Tunisia - Fourth Societe Nationale d'Investissement Project

CIRCULAITlIG COPV -`-. TO BE RETURNED To REPORTS DESK RESTRICTED Report No. P-1007 FILL uUpy 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 It may not be published, quoted or cited without Bank Group authorization.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 POR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SOCIETE NATIONALE D'INVESTISSEMENT IN TUNISIA January 6, 1972   INTERNATIONAL BANX FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOI1ENDATION OF TIIE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED FOURTH LOAN TO THE SOCIETE NATIONALE D'INVESTISSEMENT WITH A GUARANTEE OF THE REPUBLIC OF TUNISIA 1. I submit the following Report and Recommendation on a proposed loan to the Socidtd Nationale d'Investissement S.A. (SNI), to be guaranteed by the Republic of Tunisia, for the equivalent of US$10 million to help finance lending for industry and tourism. Amortization would conform substantially to the aggregate of the amortization schedules applicable to the specific investment projects financed out of th.e proceeds of the loan, with a maximum period of 15 years from the approval of an investment project. The interest rate would be 7-'> percent per annum. PART I - INTRODUCTION 2. The Bank Group first began lending to Tunisia in 1962 with a credit to help finance five secondary schools and since that time has been active in a wide range of sectors including agriculture, fisheries, industry, transportation, tourism and population planning. Outstanding commitments of the Bank and IDA now total almost $150 million. IFC has in addition made investments in a fertilizer plant, the SNI and COFITOUR, a hotel financing company, with a total amount now held of $11.4 million. A summary statement of Bank loans, IDA credits and IFC investments is at Annex I. 3. This perhaps unusually wide range of Bank Group lending in a relatively small country reflects the fact that although Tunisia's resources are on a more modest scale than those of her North African neighbors, they are quite varied. Tunisia has, moreover, a climate and history that have latterly emerged as the base for a promising tourism industry. Bank Group assistance has aimed at financing both the infrastructure needed for growth and the development of resources. Institution building has figured prom- inently in most operations. A current objective is to assist the Govern- ment in implementing new economic policies, summarized in paragraph 9 below, designed to achieve higher rates of growth by encouraging renewed private initiative. The proposed fourth loan to SNI is directly in line with this objective. Other lending in prospect will focus on projects to stimulate production in agriculture and industry, support the growth of tourism and help develop education and urban infrastructure. A power project and a tourism infrastructure project are scheduled for presentation to the Executive Directors before the end of the current fiscal year.   -2- 4. Execution of ongoing projects has generally been satisfactory with some exceptions. A detailed account of the problems encountered in implementing the Cooperative Farm Project of 1967 (Loan No. 484 and Credit No. 99) was contained in mr memorandum to the Executive Directors of November 5, 1970 (R70-213). The Executive Directors approved amendments to the original Loan and Credit Agreements on November 17, 1970. These amend- ments became effective on March 24, 1971. Project implementation is now progressing satisfactorily and disbursements are on schedule. 5. After initial delays, primarily due to the damages caused by exceptional floods in early 1970, the Railroad Project of 1969 (Loan No. 606/ Credit No. 150) is now proceeding well and is expected to be completed by the end of 1973, approximately one year behind the original schedule. The Highway Project of 1971 (Loan No. 746) is being executed satisfactorily. 6. My memorandum to the Executive Directors of August 2, 1971 (IDXA71-5 indicated that a substantial part of the Second Education Project of 1966 (Credit No. 94) would be unexpended as a result mainly of savings in the cost of construction and equipment, and recommended a reallocation of part of the proceeds of the credit to finance additional educational facilities and technical assistance in educational planning. The Tunisian authorities are now proceeding with procurement and construct- ion of additional schools. A survey of technical assistance requirements was recently made by a consultant, and recruitment of experts is to be initiated shortly. 