Tunisia - Tunis District Urban Planning and Public Transport Project

CIRCULATING COPY r-7 ' 7 \y! ) 7 TO BE RETURNED TO REPORTS DESK b y. -- . ' DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No.P- 1298-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE REPBULIC OF TUNISIA FOR THE TUNIS DISTRICT URBAN PLANNING AND PUBLIC TRANSPORT PROJECT July 25, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization.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.  Currency Unit - Tunisian Dinar US$1 = TD 0.440 TD 1 = US$2.27 TD 1,000 = US$2,270.00 TD 1,000,000 = US$2,270,000.00 Fiscal Year: January 1 - December 31 Abreviations: COFITOUR - Compagnie Financiere Touristique KFW - Kreditanstalt fur Wiederaufbau SNCFT - Societe Nationale des Chemins de Fer Tunisiens SNI - Societe Nationale d'Investissement SNT - Societe Nationale des Transports STIA - Societe Tunisienne d'Industrie Automobile T5MG - Tunis - La Goulette - La Marsa Railway (SNT) Utm3P - United R'Tations Development Programme  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE REPUBLIC OF TUNISIA FOR THE TUNIS DISTRICT URBAN PLANNING AND PUBLIC TRANSPORT PROJECT 1. I submit the following report and recommendation on a proposed loan for the equivalent of US$11 million and a proposed development credit for the equivalent of US$7 million to the Republic of Tunisia to help finance the Tunis District urban planning and public transport project. The loan would have a term of 22 years, including four years of grace, with interest at 7-1/4 per- cent per annum. The development credit would be on standard IDA terms. Of the total proceeds of the loan and credit amounting to $18 million, about $16.5 million would be re-lent to the Societe Nationale des Transports (SNT) for 22 years, including four years of grace, with interest at 7-1/4 percent per annum. The balance of about $1.5 million would be used partly to fi- nance technical assistance and partly to finance equipment and civil works for the traffic improvement program of the Municipality of Tunis. Technical assistance to the District of Tunis under the project would be financed joint- ly by the UNDP and by the Bank loan and IDA credit. PART I - THE ECONOMY 2. A report entitled "Current Economic Position and Prospects of Tunisia" (EMA-51a) was distributed to the Executive Directors on August 14, 1972. A basic economic mission visited Tunisia in February and March 1973 and is now preparing its report. Some of its preliminary conclusions are reflected below. A Country Data Sheet (Annex I) and a map of Tunisia are attached. 3. Tunisia's development has been hampered by scarcity of natural re- sources. Much of the country is arid or semi-arid, and agriculture is highly dependent on rainfall. Minerals, particularly phosphates, are mostly of low quality and limited volume. Industrial development has been handicapped by the small size of the domestic market; in most sectors a lack of skills and experience is a constraint. Fortunately, petroleum was discovered in the mid-sixties and has since become a limited but valuable source of revenue. 4. In the 1960's, development policies favored centralized decision- making and assigned a major role to the public sector. Over the period 1962- 1970, the growth of GDP at market prices averaged 5.1 percent per year. It did not reach the target figure of 6 percent, largely due to a series of dry years, to a Government investment policy which emphasized social and admin- istrative infrastructure and projects which yielded contributions to growth only slowly, to a number of uneconomic investments in public enterprises, and  to the discouragement of private initiative in nearly all sectors except tourism. In two sectors performance was clearly unsatisfactory: agricul- ture, which grew by only 2.3 percent per year, and food processing, which fell by 2.4 percent over the period. In most other sectors performance was close to planned levels. Growth in tourism, petroleum and, to a lesser ex- tent, textiles largely exceeded targets, but public manufacturing enterprises yielded disappointing results. 5. In terms of macro-economic aggregates, some results are nonetheless impressive. Between 1961 and 1972, annual investments tripled from TD 69 mil- lion to TD 207 million. Fixed investment averaged 21 percent of GDP over the period. Domestic savings rose from 11 percent of GDP to 21 percent. The bal- ance of payments has steadily improved since 1967; the deficient on current account, which had averaged $115 million per year between i362 and 1967, dropped to $69 million in 1972. A traditional net liability of foreign exchange re- serves was reversed in 1970; net holdings increased to $190 million by the end of 1972, covering six months of commodity imports. 6. Improvements in welfare have been less adequate. Reliable informa- tion on employment and income distribution is not available but there is some evidence of growing regional disparities in income, imbalance in the pattern of land ownership and concentration of economic activity in the urban areas. Unemployment is estimate_.' at 14 percent of the adult labor force, under- employment at a further 29 percent. Even with a growing number of emigrant workers, job creation through past investment has not kept pace with the growth in the adult labor force. Given the high annual rate of population increase (2.5-2.8 percent per year) from 1962-70 the growth in overall per capita income was less than 2.5 percent per annum; overall private consump- tion per capita barely increased. 