Tunisia - Phosphate Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Report No. P-1472a-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO COMPAGNIE DES PHOSPHATES ET DU CHEMIN DE FER DE GAFSA WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA FOR THE GAFSA PHOSPHATE PROJECT July 16,1974 Europe, Middle East and North Africa Region Country Programs Department II The confidentiality of this report must be strictly observed. It was prepared for exclusive use of the Bank Group Staff. It may not be published, quoted or cited without Bank Group authorization.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. To be returned to Reports Desk immediately after use  Currency Unit Tunisian Dinar (D) The exchange rate of the TiAnisian Dinar is floating. The rate used in the appraisal report, which approximates the current rate, is: US$ 1 = D o.44 D 1 $ 2.27 D 1,000 = $ 227,000 D 1,000,000 = $ 2,270,000 Fiscal Year January I to December 31 Abbreviations BDET Banque de Dgveloppement Economique de Tunisie GAFSA Compagnie des Phosphates et cla Chemin de Fer de Gafsa SNCFT Societ6 Nationale des Chemins de Fer Tunisiens STEG Soci6t6 Tunisienne de l'Electricitg et du Gaz  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO COMPAGNIE DES PHOSPHATES ET DU CIEMIN DE FER DE GAFSA WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA FOR THE GAFSA PHOSPHATE PROJECT 1. I submit the following report and recommendation on a proposed loan to Compagnie des Phosphates et du Chemin de Fer de Gafsa (GAFSA) with the guarantee of the Republic of Tunisia for the equivalent of US$23.3 million to help finance a project for phosphate development. The loan would have a term of 15 years, including 3 years of grace, with interest at 7-1/4 percent per annum. The Government of Tunisia would charge a guarantee fee of 1-3/4 percent per annum on the outstanding amount of the Bank loan, bringing the cost of the loan to GAFSA to 9 percent per annum. 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 finalizing its report following discussions with the Government. The main conclusions of this report are reflected below. Country data sheets are attached (Annex I). 3. Tunisia's development has been hampered by scarcity of natural re- sources including water. Much of the country is arid or semi-arid, and agri- culture is highly dependent on rainfall. Minerals are mostly of low quality and, apart from phosphates, limited in quantity. In the mid-1960's, petro- leum was discovered and has since become an increasingly valuable source of revenue and export earnings. Industrial development has been handicapped by the small size of the domestic market, as well as a lack of skills and expe- rience. Tourism has developed rapidly and workers' remittances have become a significant item in the balance of payments. Per capita income increased by 4.4 percent annually between 1961 and 1972 to reach a level of $379. Tunisia has enjoyed a large amount of external aid and has used this to ex- pand economic and social infrastructure, broaden the industrial base, increase the rate of growth, and make available a wide range of social and welfare serv- ices to a large part of the population. Like most developing countries, how- ever, it has not yet found a way to eliminate unemployment and poverty and to achieve a balanced distribution of consumption among income groups, between urban and rural areas, and among regions. 4. Government strategy in the 1960's relied heavily on central planning of investment and resource allocation, with the public sector playing a major role in production as well as providing infrastructure and services. Foreign  - 2 - exchange shortages and preoccupation with restraint of inflation led to re- course to a pervasive system of official price determination and administra- tive controls. An unusually long series of poor crop years due to shortage of rainfall slowed down growth of output. Many of the investments in public enterprises proved to be uneconomic and private initiative in most sectors except tourism and petroleum was weak. Growth was relatively slow until 1969, but was combined with the development of infrastructure and a high degree of domestic price stability. 5. The Government's present development strategy was introduced after 1969 and forms the basis of the current Fourth Plan, 1973-1976. The principal objectives are (a) accelerating growth based on export-oriented industries, mainly by encouraging private initiative, reducing direct Government involve- ment in production and relaxing administrative regulations; (b) easing the country's unemployment problem by creating new jobs primarily in the expanding industrial sector, but also by encouraging worker emigration, reducing popula- tion growth and improving education and training; and (c) maintaining internal and external financial stability. The target rate of GDP growth is 7.1 percent, providing for a 5.4 percent growth rate in per capita private consumption. In- vestment is projected to increase by 70 percent above Third Plan levels. Na- tional savings are to finance three-quarters of investment. Exports of goods and services are projected to grow at 8.8 percent per year at constant prices and imports at 12.2 percent. An increase in net external capital flows of almost 100 percent over 1969-1972 average levels would be required, with ex- ternal capital providing 23.5 percent of total investment; the debt service ratio would be held to below 20 percent. The Plan targets may be conservative in terms of both growth and savings potential, and are affected significantly by the impact of the changed petroleum and phosphates situations on the Tunisian economy (paragraphs 7 and 8). 