The Government will have to make budgetary provisions to meet ONTT's estimated annual financial requirements as shown in Table 14. These requirements would include (i) the Tunisian share of project cost, totalling an estimated US$18.6 million equivalent, and (ii) the estimated amounts which ONTT would have to advance in the course of construction and which would be subsequently (i.e. within 2-3 months) reimbursed by IBRD/IDA and KfW. During negotiations, assurances were obtained that the Government would provide ONTT with these budgetary appropriatiors Assurances were also obtained that the Government would cover possible cost overruns. Procurement 3.20 The proposed project is within the capacity of the Tunisian construc- tion industry to implement, but it is expected that foreign contractors would submit bids for the larger contracts. Major road, sewerage and water works would be awarded under international competitive bidding and items would be  - 15 - grouped to the extent practicable to encourage such competitive bidding. The minor water, road and sewerage elements of the project would involve numerous civil works contracts which would be too small to attract foreign bids; consequently, it is proposed that only national advertising be used for these bids. In some cases, the minor works may be carried out on the basis of force accounts. 3.21 All equipment purchase contracts would be awarded on the basis of international competitive bidding. In evaluating bids, local equipment manufacturers would be allowed the preferential margin of 15% of the c.i.f. cost of competing imports, or the level of customs duties generally applicable, whichever is lower. Tunisia is associated with the European Common Market, and imports from EEC countries enjoy preferential treatment. In the past, there has been no consistent policy in Tunisia on evaluating bids for Govern- ment imports. Some Government agencies evaluate on a c.i.f. basis, others on the basis of the offering price, including customs duties. ONTT which has only recently been established and has thus limited experience in this field, has not yet determined on which basis it would evaluate bids for the project. Irrespective of the basis for evaluation, ONTT has indicated that import duties have to be paid and the cost estimates include import duties. Disbursements 3.22 Bank, IDA, KfW, and Government funds would be made available to ONTT, which will be responsible for all payments related to project implemen- tation. The Bank/IDA would thus deal with a single administrative agency. Disbursements will be made on the basis of (a) 70% of total expenditures on civil works; (b) 75% of total expenditures on equipment or 100% of all identifiable c.i.f. costs; (C) 45% of the costs of professional services, project administration, training and promotional program. These percentages womld be adjusted as necessary so that withdrawals would be disbursed over the project implementation period. Any loan and credit funds not required for purposes consistent with the project would be cancelled. The estimated disbursement schedule of the loan is based on the projected construction and expenditure schedules shown in Table 13 and Chart 1. D. Execution 3.23 ONTT would be the "mattre d'ouvrages" of the project and as such would have the overall responsibility for the implementation of the proposed works. It would administer the project funds, provide for disbursements, and coordinate the activity of the various government agencies in charge of executing the individual project components (para. 3.24). ONTT would further- more supervise the preparation of the detailed master plans (para. 3.12) and of the studies for expanding current hotel training programs (para. 4.07).  - 16 - Finally, it would cloaely cooperate with the public real estate corporation that is to be created (paras. 2.18, 4.03) and see to the implementation of the touriam investment promotion program (para. 3.04). The various tasks required of ONTT would be performed by a newly established project unit (Direction des Travaux). A full-time director of this project unit has been appointed, who is acceptable to the Bank. The "Direction des Travaux" will be staffed with engineers, urban planners, architects, economists, lawyers and accountants as shown in Chart 2. Some of this staff will be provided through a consultant technical assistance contract. The signature of this technical assistance contract between the Government and the consultants selected would be a condition for loan effectiveness -- with both the contract and the consultants approved by the Bank. Also as a condition for effectiveness the special project unit would be operative and its key professional staff appointed. 3.24 Various government agencios would have technical responsibility for the execution of individual project components: the Ministry of Public Works for roads, the Ministry of Agriculture for sewerage, the Ministry of Post and Telecommunications for telecommunications, SONEDE for water and STEG for electricity. Whereas the present organization of SONEDE, STEG and the Ministry of Post and Telecommunications is already adequate to control the execution of the project, new organizational arrang.enta should be made in the Ministry of Public Works and the Ministry of Arlic iriie. 