7. Recognizing the shortcomings of many past policies, the Government introduced a new development strategy in 1970. Its main objectives are to increase production (especially for export) and employment, and to achieve this mainly by encouraging private initiative, reducing direct Government involvement in production and relaxing the administrative regulation of the economy. The Government has reduced import restrictions on spare parts and raw materials for domestic manufacturers. Approval procedures for new investments have been considerably eased, and banks will be given more re- sponsibility in allocating investment funds. The Government has undertaken a thorough review of the tax system, including customs tariffs, and is now introducing a number of further reforms designed to stimulate production, encourage exports and achieve greater equity and simplicity in administrative procedures. These developments have led to a sharp rise in private invest- ment. 8. In the past few years there has been a remarkable improvement in the economic situation. GDP grew by 8 percent in 1970, 9 percent in 1971 and 18 percent in 1972. The turn-around in performance can be attributed to: la) exceptionally good weather for agriculture; (b) an increase in olive production; (c) continued rapid growth of tourism; (d) increased  - 3 - production and export of petroleum, reinforced by important international price increases in 1972; (e) rapid growth in workers' remittances from abroad, which increased from $9 million in 1965 to $70 million in 1972; and (f) the accelerated growth in private investment stemming from renewed self- confidence in the private sector as a result of the new Government policies and increased emphasis on productivity and profitability. 9. Most of the above favorable factors may last throughout the Fourth Tunisian Plan (1973-1976), which has reached an advanced state of preparation. The Plan is built around the objective of attaining a rate of growth in GDP sufficient to provide a 6 percent increase in private consumption while satis- fying constraints on the balance of payments and debt service. It proposes a 20 percent limit on external financing of investment and a 20 percent limit on the debt service ratio. As a subsidiary objective, the Plan seeks the crea- tion of new employment opportunities to meet as far as possible the expected increase in the labor force. It calls for continued rapid economic growth, with GDP increasing by 7 percent per year over the exceptionally high level of 1972, and a virtual doubling of the investment effort. In formulating its strategy, the Government has placed overriding emphasis on the role of the non-agricultural industrial sector as the primary source of growth and the principal field for employment creation. 10. The Government's proposals for financing the Plan include tax re- form, and further measures to improve the performance and profitability of State enterprises and to mobilize resources in the private sector. Exports of goods and services are projected to grow at 8.3 percent per year and im- ports at 9.7 percent. The resulting average trade deficit of some $113 mil- lion, plus $73 million for debt amortization, would be more than offset by a projected annual inflow of external aid of $242 million. These assump- tions would imply a debt service ratio of about 15 percent over the next four years provided private borrowing from abroad remains limited. 11. Agriculture, the dominant sector in the economy, provides nearly half of the employment, 30 percent of merchandise exports and 17 percent of GDP. Food processing industries account for another 5 percent of GDP and over a third of value added in manufacturing. The stagnation in agriculture in the 1960's (see para. 4) can be attributed to (a) adverse weather condi- tions; (b) the disruptive effects of the effort to extend the cooperative program, which led to major changes in the direction of agricultural policy; and (c) the stress on investments that are productive only in the long run. The Government is now slowly devising a new agricultural development strategy, although its approach so far remains fragmentary. 12. A more desirable pattern of public investments in agriculture could include efforts to utilize intensive agricultural production techniques more widely; to make more effective use of land through application of existing land reform legislation and land reallocation to small-scale farmers; to ex- pand livestock and forage production; to improve marketing institutions and the quality and availability of the extension service; and to stress rural development.  - 4 - 13. Up to 1969, manufacturing, which contributes about 15 percent to GDP, focussed primarily on import substitution by state enterprises and proc- essing of minerals for export. Recent import liberalization has given larger scope to private iritiative and should help foster domestic competition. Fur- thermore, legislation providing substantial incentives for domestic and foreign investment in export-oriented industries has recently been passed. There ap- pear to be good prospects for foreign investment. 14. During the Fourth Plan industrial growth is likely to be concen- trated in the petroleum, phosphate and textile sectors. The increase in phosphate production by opening up new deposits is to be accompanied by measures to rehabilitate and improve the profitability of existing mines. Beyond this, progress in expanding indulstrial production will depend largely on the Government's ability to organize a strong promotional effort, to mo- bilize foreign and domestic participation in new ventures, and to provide incentives to reorganize and rationalize existing plants. 15. The development of tourism is a recent phenomenon. The prospects for continued rapid expansion are bright, and plans have been laid to increase hotel capacity accordingly. The Government actively supports such expansion through incentives to private hotel promoters and has recently embarked on a long-term tourism infrastructure program, financed with the assistance of the Bank Group and KfW. The Iajor constraints to the sector's expansion are the speed at which hotel capacity can be developed and an adequate, trained labor force can be made available to the industry. 