6. The annual growth rate of the gross domestic product over the decade 1961-1970 was 5 percent. A remarkable upsurge has taken place since 1970, with GDP growing in real terms by 9 percent in 1971, and 18 percent in 1972. The improvement can be attributed in part to exogenous factors such as good weather, leading to record cereal crops and a three-fold increase in olive pro- duction, in part to important growth in several areas (tourism, petroleum and emigrant workers' remittances) which previous policies had fostered, and in part to the general reorientation in Government policy since 1969, generating renewed self-confidence and initiative in the private sector. By 1972, the in- vestment rate was 23.6 percent of GDP compared to 20.8 percent in 1970; domestic savings were 21.1 percent of GDP compared to 16.3 percent in 1970, reducing Tunisia's dependence on external borrowing from 31.6 to 13.6 percent of in- vestment. The balance of payments has improved steadily since 1967, with the current account deficit dropping from about D 60 million up to 1967 to D 23 million in 1972. The traditional negative net payments balance was reversed in 1968, and at the end of 1973 net foreign assets amounted to $256 million, covering 5.5 months of commodity imports. 7. Following the very rapid expansion of the economy in 1972, the growth rate slowed last year to an estimated 2.8 percent. Agricultural output fell  - 3 - by 11.6 percent from the very high 1972 level, increases in production of cereals and livestock offsetting only part of the expected drop in olive pro- duction. Growth may be about 9 percent in 1974. The Government is attempting to maintain its past success in controlling inflation, though there will be increased pressures arising from the higher level of investment, the build-up of foreign exchange reserves and the increased cost of imports. In the medium terni, and assuming no major recession in developed countries, Tunisia's gain from the rise in petroleum and phosphate prices should more than offset fore- seeable adverse external developments on tourism earnings, workers' remit- tances and other exports due to events abroad. Export earnings from petroleum are now projected to increase fourfold from $98 million in 1973 to some $368 million in 1976, and phosphate prices have also risen sharply. As a result, a continued build-up of reserves may be expected over the next several years. A substantial reduction in the net rate of emigration, originally projected at 20,000 per year, could have serious repercussions on unemployment and income, particularly in rural areas, unless energetic measures are taken to increase labor absorption in other sectors. 8. The increased foreign exchange reserves and Government surplus ex- pected from higher export prices and consequent tax revenue do not call for a basic revision in development strategy but suggest that Tunisia could step up its efforts to achieve higher investment and growth rates and increased employment, and to depend less on emigration and foreign aid. The main con- straints are likely to be the speed at which policies and institutions re- spond to the challenge and projects are prepared and executed. The new orientation since 1969 and the improved economic situation provide the Gov- ernment with an opportunity to step up efforts to achieve its declared social objectives, including greater impact on employment. Tunisia has made some impressive social gains. By 1971, primary school enrollment had reached 73 percent and secondary enrollment 42 percent of the relevant age-groups. Public health services have been greatly expanded with many provided free, a family planning program introduced and social secur- ity services provided to an increasing proportion of the labor force. Public social expenditure, both current and capital, has increased at the rate of 9.3 percent per year and accounted for 14.5 percent of GDP in 1970. Nonethe- less, major social issues remain. Further progress is needed in land reform. Wide regional and income disparities are persistent and there has been a grow- ing concentration of productive activities in urban areas. Job creation has not kept pace with the growth of the labor force, and in 1972 the unemploy- ment rate was estimated at 14 percent. 10. Agriculture, the dominant sector in the economy, provides nearly half of total 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. Agricultural production jumped in 1971 and again in 1972, largely as a result of favorable weather, and the potential for further growth is clear. While large infrastructure invest- ments were made during the last decade, current policy emphasizes projects  - 4 - that make a rapid and direct contribution to production and recognizes var- ious constraints on agricultural development: absentee ownership and insecur- ity of tenure, inadequate access to agricultural credit, the need to devote more resources to extension services and agricultural education, and under- utiliLation of irrigation investments. D 40 million has been allocated to a rural development program to be executed by the provincial administrations. 