7. The fourth SNI project was the subject of field appraisals in February and August 1971. Negotiations for the proposed loan were held in Washington in November/December 1971. SNI was represented by Mr. Habib Bourguiba Jr. and the Government of Tunisia, as Guarantor, by Mr. Mrad. PART II - THE ECONOMY 8. A report entitled "Current Economic Position and Prospects of Tunisia" (EMA-38a) was distributed to the Executive Directors on August 18, 1971. A Country Data Sheet is attached as Annex II. A map of Tunisia is also attached. 9. The report stressed the crucial importance of fol'Lowing through with the development strategy introduced by the Government in November 1970. Increased production, exports and employment are major objectives to be achieved mainly by encouraging private initiative, and, to that end, reducing direct Government involvement in economic decisions, decentralizing responsibility for the management of the econory and relaxing administrative regulations. 10. Production has developed favorably in 1971 because of better agricultural crops, due to good weather, and a very good tourist season. Real GDP has risen by about 8 percent. Because of higher export prices   - 3 - for oil and larger receipts from tourism and workers' remittances, foreign exchange earnings were substantially hligher than in 1970, preventing a further widening of the current deficit in the balance of payments despite the continued increase in imports. As capital inflows remained at a high level, the gradual improvement in reserves achieved during the last three years continued. 11. Industrial development in the last decade has been carried out mainly by the public sector. Apart from investing throagh publicly-owned enterprises, the Government extended its control over the industrial sector through nationalization and purchase of various undertakings which were formerly owned by foreign firms. As a result, by far the greater part of industrial capacity is nowT publicly owned. Private industrial activity is concentrated in small and medium scale enterprises. 12. M4anufacturing contributes about 15 percent to GDP. The develop- mert of the sector has focussed, to a large extent on import substitution and processing of minerals for export. Because of the small size of the domestic market and deteriorating wiorld market conditions for phosphates, manufacturing output has grown slowly. Government control over investment decisions and management of public enterprises, and the extensive regulation of trade, foreign exchange, investment and prices also hindered industrial development. 13. Good opportunities exist for establishing export industries. The 1969 Association Agreement with the EEC allows most Tunisian industrial exports duty-free access to the Community, while proximity to Europe and substantial labor reserves offer scope for foreign direct investment. 14. Up to 1969 industrial policy had given priority to import substitution by state enterprises, but over the last year the Government has decided to encourage private enterprise. ITeasures have been taken to make industrial protection more selective and to foster competition through greater reliance on the market mechanism. Mlore recently, the authorities have prepared new legislation providing substantial incentives for domestic and foreign firms to establish export-oriented industries. Efforts are also being made to improve the institutional arrangements for facilitating foreign investment. IFC will assist the Government in developing contacts with industrial organizations abroad. 15. Tourism started from a low level and expanded rapidly in the 1960's. It has now become a major foreign exchange earner (about $P100 million in 1971), source of employment and means of diversifying the econory. Demand is likely to continue to expand, and hotel capacity will remain a main constraint on increased earnings. The Government is drawing up a master plan for tourism development in seven zones through 1985, and feasibility studies on infrastructure are being completed. 16. It is within this context of encouragement to manufacturing and tourism that Bank lending to SMI is important to Tunisia. SRI represents   - 4 - the major source of long-term local curTency funds and untied foreign exchange funds for small and medium-sized Tunisian private entrepreneurs in the manufacturing sector whom the Government is now seeking to encourage. Similarly, it is a key source of funds for the tourism sector. 17. Tunisia's foreign debt burden is high: in 1970 the debt service ratio was about 22 percent. This ratio (including service of new borrowing) is likely to decline to about 19 percent during 1973-76. The debt structure has improved thanks to the restraint over the past few years in short and medium-term borrowing and the availability of foreign aid on favorable conditions. Tunisia's continued creditworthiness for long-term borrowring on commercial terms depends on a large proportion of new external assistance being made available on concessional terms. 