16. Since 1962, Tunisia has benefitted from a high level of external official aid, principally from countries and international institutions par- ticipating in the Consultative Group for Tunisia sponsored by the Bank. Dur- ing 1963-1972, external aid amounted to about $957 million (in terms of dis- bursements) of which 32 percent was in grants, including foodstuffs and tech- nical assistance, and 68 percent in loans. The major donors have been the United States, France, Germany, Canada, Sweden and other EEC countries. Of- ficial loans have come from bilateral sources for 87 percent (mainly the United States, France, Germany, Italy and Kuwait) and from multilateral sources for 13 percent (primarily the World Bank Group and the African De- velopment Bank). Program loans represented 40 percent of total disburse- ments, and project loans 60 percent; the largest share of project loans was for irrigation infrastructure, transport, communications and tourism. Most aid has been obtained on concessionary terms: from 1967-1972, the average terms of borrowing from bilateral sources were 2.3 percent interest and 27 years to maturity, including 9.1 years of grace; from multilateral sources 5.4 percent interest and 28 years to maturity, including 5.9 years of grace. Borrowing on conventional terms from private sources by Government or by private enterprises with a Government guarantee, amounted to about $400 million over the decade; it took the form of suppliers' credits (mainly French) and loans by private banks (mainly Italian and French); from 1967- 1972, average terms were 6.0 percent interest and 9 years to maturity. There was virtually no other external private borrowing.  - 5 - 17. Despite the favorable terms on which Tunisia has received external assistance, the country's debt burden is relatively high. Total outstanding external public debt at the end of 1972 was about TD 490 million ($1,020 mil- lion), equivalent to 48 percent of GDP. Of this, $195 million (19 percent) was owed to the Bank Group, including $135 million (13 percent) to the Bank. Of the Tunisian total of $96 million in service payments on external public debt in 1972, $6.2 million (6.8 percent) was paid to the Bank Group, includ- ing $6.0 million (6.6 percent) to the Bank. If present trends continue, as expected, the share of the Bank Group in Tunisia's external public debt will be about 20 percent, including 14 percent for the Bank, by the end of the Fourth Plan in 1976, while the share of the Bank Group iin annual debt serv- ice will rise to about 16 percent, including 15 percent for the Bank. The share of the Bank Group in total disbursements on public debt is expected to rise to about 27 percent from 1973-1976, compared to 19 percent in 1968- 1972. 18. The maturity structure and terms of Tunisia's debt have improved continuously since 1969, when the Government started to limit borrowing from private sources; the proportion of outstanding debt at the end of 1971 was 60 percent from Government (62 percent in 1968), 17 percent from multilateral sources (11 percent in 1968), and 23 percent from private sources (27 percent in 1968). The debt service ratio declined from 26.7 percent in 1968 to 17.2 in 1972. Under the Fourth Plan the Government intends to keep the ratio of external debt to GDP below 50 percent. Moreover, in future the Government plans to be more selective in external borrowing and to give preference to project aid over program aid. But, as is indicated above, overall aid re- quirements remain high. PART II - BANK GROUP OPERATIONS 19. Beginning with a credit of $5 million for an education project in 1962, Tunisia has to date received a total of fifteen Bank loans and nine IDA credits amounting to, respectively, $155.6 million and $58.7 million, net of cancellations and refundings. The proposed loan and credit would raise the total of Bank and IDA assistance from $214.3 million to $232.3 million. 20. While the present operation would be the first project specifically emphasizing urban transport, the largest share of Bank Group lending has been for transport. Two lending operations for port construction, one for the na- tional railway company, one for road construction and one for a gas pipeline account for 30 percent of present Bank/IDA commitments in Tunisia. Industrial and hotel financing through the Societe Nationale d'Investissement (SNI) come second (22 percent), followed by public utilities (17 percent), tourism infra- structure (11 percent), agriculture and fisheries (9 percent) education (9 percent), and family planning (2 percent). 21. While there have been problems in project execution, as in the co- operative farms and family planning projects, on the whole project implemen- tation has been satisfactory. Important institutional improvements have been  achieved. In the transport and public utilities sectors, independent agencies and public corporations have been significantly strengthened. The Turisian development finance company, SNI, has been placed on a sound footing. 22. IFC has invested in a fertilizer plant, in SNI, in COFITOUR (a com- pany to promote and invest in tourism projects) and in RYM (a large hotel de- velopment). In addition it has recently made a $39,000 equity investment in a promotional company "Sousse Nord"; this company is to prepare plans for an integrated tourism resort development in the Sousse area, one of the areas in which tourism infrastructure is being financed jointly by the Bank, IDA and KFW. IFC's net commitments iri Tunisia presently total $13.5 million. 23. In the early years of cooperation with Tunisia, Bank Group lending primarily aimed at support of the Government's policy of emphasizing long-term investments in infrastructure. In keeping with the changes in the Government's economic policies and development strategy described in Part I of this report, current and future operations stress imnediately productive investment in in- dustry, tourism and agriculture, with emphasis on projects increasing foreign exchange earnings and employnent. 