11. During the 1960's manufacturing production in Tunisia increased by 7 percent annually. There was a remarkable 30 percent further increase in 1972 due in part to a record year for the olive oil processing industry. The early thrust of industrialization was supplied by large import substitu- tion projects in the state sector. These suffered, however, from the limited domestic market and shortages of experienced staff and management. Under the Fourth Plan, private manufacturing investment, particularly in textiles, fertilizers and metals transformation, is expected to average D 25 million per year between 1973 and 1976, compared with D 12 million in 1972, and to account for two-thirds of total investment in manufacturing. Foreign private investors have been offered incentives and are expected by Tunisia to contri- bute through finance, know-how and overseas marketing, in creating competitive industries producing a wide range of exports. Tunisia's preferential trade agreement with the EEC, currently being renegotiated, also gives it some ad- vantages. Preinvestment work, and the preparation of programs for re-equipment and modernization in priority subsectors have been started. Tunisia aims to develop petroleum-based industries and production of phosphoric acid and other phosphate derivatives for export, while possibilities for metal manufacturing for export are being explored. The Plan further foresees the establishment of a small-scale industry fund to encourage growth and decentralization of such industries. 12. The development of tourism is relatively recent. Foreign-visitor arrivals in Tunisia reached 780,000 in 1972, with an annual rate of growth of 30 percent -- higher than any other Mediterranean country. Earnings from tourism are now a main source of foreign exchange, reaching US$154 million in 1973. The Government actively supports expansion through incentives to private hotel promoters and has recently embarked on a long-term tourism infrastructure program. 13. Since the early 1960's Tunisia has received large amounts of external capital. Official aid amounted to an average of US$19 per capita per annum, almost half from the United States, mostly in the form of program loans and PL 480 commodity aid. Other major lenders were France, the Federal Republic of Germany, Italy, Kuwait and the Bank Group. Project loans, particularly for public enterprises, accounted for 58 percent of total disbursements in 1969- 1972. Most aid has been obtained on rnclcessionary terms: from 1969-1972, the average terms of borrowing from bilateral sources were 2.3 percent interest and 27 years to maturity, including 9 years of grace; from multilateral sources 5.4 percent interest and 28 years to maturity, including 6 years of grace. For private borrowing (about $40 million annually), average terms were 6.0 percent interest and 9 years to maturity. Direct foreign private investment  - 5 - in Tunisia has been limited. However, mainly as a result of increasing out- lays on petroleum exploration and development, it has risen from ar. average of $19 million per annum in the late 1960's to $40 million in 1972. 14. Tunis'a's total external public debt was $1,108 million (of which $693 million were disbursed) at the end of 1972. Disbursed debt is estimated to have been $862 million at the end of 1973. The debt service in 1973 is estimated to have been 12.7 percent of exports of goods, non-factor services and workers~ remittances. The ratio is expected to fall significantly by 1976, folflowing recent petroleum and phosphate price increases. Government policy on futujre external borrowing in the light of its new balance of payments po- sition is still under review. Tunisia is capable of servicing substantial additional debt on less concessionary terms than it has received in the past. PART II - BANK GROUP OPERATIONS IN TUNISIA 15. Starting in 1962, Tunisia has received a total of eighteen Bank loans and ten IDA credits amounting respectively to $195.2 million and $65.7 million, net of cancellations and refundings. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of May 317 1974, and notes on the execution of ongoing projects. 16. While there have been some problems in project execution, as in the railways, agricultural credit and family planning projects, on the whole project implementation has been satisfactory. Important institutional improve- ments have been achieved. In both the transport and public utilities sectors, in lependent agencies have been created or strengthened. The main Tunisian development finance company, BDET, has been placed on a sound footing. 17. In accordance with Tunisian priorities, past Bank Group lending has emphasized support for long-term investments in infrastructure and social de- v7elopment. Lending for transport, power and tourism infrastructure, has ac- counted for 34 percent of Bank/IDA commitments in Tunisia. Lending for urban and social development, including water suipply, education, family planning and the Tunis urban planning and public transport project, has recently become the largest component of Bank lending and accounted for a further 40 percent. In- dustrial and hotel financing through Banque de Developpement Economique de Tunisie (BDET, formerly Societe Nationale d'Investissement) comes third with 19 percent. Agriculture and fisheries have received 7 percent of total com- mitments. 18. Three more projects, for irrigation rehabilitation in the Medjerda and Nebhana Valleys, BDET, and urban sewerage, are expected to be presented  -6- to the Executive Directors this fiscal year. Future lending is expected to support the Government's policies aiming at rapid growth in a more open, export-oriented economy, measures to create employment and to achieve a more equitable income distribution, and institutional reform. The proposed lending program will emphasize agriculture including rural development. This would require substantial inputs of -manipower and technical assistance to support increased production and the creation of new institutions which can reach the rural poor. Over the next several years, it is expected that a number of projects will be presented which address the problems of land reform, organiza- tion for agricultural and rural development, and integration of agricultural with other aspects of rural development. Urban and social development will be furthered by a first operation in the sewerage sector involving important organizational changes, while a third education project would also be presented. 