18. The Consultative Group for Tunisia met in October and discussed the economic position and prospects of the country. Tunisia's new economic policy objectives were welcomed. It was agreed that Tunisia would need assistance on concessional terms for several years and the members of the Group expressed their wrillingness to continue providing such aid. PART III - THE PROJECT 19. An appraisal report on the Soci6td Nationale d'Investissement (No. DB-81a) dated December 28, 1971 is being distributed separately. A Loan and Project Sumary is attached as Annex III. Establishment of SNI 20. The Societe Nationale d'Investissement (SNI) was established in 1959 and reorganized in 1965 with the assistance of the Bank Group. After the completion of a 100 percent share capital increase on January 29, 1971, the D 3.0 million share capital is held as follows: Tunisian public sector 24.2 percent, Tunisian private sector (including about 60,000 indiv- iduals) 42.5 percent, foreign shareholders 13.3 percent and IFC 20 percent. The Bank made three loans to SNI, the first for $.`5 million in I-ay 1966 (No. 449), the second for 10 million in September 1967 (No. 512), and the third also for $10 million in December 1969 (Hio. 648). The Swedish International Development Agency (SIDA) has made two long-term loans to SNI, totalling US$9 million. In addition, SNI obtained about D 1.1 million from banks and the government in Tunisia. The Government has also provided SNI with a grant of D 0.5 million. Objectives and Role of S11I 21. According to its Statement of General Policies and Operations, S1TI is to stimulate industrialization and the development of tourism in Tunisia through the financing of sound and productive projects. It also seeks to help develop the capital market and, in particular, to broaden the securities market.   -5- 22. From 1966 to the end of 1970, SNI approved 211 loans and equity investments amounting to D 21.6 million. SN'I doubled the volume of its annual operations from D 3.2 million in 1968 to D 6.7 million in 1970. Approvals for the current year through November 1971 were D 5.9 million. 23. SNI finance has been mainly in the form of loans, wJhich represented 84 percent of SN1I operations since 1968. Terms were from five to twielve years. Normally SNIF charges 9 percent interest. 4hile interest rates charged by Tunisian banks range from 7 to 8 percent for short and medium-term credits, SNI has been able to maintain its 9 percent rate, because its loans are long-term and its foreign exchange loans are not tied to procurement in specific countries. Horeover, the foreign exchange risk, when foreign credit lines wrere used, has been borne by the Government. 24. SNI's equity investments totalling about D 2 million were, at the beginning of 1971, close to the limit its policy Statement permits, i.e. the equivalent of its net wJorth. The share capital increase wizll allow it to continue to expand its equity investments. The most important single equity investment (D 830,000) was SlJI's subscription to COFITOUR (Compagnie Financiere et Touristique), in iwhich IFC also is a principal investor. 25. SWI has been active in financing manufacturing and tourism. flJhile total manufacturing investment in Tunisia increased on the average by less than 5 percent annually since 1956, SNI's share in financing industrial investment increased from 5 percent in 1966 to 12 percent in 1970. SNI has financed about 13 percent of total investment in tourism since 1968 and tourism now accounts for about 41 percent of SNI's portfolio. 26. Through the projects it has financed, SFI1 has made a substantial contribution to Tunisia's foreign exchange position. Tourism is Tunisia's leading foreign exchange earner and the hotels financed by SMI have had a marked impact on Tunisia's foreign exchange receipts. In the manufacturing sector, 20 percent of SNI's funds have gone to enterprises exporting over half of their production. As the Government increases its incentives for exports, SNI would be in a position to do even more in this field. Until 1969 SNI did not finance public sector enterprises as a matter of policy. Since then SNII has approved eight loans for D 3.5 million for such enter- prises. These loans have been made principally for projects in transport (buses) and construction materials. 27. Despite its increasing operational wjorkc load in the past four years and scarcity of experienced staff, SNI has tried to assist small industrial enterprises and has recently given increasing attention to applications for loans to such enterprises. Since new Tunisian entre- preneurs are to be found mainly in snall and medium-sized enterprises, SFI is justified in supporting this type of activity.   - 6 - 28. A pressing issue facing the Government is unemployment. SNI1s operations have had only a modest impact on the overall problem since they affect a small part of total economic activity in the country. However, SNI estimates that industrial projects financed by it have added about 4,000 jobs between 1966 and 1970. The capital cost per job was $12,000. Jobs created by SNIts tourism investments in the same period total 5,000 at a capital cost per job of $10,000. The capital cost per-job figures are reasonable given the sectors SNI is financing. SNI has, neverthe- less, agreed that it will focus more explicitly on the employment impact in selecting among investment proposals. Organization 29. Board of Directors and Executive Committee. SNIts Board of Directors has 14 members. Mr. Habib Bourguiba Jr. was elected President- Director General on March 8, 1971 to replace iMr. Moncef Belkodja, who has agreed, for the time being, to remain as a Director with special executive powers on SNI's staff. IFC is represented on SNI's Board. The Board meets three or four times a year. It reviews general policy matters and has to approve all loans and investments of more than D 200,000. Transactions below this level are dealt with by SNIts Executive Committee, composed of 7 Board members. 30. Management, Staff and Procedures. The organization and opera- tional performance of SNI began to weaken in mid-1969, with the departure of several senior officers at a time when SNIPs operations and portfolio were growing considerably. These developments affected adversely the quality of project appraisal; technical and marketing evaluations of projects in particular were weak, and the economic merits of projects not well reviewed. Internal coordination also suffered. 31. During the past year, the new management has initiated measures to improve SNIIs capabilities. An International Executive Service Corps consultant was engaged to advise SNI on steps to strengthen its organiza- tion and administration. Based on the comments by the consultant and Bank staff, SNI has started to carry out a reorganization to improve its project appraisal work as well as to develop its promotional capability, essentially through strengthening its engineering staff. SNI is also strengthening its- follow-up staff, and is arranging for additional training of other staff. Organizational changes have been made and senior SNI personnel have been placed in-assignments more appropriate to their competence. New staff has been hired, bringing professional staff strength to 27. The Bank will pay close attention to progress made in the intended improvements. 32. With respect to project appraisal, SNI has recently adopted more refined methods for establishing rates of return for project selec- tion purposes. It is also improving the economic aspects of its appraisal work and is consulting with the Bank on ways to strengthen its work in this area.   -7- Financial Results 33. Net earnings for 1970 were about D 134,000, equivalent to nearly 9 percent on the then share capital. They were about one-third less than in 1969, mainly because administrative expenses increased due to the cost of the share increase and because SNIts tax exemption had expired at the end of 1969. SNIts 1971 net profits are likely to be somewhat higher than last year. SNI paid a 6 percent dividend on 1970 results. 34. Total assets grew rapidly from D 6 million in 1967 to nearly D 15 million at the end of 1970 and further growth has been experienced since then. SNI's financial position at the end of 1970 was sound and its liquidity was strong, with net working capital of over D 1 million. This figure rose to D 1.3 million by November 1971. SNI's debt equity ratio as defined in the loan agreements with the Bank stood at tho end of October 1971 at about 2:1 against a limit of 41L. 35. Overdues increased in 1970 and the initial audit was incomplete due to inadequate information. Following this, in the course of 1971, a thorough appraisal of the situation was made by SNI, its auditors and Bank staff and the conclusion was that SNI's portfolio is sound. The hard core loss possibilities are small and amply covered by provisions for bad debts (D 102,000). SNI is taking measures to reduce arrears, and has been able to bring-them by the end of October 1971 to about D 570,000 as compared with D 750,000 at the beginning of 1971. Another difficulty is that on a number of loans, SNI is the major creditor but does not have a senior security position due to legal complications in registering mort- gages. SNI and the Tunisian Government are currently working on remedying this situation and this problem will likely be solved by the end of 1972. ProJected Operations and Resource Requirements 36. Forecasts of Operations. SNI has based its five-year forecast of operations (1972-76) on an assumed modest growth of investment in industry of about 4 percent per annum and of hotel financing of about 11 percent per annum which is in line with the Governmentts plans. This would mean a higher share of SNIts tourism investment than in the past, but given SNIts capabilities, this appears probable. Total contractual com- mitments in the 1972-76 period are forecasted at D 40 million, including D 7.9 and D 7.4 million in 1972 and 1973 respectively. 