24. In agriculture, Bank Group assistance is expected to help to put to full use existing irrigation infrastructure in the Nebhana and Medjerda areas through financing of on-farm investment programs, and associated extension and marketing services. The Bank Group will also assist the Government in its en- deavors to improve rural living and employment conditions and to discourage rural-urban migration through projects for livestock and rural development in the Sedjenane area of Northern Tunisia and for rural development in Cen- tral Tunisia. Continued support of industrial and hotel credit through loans to SNI should help to build up the country's foreign exchange earning capacity and help the Government to increase employment opportunities in industry and tourism. A separate tourism training project is also in preparation. Finally, projects in phosphate production in the South, and for urban sewerage in Tunis are planned for the next two years. IFC has under consideration a large proj-- ect to produce and market poultry locally and a project to manufacture alumi- num fluoride from local fluorspar. PART III - URBAN PLAYNING AND TRANSPORT IN TUNIS The Tunis Metropolitan Area 25. Tunis, the capital of Tunisia, is the country's principal concen- tration of population, employment and economic activity. Metropolitan Tunis accounts for more than half the country's total commerce and trade, construc- tion, and administrative and ,thE.r white collar Jobs. Rapid urbanization has characterized the area in recent ,,ears, but the full thrust of urbanization has not yet overtaken the city. En 1956, the year of Independence, 400,000 people lived in the area; by the m:iddle of 1972 this figure had more than doubled to about 900,000. By 1976, the population, which is growing at  -7- about 5 percent per year, is expected to reach 1.2 million. The Municipal- ity of Tunis, with some 558,000 inhabitants, is the largest of the thirteen communes composing the Tunis District, a regional governmental body recently established to coordinate metropolitan public investment planning and devel- opment. 26. The location of the central city between two bodies of water, the Lake of Tunis to the east and the Sebkha de Sedjoumi to the west, has strongly influenced Tunis' settlement pattern. The ancient Medina, or walled city, with its extremely high population density (comparable to Bombay and Calcutta) constitutes the core of the city. The modern city, constructed on a grid street pattern in the 19th and 20th centuries, occupies the rest of the area between the two lakes. Middle and high income residential areas have grown principally to the north and northeast of the neck of land between the lakes, industrial zones to the south. Urban Planning in Tunis 27. The tendency towards dispersal of residential development and em- ployment zones created by the city's location has been strengthened by the inadequacy of the planning and institutional framework for dealing with the area's problems. Ministries and decision-making are highly centralized on a sectoral basis, and inter-ministerial coordination on investments affect- ing the growth and development of metropolitan Tunis is weak. Individual ministries and agencies tend to follow the narrowly conceived demands of their particular responsibilities, and not to take the implications of their programs for the activities of other public bodies adequately into account. 28. The Government has recently begun to view the absence of effective planning and the pattern of Tunis' development with concern. In 1972, it took an essential initial step by setting up the Tunis District, designed to create an institutional structure within which the area's development could be seen and guided as a whole. The principal task of the District is to plan, coordinate and supervise public investments at the metropolitan level. The staff falls under the authority of the Governor-Mayor of Tunis; a Board of local representatives chaired by the Governor-Mayor and a ministerial-level Council chaired by the Prime Minister exercise supervisory and decision- making responsibility. 29. Establishment of the District constitutes a major step towards de- centralization and sets a precedent for the eventual regionalization of pub- lic administration in Tunisia. Such fundamental change cannot easily be put into effect and practical measures are only now being taken to establish a staff and make the District operational. When it reaches its full effec- tiveness, the District is to have a major role in planning the public in- vestment program for the Tunis area, in preparing the state capital budget for Tunis and in supervising the execution of projects. Agreement was reached during negotiations on a draft decree concerning the District's organization, staffing, financial authority and relations with other agencies; issuance of the decree is a condition of effectiveness. Agreement was also reached on the establishment of a technical coordinating committee for the District  bringing together decision-making level representatives of the interested ministries and public corporations. 30. The District will have three directorates, responsible respectively for planning and studies, programming and the public investment budget, and supervision. In close cooperation with the ministries and other public agencies concerned, the Planning and Studies Directorate will prepare meciium and long term development plans for the District. It will examine fiscal and .-inancial problems, as well as other public policy issues, concerning the de- velopment of the Tunis area. Before any commitment to an investment project in the area is made by a ministry, a commune, or, when a state grant is re- quired for its realization, by a public corporation, the Planning and Studies Directorate will review the project. The Planning and Studies Directorate will also initiate and prepare specific investment projects through its own staff or with the assistance of consu'ltants. 