3.25 For the supervision of the road works, the Governrent will establish a special operations unit ("8ervioe des Cperations Speciales") within the DPC, similar to the "cellule de contrSle" which is currently supervising the works under the Bank'sfirst highway project. Technical assistance to this special unit will be provided by consultants acceptable to the Bank. During negotia- tions, the Government agreed that, if the special operations unit could not be established in good time, a consulting firm acceptable to the Bank would be employed for construction supervision. 3.26 The Htrdraulic Department (H.A.R.) of the Ministry of Agriculture is presently responsible for planning and constructing all sewerage facilities financed by the Government. Due to the cumbersome administrative procedures of the Ministry of Agriculture, H.A.R. has been slow to respond to the sewerage needs of Tunisia. To ensure the implementation on schedule of the sewerage component of the project, the Minister of Agriculture has recently established an autonomous project unit within H.A.R., and has appointed the Chief Officer of this unit. Technical assistance to the special unit would be provided by a general contract with consultants (BCEOM). Terms of Refer- ence for this contract were reviewed and finalized by the Government and the Bank during loan and credit negotiations. Signature of the contract would be a condition of loan and credit effectiveness. Before effectiveness, the special unit would be operative and have its key professionals in place. 3.27 The detailed engineering for major road works and for the works included in the sewerage component of the project will be prepared by consult- ants. Signature of the consultantst contracts would be a condition for loan and credit effectiveness -- both the consultants and the contracts having been approved by the Bank.  - 17 - 3.28 Strict coordination is needed for the implementation of the proj- ect, which involves numerous governmental agencies. Two specific instruments have been planned to this effect: interagency agreements and a Technical Coordinating Committee. Five interagency agreements (protocol), regulating in detail the relations between ONTT and each of the executing agencies on matters of project preparation, construction supervision, procurement and disbursement, have been agreed upon between the parties concerned and received approval by the Council of Ministers. The Technical Coordinating Committee would be composed of high-ranking representatives of the various executing agencies who will meet periodically, under ONTT direction, to consider major problems of coordination. In the event of disagreement within this committee, these will be settled by the Council of Ministers. The decrees establishing this committee and appointing committee members, which is already in final form, would be issued prior to loan and credit effectiveness. Furthermore, a comprehensive schedule would be prepared to ensure that preparation of both detailed master plans (para. 3.12) and final engineering on road8 and sewerage (para. 3.27) proceed in a coordinated fashion. This schedule would be prepared by ONTT in consultation with the executing agencies and be approved by both the Technical Coordinating Committee and the Bank prior to loan and credit effectiveness. E. Organization for Operation 3.29 Upon completion of all proposed works, the project unit within ONTT would be dissolved and all the roads, water, electrical power and telecommuni- cation infrastructures would be entrusted to the appropriate governmental agencies -- the Minister of Public Works, SOXEDE, STEG, and P.T.T., respectively. Past Bank experience with these agencies indicates that they are capable of maintaining and operating such infrastructure. 3.30 With regard to the sewerage component of the project, the special unit within H.A.R. would also be dissolved and the coMpleted facilities entrusted to SONEDE. Accordingly, the law establishing SONEDE has been modified to broaden SONEDE's scope of activity in such a way that this agency can operate, maintain and renew the project's sewerage facilities in each of the tourism zones and also have the right to operate and maintain similar facilities throughout the country. The modified law also provides that a "convention generale" promul- gated by decree would establish the framework and general guidelines for proce- dures, charges and relationsips between SONEDE and the parties concerned (government, municipalities, or private entities), leaving only the specifics to be fixed in individual agreements with each party. The decree establishing the "convention generale" should be issued prior to loan and credit effective- ness, after the draft of the "convention generale" has been approved by the Bank.  - 18 - 4. HOTL DEVELOPNT .01 Joint projections by Italconsult, ONTT and Bank pre-appraisal missions envisage the opening of about 56 000 additional bedsl-' in the six project sones during the 1972-1981 periocv/. Whereas projections of capacity up to the end of 1972 reflect beds currently under construction, those for the following nine years (1973-1981) are generally based on a linear extra- polation of the 1967-1972 trends. In the Tunis North and Sousse zones, however, projections have also taken into account specific hotel investments now in the planning stage (Annex 2). The past, current and prospective development of accommodation capacity in the Bix tourism zones may be summari- zed as follows: Table V Past and Projected Development of Accomnodation Capacity in the Six ProJect Zones (beds) Average Annual Projections 1967 1972 Increase. 1967-72 1981 Tunis North 898 1,782 176 5,700 Tunis South 658 2,182 304 5,200 Hammamet 3,138 14,379 2,248 35,000 Sousse 1,461 5,419 791 22,500 Djerba 2,153 7,134 996 14,700 Zarzis 08 2.315 381 5.9oo Total 8,716 33,211 4,896 89,000 The 1972-1981 projections for the distribution of accommodation capacity by category reflect a gradual adjustment towards the saturation-point distri- bution patterns recommended by Italconsult for each zone (para. 3.11). 4.02 Entrepreneurial interest in tourism, which may have slackened temporarily as a result of the opening of other sectors of the economy to private capital, should rapidly revive. The favorable market outlook, and the prospect of improved external economies and operational profits result- ing from the project's works, should effectively stimulate hotel investment 1/ 4.3,000 beds out of this total would be opened between 1975 and 1981, and may be properly ascribable to the project (Annex 8).  i Y - 19 - in the six project zones -- as should the knowledge that these works are backed by external financial assistance. The 1981 target, implying an annual growth in accommodation capacity of 6,198 beds over the period 1972-1981, as compared with the historical growth of 4,896, appears reasonable in this context. The attainment of this target assumes, however, intensified govern- mental action directed to reinforce the tourism sector in general and to improve further investment conditions in the six project zones in particular. 4.03 Prevention of land speculation within the project zones and avail- ability of land at reasonable prices for hotel investors are essential to the project's success. A first step towards the attainment of these objectives would be the establishment of the public real estate corporation envisaged by the draft-law on land use, building activities and land transfers in the tourism zones (para. 2.18). Acting as a land-bank, this corporation would acquire land before and during the implementation of the proposed works and resell it to hotel investors. Land acquisitions by the corporation would be through one of the following methods: (i) normal purchase; (ii) expropriation; or, (iii) the exercise of the "droit de pr4emption" (that is, the right of the corporation to preempt land when offering a price equal to that offered by prospective private purchasers). )4.04 To put the corporation in a position of operating effectively, additional measures would be taken to complement those envisaged in the draft- law mentioned above in para. 4.03. In the first place, to avoid speculation, the corporation would immediately proceed to buy substantial quantities of land in the project zones at their present low prices. All sellers of land in the project zones will have to notify the corporation sufficiently in advance of their intention to sell. In the second place, appropriate measures would be taken to prevent land speculation at subsequent stages and/or land misuse by hotel investors. In particular, the sale of land to these investors would be condtional upon the exclusive use of land for the purpose of tourism develop- ment; in the case of insufficient use or misuse of land by hotel investors (or their possible assignees), the corporation would be entitled to repossess 4t. The passage by the National Aseembly of the draft-law on land use, building activities and land transfers in the tourism zones, as well as the introduction of complementary legislative and regulatory measures on the functioning of the corporation and land transfers within the project zones would be a condtion of loan and credit effectiveness. Before their formal adoption, all said legislative and regulatory measures would be submitted for Bank approval. 