37. To meet forecast commitments of about D 40 million through 1976, SNI has to raise, in addition to the D 2.5 million of uncommitted resources available at the beginning of 1972, another D 37 million. SNI expects to fill most of this gap by internal cash generation and by further recourse to its present foreign creditors, the Bank and SIDA. SNI also will have - to intensify efforts to tap fresh sources of both dinar and foreign fundss and it hopes to borrow, with the Government's endorsement, some amounts from bilateral aid sources. However, in the short run, SNI will have to   -8- continue to look mainly to SIDA and the Bank. Looking to the end of 1973, a two-year period to which the Bank normally would relate its lending to a development finance company, SNIts total commitments are estimated at about D 15.3 million. SNI, to cover these commitments, would have to find resources of about D 13 million, of which D 11 million would be required to finance import needs. SNI hopes to obtain a third SIDA credit of D 4 million in 1972. This plus internal cash generation leaves a gap of about D 8.6-million. The proposed loan of $10 nmllion, equivalent to about D 5 million, would, however, cover SNIts commitments for imports only until about the end of 1972, i.e. for about one year. Limiting Bank assistance on this occasion to the estimated requirements for only one year is considered prudent in view of the weaknesses which have arisen in SNIts work and the need to evaluate SNIts progress in carrying out its reorganization program. A reappraisal of SNI will be made in mid-1972 with a view to possible further lending early in 1973. 38. - Total assets are expected to more than double in the period 1972-76, reaching a level of about D 40 million at the end of 1976. SNi1s long-term debt will remain below the limit agreed with the Bank. SNIts earning prospects are reasonably good. Net profits are expected to increase from about 6-percent of net worth in 1972 to 13 percent in 1976. With such returns, and continuing prudent appropriations to reserve, SNI should be able in a few years to distribute dividends higher than the 6 percent paid out in 1971. Terms of the Proposed Bank Loan 39. The proposed loan to SNI follows the terms and conditions of recent Bank loans to other development finance companies, including the standard commitment-charge. The free limit above which Bank approval of a project is required, would be maintained at $200,000. The aggregate free limit would be $2.5 million. The debt limit as defined in the previous loan agreement would also be retained. The financing of public sector enterprises would not exceed 25 percent of the amount of the proposed loan without the agreement of the Bank. 40. SNI is, with the Bank Groupts assistance, continuing its important role in the Tunisian economy. It has recently experienced difficulties in its organization and staff, but the remedial measures which are being introduced should enable the Company to cope effectively with the growing tasks ahead* SNI is creditworthy for the additional financing proposed.   - 9 - PART IV - IEGAL INSTRUNENYTS AND AUTHORITY 41 The draft Loan Agreemient between the Bank and SNI, the draft Guarantee Agreement between the Republic of Tunisia-and the Bank, the Report of the Committee provided for in Article III$ Section 4 (iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. The draft agreements conform to the normal pattern for loans for develop- ment finance companies. 42. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART V - RECOMMENDATION 43. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments January 6, 1972   A'NEX I Page 1 of 2 STATE7EKT OF BkuJ LOANVS A)T IDA CREDITS TO TUNISIA AT NOVEMBER 30 1970 Loan or Credit ,Alount (US$ ;Jllion) Nlumber Year Borr8wer Bank IDA Undi.s 29 1962 Republic of Tunisia Education 4.9 _ 380 1964 Republic of Tunisia Port Development 7.0 _ 449 1966 Societe iWationale Developmen,t d'Investissement Finance Co. 4.7 94 1966 Republic of Tunisia Education 11.9 2.1 484 1967 Republic of Tunisia Cooperative Farms 6.1 1.5 99 1967 Republic of Tunisia Cooperative Farms 3.1 0.8 512 1967 Societe Ilationale Development . d'Investissement Finance Co. 10.0 1.2 573 1