31. The Directorate for Programming and the Budget will participate, in close cooperation with the Planning Ministry, in the preparation of the state investment budget insofar as the Tunis area is concerned. The Super- vision Directorate will ensure conformity of projects being executed with agreed plans, and will arrange cooperation with three public land corpora- tions recently established to ensure the timely availability of land for housing, industry and tourism. The Urban Transport System 32. The transport system serving metropolitan Tunis is in many ways a function of the city's location and the configuration of the walled Medina and adjacent modern city. The absence of adequate and properly enforced regulations, standard lane-widths and systematic control of inter-sections has resulted in mounting inner city congestion. Anarchic driving and park- ing practices also prevail. Action to improve the urban transport system is required now if major difficulties are to be avoided in the future. 33. Ownership and use of private automobiles are low relatively to many other cities of comparable size or wealth, but are increasing rapidly. Private vehicle ownership has been estimated at one automobile for every twenty-seven persons. About 75 percent of all passenger trips in the Tunis area are still made by public bus or train. This compares favorably with Buenos Aires (66%), Stockholm (57%), London (54%), and Kuala Lumpur (35%), to cite a few examples from both developed and developing countries. . 34. Public transport is provided in Tunis by the bus system and the Tunis-La Goulette-La Marsa (TGM) northern suburban railway, both run by Societe Nationale des Transports (SNT); by a suburban railway operated on the main line to the South by societe Nationale des Chemins de Fer Tunisiens (SNCFT); and by a taxi fleet of over 1,100 privately owned vehicles. Within the metropolitan area SNT accounts for over 90 percent of public transport trips made by bus and train, and nearly 70 percent of all passenger trips by ali modes.  - 9 - 35. SNT's urban bus fleet consists of 355 vehicles, of which over 100 are more than 12 years old. Due to the age of the fleet, inadequate manage- ment and insufficient maintenance, the fleet utilization rate of 58 percent is well below the standard (usually 85 percent or better) of efficient pub- lic transport enterprises. The TGM railway line was constructed in the early years of the century, and has benefitted from little new rolling stock since its inception. In the absence of a major modernization program, it is esti- mated that service could not be continued more than five years. PART IV - THE PROJECT 36. The project was first discussed with the Tunisian authorities in early 1972. It was prepared by consultants to SNT and the Bank. Field ap- praisal took place in January 1973. Negotiations were held from May 23 to June 5, 1973. The Tunisian delegation was led by Mr. Moncef Bel Hadj Amor, Secretary-General of the Ministry of Finance. 37. The project consists of: (a) consultant services to the Tunis District, to aid it in carrying out its planning, programming and supervision functions and in training its personnel; (b) purchase of up to 210 buses, including an initial stock of spare parts, to renew SNT's urban bus fleet and help meet its needs for new vehicles; (c) purchase of 26 electric railway cars, signalling equipment and other materials required to renew the TGM railway line of SNT; (d) construction of a new bus maintenance depot for SNT; (e) improvement of key traffic intersections and purchase and installation of related signalling equipment for the Munic- ipality of Tunis; (f) consultant services for technical assistance, to the Govern- ment, SNT and the Municipality of Tunis. 38. A loan, credit and project summary are at Annex III. The appraisal report on the project (Appraisal of the Tunis District Urban Planning and Public Transport Project, July 25, 1973, Report No. 157a TUN) is being cir- culated separately to the Executive Directors. The Tunis District 39. Under the project, the Tunis District will prepare an urban devel- opment strategy, encompassing an examination of urban land use. The District will also carry out a series of special policy and feasibility studies. The  - 10 - policy studies will be addressed to public transport solutions for metropoli- tan Tunis, fiscal and financial questions at the District level, and housing policies for the Tunis area. During negotiations it was confirmed that the Government will consult with the Bank on the recommendations in these studies, and agree with the Bank on action to be taken in their light. Follow-up fea- sibility studies on housing and industrial sites and services, and renewal of the port area will also be undertaken. The Distr-ict will assume a leading and coordinating role in other project preparation studies, and ensure that they are placed in a metropolitan framework. In these activities it will be assisted by the team of consultants provided under the project. 40. The District will be responsible for overall supervision of project execution, coordinating the work of the! different entities involved. Working under guidance from the District, the Tunis Municipality will carry out the traffic improvement program, and a consultant to it will aid in introducing schemes to facilitate traffic flows and examine measures to enforce and, as necessary, modify existing traffic and parking regulations. His work will lead to the adoption, in agreement with the Bank, of a short and medium term action program. For the long term, automobile regulation, restraint and pric- ing policies will be among the subjects to be taken up by the District in the urban transport ppolicy study. Thus, in its financing of physical improve- ments and a series of associated studies, the project will give practical expression to the Governm-nt's policy of priority for public transport. The record of action in this respect will be an important element in the consideration of a possible second Bank Group project for the development of metropolitan Tunis. Co-financing with UNDP 41. The Bank/IDA and UNDP will jointly finance technical assistance to the District of Tunis. Preparation of the UMND Project Document on assistance to the technical services of the District was undertaken by a UJNDP mission in Tunisia at the same time as the Bank appraisal mission. The Bank will serve as Executing Agency for the UNDP project. UNDP and Bank/IDA funds would be drawn down in proportion to the participation of the two agencies in the total. Societe Nationale des Transports (SNT) 42. SNT, a public enterprise entirely owned by the State, will be the principal beneficiary of the loan and credit. It was established by statute in March 1963 by the nationalization and merger of several smaller enterprises providing public transport services. There are no disputes outstanding con- cerning compensation of former foreign owners. In addition to urban services, SNT provides inter-urban bus transport services. Their future will be con- sidered in the context of a national transport policy study financed under the Bank's highway project. 