4.05 In addition to the financial requirements of the proposed infrastruc- ture project, planned hotel development calls for a total investment in accommo- dations of about US$220 million in the period 1973-1981. Given the financial  - 20 - structure of hotels in Tunisia, this would mean that the requirements in loan funds would be US$16.5 million per year on an average. During loan negotiations, assurances were obtained that the Government would make its best efforts to provide the necessary financing, should loan funds from normal channels fall short of requirements. Further, ir. order to make the terms of Tunisian hotel credit comparable with those of other competitive Mediterranean countries, the Bank Group should encourage COFITOUR and SNI to extend the term of their loans to an upper limit of 20 years (as against the present 12 year limit). Within this new limit, the range of individual loans should reflect the average life of proposed hotel projects. 4.06 During loan and credit negotiations it was agreed 'that ONTT would carry out a study aimed at increasing the efficiency of the Tunisian hotel investment incentive system (para. 2.15). To be completed within 18 months from loan and credit signature, the study would assess whether the overall amount of incentives under the present system is economically justified. This assessment would be made in the light of (i) policies pursued in other sectors of the country's economy, (ii) the proposal that Tunisian hotel financing institutions such as SNI and COFITOUR extend repayment terms of their loans (para. 4.05), (iii) the level of hotel investment incentives current in competing Mediterranean countries, and (iv) other relevant factors. Furthermore, the study would propose suitable selectivity criteria graduating investment incentives according to the location and category of hotel. The location criteria would favor the coneentration of hotel investment in the six project zones; hotel investments in these zones would enjoy, at least over the next five years, greater benefits than hotel investments in any other part of Tunisia. The category criteria would reflect the desirability of bringing existing category patterns in the six project zones into line with both the ideal patterns proposed in Italconsult's general plans (para. 3.11) and anticipated market trends. Finally, the study would propose all appropriate measures to simplify existing, cumbersome procedures and to render the system more easily administered. Within one year from completion of the study, the recommendations would be jointly reviewed by the Government and the Bank in order to determine the amendments that would be actually made to the hotel investment incentive system. Submission to the Bank of the Terms of Reference for the study would be a condition for loan and credit effectiveness. 4.07 Because of the natural influx of domestic capital into the tourism sector, little promotional effort has thus far been needed to stimulate hotel investment. With the likely diversion of domestic capital to other sectors of the economy, foreign private initiative should be encouraged to increase its participation in the development of accommodations in the six zones. The Government intends to submit for Bank approval the outline of a specific promotional program, the implementation of which is provided for in the proj- ect costs. This program should include, amongst others, the preparation and distribution of an investment guide in several languages describing investment conditions in the six project zones, as well as campaigns aimed at the inter- national capital market.  - 21 - 4.o8 A recent survey on employment within the hotel industry shows that one position requiring hotel training is created, on the average, for every nine beds built. On the basis of this survey it can be estimated that the hotel industry will be requiring 1,100 trained persons annually in the coming years. At present, the existing hotel schools can accommo- date a demand of roughly hOO. This capacity is going to increase to 500 as a result of the expansion of the hotel training program currently in progress. Even though the Government has earmarked funds in the budget of 1972 for further additions of 300, supply would still fall short of demand to an extent of about 300 hotel personnel. Funds have thus been included in the project to study the possibility of a new expansion in the Tunisian hotel training program designed to meet fully anticipated personnel require- ments.  - 22 - 5. JUSTIFICATION A. Market Justification Prospects for the Development of the Market 5.01 The market Justification for the project is based on the forecast that foreign visitor traffic to Tunisia, in terms of bednights, will grow in line with the expected development of the country's accommodation capacity (Table 5). Assuming that in the forthcoming decade the average length of stay of foreign visitors increases from the present 10 days to 12 days, as is likely given past trends, the number of these visitors would rise from 642,000 to 1,516,000 (Table 15). This forecast is basically consistent with that proposed by both Italconsult and the Tunisian authorities and appears reason- able in the light of (i) the past performance of the tourism sector, (ii) the prospects for the expansion of the European tourism market, and (iii) the comparative advantages the country enjoys. 5.02 The above assumptions imply that foreign visitor arrivals and foreign visitor bednights in the whole of Tunisia would grow in the 1971-1981 period at annual rates of 9.0% and 10.8% respectively -- as against corresponding rates of 25% and 33% registered for the 1965-1971 period (Table 15). In absolute terms, the projected growth rate of foreign visitor arrivals would represent an average annual increase of 87.,400 -- only slightly higher than the 79,500 average experienced from 1965 through 1971. 5.03 Tunisia, like other destinations in North Africa and the Middle East, is primarily accessible by air from Europe, their major tourism supply market. This group of tourist destinations cates to a particular segment of the European market clearly differentiated from that composed of European vacationers travel- ling either within their own countries, or to neighboring countries easily reached by ground transportation. In season, an all-inclusive two-week vaca- tion in North Africa or the Middle East is currently being marketed at between US$200 and US$300 via charter, or US$300-400 on an inclusive tour basis (Table 18) -- i.e., at prices considerably higher than those spent by most Europeans for an equally long vacation within Europe itself. 5.04 Given current and prospective per capita income levels and income distribution in Europe, the number of Europeans able to afford a vacation in Mediterranean tourist destinations of North Africa and Middle East -- at present relatively small -- should grow rapidly in the coming years. Moreover, the increasing popularity of air transport, coupled with the progressive saturation of Europe's tourist resorts, is likely to stimulate European vaca- tioners to travel further in search of more exotic environments and less crowded beaches. Both the favorable outlook for the expansion of the potential  - 23 - market and the heightened tendency to substitute remote destinations for those close at hand, should increasingly support the development of the European tourism demand for North African destinations. Throughout the seventies, this demand may be expected to develop at a pace at least sim- ilar to that registered in the 1965-1971 period -- an annual average growth rate of 11% (Table 16). 5.05 Because of its favorable geographical position and its relatively low level of prices, Tunisia is at present the least expensive tourist destination among North African and Middle East countries for organized air travellers departing from Europe (Tables 17-18). The implementation of the project should substantially improve the country's competitiveness in terms of services. The prospect of a vacation in a well-preserved envirorment with unpolluted beaches and planned accommodations should prove an important factor in this context; as should the completion of the planned ferry-boat connections with Sicily which will open the country to expanded flows of motorized vacationers. Occuanc Rates 5.o6 Parallel growth of accommodation and demand implies that occupancy levels of both existing and planned hotels in the six zones will be similar to that experienced in the recent past. This implication is rendered likely by seasonal fluctuations which are mainly governed by social customs in the tourist-generating market (school holidays, closing of factories in August, etc.). 5.07 One particular factor to be taken into account, however, is the 11runnin-infl period of a hotel. In the case of Tunisia, it is assumed that in the fi-rstC year of its opening, a new hotel would have an occupancy rate of only li&lf of the normal occupancy it should enjoy; and would reach normal operational levels only in the third year. B. Economic Justification Th e project is a package of infrastructure investments serving primarily the tourism industry and covering widely-separated geographical areas. Since the project is part of a larger program of investments, its economic evaluation has been made in terms of this larger whole. The gross benefits of these investments consist mainly of the additional revenues earned or "savedl/ by hotel and other facilities used by tourists. Investment costs include not only the capital required to construct the proposed infrastructure works, but also the costs of expanding other tourist facilities, the most important being hotel accommodation. Needed investments in facilities such as shops and restaurants are also taken into account. J "Saved'means revenues of existing hotels which in the absence of the project might be lost through lower occupancies (c.f. para. 11 of Annex 8).  - 24 - 5.09 The net benefits of the program of investments envisaged would be the additional revenues generated or "saved" as a result of increased tour- ism in the six project zones legs the costs of operating the facilities and services to be provided. Revenues and costa associated with international air travel and other segments of the travel industry have not been taken into account, since the benefits would mostly accrue to foreign airlines and travel agents. Rates of Return 5.10 With an estimated economic life of the investments of 25 years, the internal economic return on the program would be 16.3%. To allow for uncertainty, and to test the sensitivity of the rate of return to changes in the values of some of the variables, various rates of return were calcu- lated by modifying some of the key assumptions made in the economic analysis. Results of this testing show that the rate of return is sensitive to changes in occupancy levels, investment timing, and especially to a change in the foreign exchange rate. However, even on the least favorable combination of assumptions, the rate of return does not fall below 12.8%. 5.11 Separate rates of return were calculated for each of the tourism zones. These rates vary greatly with the highest on investment in Hammamet (19.4%) and lowest on investment in Tunis South (10.9%). 5.12 The economic justification is reviewed in greater detail in Annex 8. C. Balance of Payments and Emnloyment Effects 5.13 Tunisia has experienced sizeable deficits in the current account of the balance of payments in recent years. Between 1965 and 1970, such deficits averaged US$120 million a year or about 11% of GNP. Imports of capital and intermediate goods continue to rise under the impetus of higher investment and increased industrial demand. Since the trade deficit is not likely to decline, the growth of foreign exchange earnings from tourism is vital to the development of Tunisia's economy. 5.14 The facilities planned for the six zones will primarily serve foreign visitors. Starting with a small inflow of US$114 million in 1975, net foreign exchange earnings attributable to the program of investments will rise to US$97 million in 1984, and subsequent years, when the facilities are fully operational. This compares with the estimated foreign exchange cost of the program of investments of about US$100 million. 5.15 Although statistical evidence is insufficient, rough estimates indi- cate that total employment in Tunisia has risen little over the last three years, and the percentage of male unemployment has remained high (at 15 to 20% of the labor force). The proposed program is important in this context. When in  - 25 - full operation, it is estimated that the program of investments will provide 12,500 additional jobs, one half of which will be for unskilled personneli In 1971 employment within the hotel industry for the whole of Tunisia stood at 13,000. The addtional employment created understates the full employment effects of the project, since hotels represent only a part of the tourist sector and since in addition to direct employment the program will indirectly generate employment in other sectors. Furthermore, with the exception of Tunis North and South, which account for only 15% of the investments, the project is concentrated in semi-urban or rural areas where, according to the 1966 census, unemployment and underemployment rates are substantially higher than the national average. 6. FINANCIAL ASPECTS 6.01 The envisaged tourism investment program consists of different superstructure and infrastructure elements, some revenue-earning and others not. Superstructure facilities, of which the hotels are the most important, will earn their revenues by charging the viBitors directly. Given favorable market prospects and assuming hotel loans are granted on more appropriate terms, investors in hotels and other facilities can expect to repay any debt incurred and earn a satisfactory return on their equity. 6.02 During loan and credit negotiations, it was agreed that the Govern- ment make available a minimum of about US$2.1 million to the public real. es-tate corporation (Agence Fonciere Publique) (paras. 2.18, 4.03 and 4.04). The Governmentts intention is to make the corporation financially autonomious, with m.ost of the revenue coming from the sale of land. Resale price of land would be calculated on the basis of the aggregate amount of the initial price paid for the land and the corporation's ewp.nditures. 6.03 With regard to water supply, existing rates produce a reasonable cash position and an adequate rate of return on net fixed assets. These financial results, however, are achieved through year-round, nationwide uniform tariffs wh-lch dn not reflect the marginal cost of water in the various zones and seasons, The gap between the economic cost of water production and tariffs is particul.,arly wide in the Djerba-Zarzis project zones during the suimmer months -- a gap which might lead in the future to investment misallocations and water shortage. Obviously, this problem could only be solved with the introduction of seasonal differential pricing in Djerba-Zarzis substantially higher than in the rest of the country. During negotiations it has been agreed that SONEDE, upon completion of the hydrogeological and water consumption studies it is presently undertaking, would introduce in Djerba and Zarzis, water rate schedules which would reflect the higher marginal costs of supplying water to large consumers during the peak periods. The detailed structure and level of such water rates would be evaluated in the light of the study O04TT would make to improve the effectiveness of the current system of investment incentives to the tourism industry (para. 4.06).  - 26 - 6.04 The sewerage component of the project represents the first organized attempt towards alleviating the problems posed by an insufficient sewerage system. It is proposed that charges for the services at least cover the operating, maintenance and depreciation costs (see Annex 5, paras. 31-33). The establishment of such charges, prior to the operation of these facilities, would be a condition of the loan and credit. 6.o5 The electric power component of the project is a small part of the expansion program planned for the whole country. Electric power provided to the project zones will be so priced as to cover operating costs and depre- ciation; it would furthermore provide an adequate return on capital invested. The precise tariffs to be applied are currently being examined as part of a larger rate study. 6.o6 The telecommunications component of the project is similarly expec- ted to earn sufficient revenues to allow for an adequate return on the invest- ment. 6.07 Roads included in the project would generate revenues in the form of incremental gasoline taxes, etc., and these revenues would be more than adequate to cover maintenance costs. 6.08 In addition, substantial amounts of incremental tax revenue will be accruing to the state and should properly be imputed to the project. These revenues are derived from sales taxes, income taxes, import duties, etc., on goods and services sold to foreign and domestic visitors. While the exact amount of taxes as a percentage of total revenues will vary greatly, it is estimated that on an average every 100 units of tourism expenditures generate, directly or indirectly, 20 units of tax revenue. 6.09 When the tax revenues are added to the revenues generated through charges and tariffs minus the operating costs associated with providing these services and this stream is measured against the investment cost of US$55 million, it yields a return of at least 22%. 6.10 Accounts and financial statements in a form acceptable to the Bank should be kept by ONTT for all project operations. Audited financial state- ments in a form acceptable to the Bank, prepared by auditors approved by the Bank, would be presented to the Bank within three months of the close of the financial year.  - 27 - 7. RECCMMENDATIONS 7.01 Conditions of effectiveness of the proposed loan and credit would be: (i) promulgation of the draft law on land use, building activity and land transfers in the tourism zones (para. 4.03); (ii) issuing of the decree attributing tourism zone status to all six project zones (para. 3.12); (iii) enforcement of all appropriate legislative measures regulating the functioning of the public real estate corporation providing, inter alia, that: (a) all sellers of land in the project zones will have to notify the corporation of their intent to sell sufficiently in advance (para. 4.04); (b) sale of land by the corporation to hotel investors be conditional upon the exclusive use of land for the purpose of tourism development (para. 4.04); (c) the corporation be granted the right of repossessing the land in case of insufficient use or misuse by investors (para. 4.04); (d) the resale price of land transfers from the corpora- tion to hotel investors be calculated on the basis of the aggregate amount of initial cost of land and the corporation's current expenditures (para. 6.02); (e) the corporation closely cooperate with ONTT (para. 3.23); (f) the Government provide the corporation with an initial working capital of no less than about US$2.1 million, so as to enable the corporation to promptly acquire land in the project zones (para. 6.02); (iv) issuing and ratifying of the decrees establishing the "conven- tion generale", regulating sewage charges, procedures and rela- tionships between SONEDE and parties concerned, after the draft of the "convention genirale" has been approved by the Bank (para. 3.20);  - 28 - (v) issuing of the decree establishing the Technical Coordinating Committee (para. 3.28); (vi) employment of consultants, acceptable to the Bank, to: (a) provide technical assistance to the "Direction des Travaux" within ONTT (para. 2.23); (b) provide technical assistance to the special unit within H.A.R. (para. 3.26); (c) undertake the detailed master plans in the six project zones (para. 3.12); (d) undertake final engineering for the road and sewage components of the project (para. 3.27). 7.02 During loan and credit negotiations, assurances were obtained that: (i) A special operations unit would be established within the "Direction des Ponts et Chauss6esw for supervising road construction work or., if this unit could not be established to the satisfaction of the Bank, to employ consultants acceptable to the Bank (para. 3.25); (ii) a study would be undertaken by ONTT within 18 months from loan and credit