43. In 1972, a new General Manager took over the running of SNT. He has introduced important technical, operational and administrative changes to increase efficiency. During project execution, technical assistance in  bus and TGM rail operations and maintenance, and to help in the use of modern managerial control and cost accounting procedures will be provided to SNT. Consultants will also assist SNT staff in the preparation of tender documents and the evaluation of bids. 44. Physical execution of the project is expected to begin, with work on the renewal of the permanent way of the TOM railway, in late 1973. New buses are expected to arrive in batches starting in early 1974; up to the end of 1975 SNT requires 210 new buses to meet its needs for replacement of old vehicles and to expand its fleet to meet rising demand. Physical execu- tion of the TGM improvement program will terminate with the delivery of the last of three batches of railway cars in May 1975. These cars, a total of 13 motor/trailer sets, will replace the nine existing three-car trains; they will increase capacity and reduce running time and breakdowns. The bus main- tenance depot will provide the additional space and equipment required to im- plement a sound maintenance program. Project execution is expected to be completed by the end of June 1976. Sfax Study 45. The consultants to the Government would carry out a study of the urban development options of Sfax, Tunisia's second largest city. The studies undertaken by the District and by the consultants on Sfax may lead to a second urban project in Tunisia in two to three years. Cost Estimates 46. The project is estimated to cost about TD 12.5 million ($28.6 mil- lion equivalent). The foreign exchange component is estimated at nearly TD 8.5 ($19.53 million equivalent) or 68 percent of total costs. The following table summarizes the cost estimates, excluding customs duties, which the Gov- ernment intends to waive:  - 12 - Summary Cost Estimates $'000 % Foreign Item Local Foreign Total Exchange Tunis District 348 1347 /1 1,695 79 Public Transport (SNT) Bus procurement 4,868 5,059 9,927 51 TGM modernization 324 7,950 8,274 96 Bus maintenance depot 1,343 1,864 3,207 58 Technical assistance 2M3 439 657 67 Contingencies /2 858 1,920 2,778 69 Sub-total 7J611 17,232 24,843 69 Tunis Municipality /3 12000 762 1,762 43 Sfax Study /3 130 189 319 59 TOTAL 9 089 19 530 28 61968 /1 Includes UNDP financing of $850,000. 77 Physical contingency 5%, price escalation 5% a year over procurement period. /3 Includes contingencies of 10%. Financing Plan 47. The Government will lend $16.552 million out of the proceeds of the Bank loan and IDA credit to SNT on the terms and conditions applicable to the Bank loan to the Government: twenty-two years to maturity, four years of grace, and 7-1/4 percent interest per year on outstanding principal. The twenty-two-year term is based on a weighted average of the economic life of the equipment and building to be financed under the loan and credit. The Bank loan and IDA credit will finance 92 percent of the foreign currency costs; UNDP will finance about 4 percent. Local financial institutions will finance the remaining portion, for materials to be imported for use in manufacturing bus bodies. The Government will bear the exchange risk and, with local banks, complete the local financing required. The financing plan is summarized in the following table: $ millions Sources of Funds Proposed IBRD Loan and IDA Credit 18,000 63 UNDP Contribution (for Tunis District) 0.850 3 Government (for District, Traffic Improvements, Sfax Study) 1.478 5 Government (for Public Transport-SNT) 2.154 8 Tunisian Banks (for Public Transport-SNT) 69137 21 28.619 100 GS_=  - 13 - Financial Position of SNT 48. The Government plays a major role in SNT's finances because Gov- ernment approval is required for, among other matters, operating and capital budgets, staff rules and regulations, tariffs and borrowing. The SNT Statute requires that if the Government imposes reduced tariffs for certain user groups, as it does, then it must compensate SNT for the lost revenue. This has not been done in the past, and SNT's books show a profit over the past few years only because service has been allowed to decline. The enterprise is weak fi- nancially, and with the present tariff structure, its urban bus and rail op-- erations would show significant operating losses in the next decade, even after taking into account the major improvements in management and main.e- nance planned under the project. 49. SNT has agreed, under the project, to revise its accounting system and to have its accounts audited annually by independent auditors. In addi- tion, starting with the present fiscal year, SNT will maintain separate ac- counts for its urban and its inter-urban operations. During negotiations the Government agreed that in the future it will comply with its obligation under the SNT Statute to compensate SNT to the extent that it imposes reduced tariffs for certain categories of passengers. SNTts inter-urban operations have experienced serious loses in recent years, and the company has agreed, no later than December 31, 1974, to modify its inter-urban tariffs so that its operating revenue (including any compensation for reduced tariffs) will cover its operating expenses and debt service requirements on this branch of its operations. 50. For SNT's urban services, both the TGM railway and its urban bus operations, it was agreed during negotiations that tariffs will be increased in mid 1975 so as to yield an overall increase of operating income of not less than 15 percent. The Bank's projections indicate that a financing gap may remain, calling for additional tariff increases or subsidy payments by the Government. Long term tariff policy for SNT's urban operations will be considered in the context of an urban transport policy study to be carried out by the District. The Government and SNT will adjust tariffs in agree- ment with the Bank in light of the economically and socially desirable level recommended in the study. Any Government subsidies will be linked to a set of financial and operational performance criteria to be elaborated by SNT with the assistance of consultants and agreed by the Bank by the end of April 1974. These criteria will cover the introduction of improved finan- cial controls, operating and maintenance targets, including manpower, and indices of labor productivity. An annual review of performance and finan- cial requirements will be carried out by SNT with the District, the Govern- ment and the Bank. 51. This approach to urban transport differs from the Bank's usual concept of the financial autonomy and viability of enterprises whose invest- ment programs it supports. Subsidization of metropolitan public transport systems may be justified, however, since the external benefits of improved  - 14 - public transport and balanced urban growth cannot be fully captured finaxi- cially through tariffs. Since low income groups would be the main bene- ficiaries of such subsidization, this would also be in keeping with the social desirability of income transfers to such groups. The studies to be carried out under the project, and especially the attempt to relate subsidization to performance, will contribute to the Bank's knowledge in this new area. Procurement 52. During negotiations, the Government requested that the Bank Group finance imported chassis and mechanical sub-assemblies for buses; the compo- nents would be assembled by the Tunisian automobile and bus manufacturing enterprise, Societe Tunisienne d'Industrle Automobile (STIA). STIA had al- ready invited bids for the supply of chassis and mechanical sub-assemblies on the basis of procedures for international competitive bidding which con- form with the Bank's Procurement Guidelines; it is expected soon to submit its evaluation report and recommendations to the Bank for review and approval before commencing corntract negotiations. To ensure that the cost co the proj- ect of the STIA-assembled buses is not unreasonable, it was agreed during negotiations that buses would be procured through STIA only if STLA's firm offer does not exceed by more than 15 percent an international reference price (c.i.f. Tunis) for compar.`,le buses, to be established by SNT with the assist- ance of a consultant and agreed by the Bank. If STIA's price exceeds this limit, SNT will acquire complete buses through international competitive bidding. 53. Local procurement of buses should help to build up STIA's capacity to manufacture bus bodies and thus provide the impulse for a new industrial activity in an area where, because of low-priced labor, Tunisia has a com- parative advantage. STIA has experience in assembling buses from imported components, and it has recently latuched an expansion program, which would become operational with the project buses, under which it will manufacture bodies largely from locally produced materials and complete the buses with imported chassis and mechanical sub-assemblies. STIA will receive technical assistance from van Hool, a well-knowrn European body manufacturer, with which it has recently signed a licensing agreement. Its expansion program will create some 300 new jobs within the firm, in addition to an unspecified number of positions in domestic supplying industries. STIA's participation in the project would be consistent with the recommendations of recent Bank economic reports, which proposed that Tunisia concentrate on labor-intensive production such as assembly operations. Arrangements satisfactory to the Bank to com- plete the financing of SNT's bus purchases under the project would be a con- dition of Bank approval of SNT's contract with STIA. 54. With the exception of the traffic improvement program of the Munici- pality of Tunis, all project-financed items, including particularly the TGM rail equipment and the construction and equipment of the bus maintenance depot, would be procured through international competitive bidding.. A preference of fifteen percent or the applicable customs duties, whichever is lower, would be applied to bids from loca' equipment maniufacturers; preferential tariffs will not be  - 15 - taken into account in bid evaluation. Standardization of the Municipality's traffic signalling equipment calls for new purchases to be made from existing suppliers through normal commercial channels. The Municipality's construction works under the project will be carried out in small units, and procurement of construction services will be undertaken in accordance with Tunisian Gov- ernment procurement regulations. Disbursement 55. Bank and IDA funds will be disbursed under the project ir 1973, 1974, 1975 and 1976 (see Annex III for a breakdown). The IDA credit will be disbursed before the Bank loan. For the purchase of buses, if locally procured, the loan and credit will be disbursed against 45 percent of total expenditures, representing the foreign expenditure component of the chassis and mechanical sub-assemblies to be imported by STIA for use in manufactur- ing complete buses for SNT, or 100 percent of foreign expenditures, if f in- ished buses are procured through international competitive bidding. Dis- bursements for equipment will be made against the foreign exchange cost or 100 percent of the ex-factory price; for construction works and consultant services (jointly with the UNDP in the case of the Tunis District), against the foreign exchange component. Retroactive financing of up to $50,000 for consultant services to assist SNT is proposed. Economic Evaluation 56. The major quantifiable benefits under the bus component are obtained from improving maintenance facilities, replacing over-age vehicles, and expand- ing the fleet. The expansion of the bus fleet, combined with the provision of improved maintenance, assures greater reliability of service and lower over- all operating costs. Thus, the highest rate of return, over 29 percent, is obtained when all three sub-components of the bus program are undertaken si- multaneously, as is proposed under the project. The principal quantifiable benefits of the TCM renovation program derive from a reduction in operating costs and the costs of alternative transport modes in the absence of the project that can be foregone. The savings taken into account include costs avoided by not investing in highways to the extent required to accommodate the additional automobile traffic that would be generated if the TGM line were discontinued. The economic return is 16-17 percent. 57. The expected non-quantifiable benefits of the project are no less important than the quantifiable ones. The project's strengthening of the Tunis District should lead to more coherent planning, programming and super- vision of public investments in the metropolitan area. The public budget would be able for a longer period to avoid major investments in urban high- ways. The external diseconomies of private automobile use would be reduced, and the efficiency of resource allocation increased. The principal direct beneficiaries of the project will be people most dependent on public trans- port, the low and middle income earners.  - 16 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 58. The draft (a) Loan and Development Credit Agreements between the Republic of Tunisia and the Bank and the Association, respectively; (b) Proj- ect Agreement between the Bank, the Association and Societe Nationale des Transports (SNT); and (c) Project Agreement between the Bank, the Associa- rion and the District of Tunis; the Reports of the Committees provided for in Article III, Section 4 (iii) and in Article V, Section 1(d) of the Arti- cles of Agreement of the Bank and of the Association respectively; and the texts of the resolutions approving the proposed loan and credit are being distribution to the Executive Directors separately. 59. The effectiveness of the Loan, Development Credit and Project Agree- ments are conditional on each other. Additional conditions of effectiveness include inter alia the enactment of the decree and the establishment of the technical coordinating committee referred to in paragraph 29 of this report. 60. Additional events of default would give the Bank and the Associa- tion the right to suspend or premature the loan and credit if certain events occurred, including the amendment, suspension, abrogation, repeal or waiver of the SNT Statute or the law or decrees establishing and governing the Dis- trict, in such a way as Trterially and adversely to affect the ability of SNT or the District respectively to carry out its obligations under the SNT or District Project Agreement. 61. I am satisfied that the proposed loan and development credit would comply with the Articles of Agreement of the Bank and the Association. PART VI - RECOMMENDATION 62. I recommend that the Executive Directors approve the proposed loan and development credit. Robert S. McNamara President Attachments  Pce COUNTRY DATA - TUNISIA AREA 2/ POPULATION DENSITY 16E40OO km- 5.t4 million (mid-1972) 33 per kn/a Rate of Natural Growth: 2.6% JCJ per km-/of arable land Rate of Real Growth: 2.0% POPULATION CHARACTERISTICS (1972) HEALTH (1971) Crude Birth Rate (per 1,000) 38. Population per physician 6,486 Crude Death Rate (per 1,000) 12.0 Population per hospital bed 4o00 Infant Mortality (per 1,000 live births) 115 INCOME DISTRIBUTION DISTRIBUTION OF PRTVKE ,.A C!-A;T (197:> 2/ 7, of national income, lowest quintile .- % owned by top 10% of owners 53.0 highest quintile .. % owned by smallest 10% of owners 0.5 ACCESS TO PIPED WATER ACCESS TO ELECTRICITY (19G66) % of population - urban 89.7 (1972) % of population 25 - rural 19.5 (1966) NUTRITION (1966) EDUCATION (1972) 2/ Calorie intake as % of requirements 93.6 Adult literacy rate % 55-' Per capi:,-i protcin int ;ce (grans per daj) 62.5' Primary school enrollment 78 1/ GNP PER CAPITA in 1972 US $379 CROSS NATIONAL PRODUCT IN 1972 ANNUAL RATE OF GROWTH (% constant prices) US $ Mln. % 1961-65 1965-70 1971 1972 GNP at Market Prices 2,113 100.0 5.2 4.6 10.8 17.9 Gross Domestic Investment 505 23.9 10.6 2.9 13.0 33.9 Gross National Saving 436 20.6 1.7 17.3 48L.6 30.8 Current Account Balance -69 -3.3 Exports of Goods, NFS 555 26.3 - 0.1 11.6 31.1 26.4 Imports of Goods, NFS 609 28.8 3.9 3.0 18.0 28.0 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1972 Value Added t factor cost) Labor Force V. A. Per Worker US $ln. 7, Mln. % US $ % Agriculture 400 21.5 0,80G 52.5 00 41 O Industry 477 25.6 0.252 16.5 1,89; 155.2 Services 983 52.9 0.333 21.8 2,952 242.0 TJnemployed G.1 4G/ 9.2 Total/Average 1, 100.0 5 1,22C 100.0 GOVERNMENT FINANCE General Government Central Government (Dinar Mln.) % of GDP (Dinar Mln.) % of GDP 1972 1972 1970-72 1972 1972 1970-72 Current Receipts 253.1 24.6 25.2 216.1 21.0 21.4 Current Expenditure 215.9 21.0 21.9 175.8 17.1 17.5 Current Surplus Y?72 3.6 3.3 4G.3 3-.9 Capital Expenditures 85.O 8.3 8.4 58.6 5.7 60o External Assistance (net) 43.7 4.3 4.6 36.1 3.5 3.6 W World Bank Atlas conversion. j Estimate. j Residual, equivalent to approxdmately 350 thousand in full-time employment, the balance represents underemployment. M/ Male only. ,, not available not applicable  COUNTRY DATA - TUNISIA MONEY, CREDIT and PRICES 1965 1969 1970 1971 1972 (MVilion Dinars outstandLng enn perlx, Money and Quasi Money l59.6 229.8 250.9 303.9 354.7 Bank Credit to Public Sector 73J-h 86.4 8h.7 76.1. 61 .3 Bank Credit to Private Sector 149