19. Lending for industry has so far been through the development fi- nance company, BDET, and has mostly benefited medium-size companies. Such lending will continue, but at a declining rate as BDET diversifies its sources of funds. It is expected to be supplemented by direct industrial lending, first for the proposed phosphate mining project, and later for small-scale industries and in other priority subsectors, now being studied with Bank technical assistance, in which Tunisia has a comparative advantage. 20. The Bank Group accounted for almost 20 percent of disbursements of official aid to Tunisia between 1969 and 1972 and is expected to maintain its share, with that of the US declining and that of other, particularly Arab, sources of funds rising. The Bank Group's shares in total debt outstanding at the end of 1972 and in debt service during 1972 were 18 percent and 7 per- cent respectively. Over the rest of the decade, the Bank Group's share in total external debt is not expected to vary much; its share in debt service will probably rise to approach the share of debt outstanding. 21. IFC has invested in a fertilizer plant, in BDET, in COFITOUR (a company to promote and invest in tourism projects), in RYM (a large hotel development) and in a promotional company Sousse Nord which is to prepare plans for an integrated tourism resort development in one of the areas in which tourism infrastructure is being financed jointly by the Bank, IDA and Kreditanstalt fur Wiederaufbau (KfW). IFC's most recent investment, in May 1974, was in Industries Chimiques du Fluor, which will produce aluminum fluoride from local fluorspar for export. With the inclusion of this in- vestment IFC's net commnitments in Tunisia total $14.0 million. PART III - THE PHOSPHATE SECTOR IN TUNISIA 22. The phosphate sector (mining and processing) had a constant value of output after 1966, and its share of GDP fell to about 3 percent in 1973. Tle industry employs 13,000 persons, mostly in the Gafsa area of southern Tunisia which offers few alternative sources of employment. Export earnings declined between 1967 and 1973 despite the increase in exports of superphos- phates and the steady volume of rock exports, as the prices of both phosphate  rock and fertilizers declined by more than 20 percent over this period. As a result, the contribution of phosphates to total Tunisian export earnings declined from over 25 percent in the mid-1960s to 16 percent in 1972. This proportion is, however, expected to increase sharply in 1974 and stay higher for several years as a result of both a large increase in prices in 1974 over 1973 (para. 26) and a build-up of production and export of rock, acid and fertilizers, associated in part with the proposed project. Receipts from exports of processed products exceeded those from rock exports for the first time in 1972. 23. Tunisia accounts for about 4 percent of world production of phos- phate rock with ore which is generally of low to medium quality compared with that sold by Morocco and other competitors. Output of saleable rock has fluctuated between 2.6 and 3.4 million tons per annum since 1965. Exports have remained constant at 2.3 million tons, while consumption of the domestic processing industry more than doubled, to 1.1 million tons or one-third of output. Over 90 percent of phosphate rock is produced by the Government- controlled Compagnie des Phosphates et du Chemin de Fer de Gafsa (GAFSA), the proposed borrower of the Bank loan (para. 31). 24. Processing of the sector's output is dominated by the production for export of phosphoric acid and triple superphosphate from about one-third of annual phosphate rock output. Four large producers account for nearly all of Tunisia's phosphoric acid and fertilizer production. The Government and GAFSA between them hold a controlling interest in each of these companies, in partnership with various foreign private interests. Total capacity of the processing plants is 120,000 tons per annum phosphoric acid (as P205), 460,000 tons of triple superphosphate, and 120,000 tons of compound fertilizer. Near- ly all of this production is exported. 25. Tunisia's phosphate sector has good potential for future develop- ment with numerous investment possibilities. The ore reserves presently de- lineated are sufficient for about 20 years even with major production in- creases, provided several new mines replace depleted deposits. The Sehib mine, to be developed under the proposed project, will be the next such new mine. In addition there are indications of further reserves as large as those presently known in other parts of the Gafsa area. Over the period 1974 to 1978, investments in mining and beneficiation facilities are expected to be $122 million (para. 47). Production should increase from the present 3.4 million tons to 4.6 million tons by 1976. Investment in processing may reach $43 million between 1973 and 1976; one-quarter of this total, however, is for plants still at relatively early stages of planning. This investment should double the domestic processing of phosphate rock, to 2.1 million tons or 46 percent of 1976 rock output, with exportable supplies of rock almost unchanged. Most of the increased acid and fertilizer production would continue to be for export, with only a small quantity required for the domestic market. The annual growth in export sales would be between 10 and 15 percent.  -8- The Market for Tunisian Phosphate Rock 26. World production of phosphate rock rose from 40 to 90 million tons between 1960 and 1972, with the US (42 percent), the USSR (22 percent) and Morocco (16 percent) as leading producers. World export trade increased from 29 to 44 million tons between 1965 and 1972; the main exporters were Morocco (31 percent), the US (29 percent) and the USSR (14 percent). The world rock supply/demand situation imoved from a world wide over-supply in the late 1960's and early 1970's to a serious shortage by late 1973 as a result of increased worldwide fertilizer demand and supply problems in the U.S. Prices reflected this development; export prices for the first half of 1974 were three times higher than those prevailing in 1973 and there was a further rise in July 1974. The sharp increase in prices is also explained by a necessary recovery following a depressed price situation over most of the last decade. World rock prices are expected to remain strong through late 1975 because of an expected continuing tight supply. World rock supply is, however, expected to improve and balance demand in late 1976. Thereafter a small supply surplus is expected to persist. Long-term FOB equilibrium prices are therefore fore- cast to stabilize -- by 1976-77 -- at 20 to 3n percent below January 1974 price levels, and to increase thereafter at a rate close to the prevailing world inflation rate. 27. Prices for Tunisian rock tend to follow world trends fairly closely. Tunisia should be able to maintain its present level of exports without dif- ficulty in spite of the medium quality of its product. About 40 percent of exports go to consumers who are considered to constitute a captive market. Some of these consumers operate plants in Europe designed to accommodate the specific characteristics of Tunisian rock. In addition there is a large demand (0.8 million tons in 1972) for Tunisian rock for direct application because of its softness, reactivity with other soil elements and solubility. Finally, some traditional markets in South East Asia may be regained if the Suez Canal is reopened. PART IV - THE PROJECT Background 28. In 1972 the Government requested Bank assistance in rationalizing the Tunisian phosphate sector and more specifically in the modernization and expansion of GAFSA's mining operations. Two Bank reports to the Government and the companv in early and mid-1973 pointed to the need for GAFSA to carry out further preparatory work on its investment plans, define more clearly plans for modernizing existing mines, and strengthen management, planning and financial control. The company took steps to reorganize, established a planning unit and formulated a modernization program. 29. A feasibility study of the Sehib project, and preliminary engineer- ing, were carried out by the consultants Heurtey (France). The project was  - 9 - ready for appraisal in February-March 1974. Negotiations took place in Washington in June 1974. The Tunisian delegation comprised Messrs. Amira (Managing Director), Ben Debba, Beji and Karai (for GAFSA) and Mr. Ennaifer (for the Government). 30. A report entitled "Tunisia - Appraisal of the Gafsa Phosphate Proj- ect" (No. 482-TJN) dated July 12, 1974 is being distributed separately to the Executive Directors. The appraisal report covers the Sehib project (para. 41), for which $23.0 million would be provided out of the proposed loan. An addi- tional sum of $0.3 million is included in the loan for a study of the develop- ment of the Gafsa region (para. 55) of this Report). A loan and project sum- mary is attached as Annex III. The Borrower 31. The Compagnie des Phosphates et du Chemin de Fer de Gafsa (GAFSA) was founded in 1887. After Tunisia's independence the Government was invited to buy participation and by early 1973 held 83 percent of the share capital. A large number of small holdings account for the remaining shares. After the Government makes a further equity contribution to GAFSA in 1974 (see para. 35) its holding will rise to 98 percent. 32. GAFSA operates four long-established mines and has four other de- posits in various stages of development, all except one of which are tinder- ground mines. The extracted phosphate rock is processed in four washing and three air classification plants to produce 3.3 million tons of saleable product per annum before being shipped by rail to Sfax (some 230 km away) and to Gabes (300 km) for export and domestic manufacture of phosphoric acid and fertilizer. 33. GAFSA employs about 10,000 people. Efficiency suffers from a lack of underground face workers and overstaffing in surface jobs, resulting in low productivity and a high level of absenteeism. Past neglect of training and safety programs and poor working conditions have been contributory factors. A manpower study in 1974 has formulated a program for dealing with these problems and will be implemented in conjunction with the modernization program for existing mines and plants (para. 39). 34. Management was poor in the past and was changed too frequently. Re- cent steps to reorganize, recruit experienced staff, and review salary policies have improved the situation. The company is making a determined effort to improve its managerial effectiveness: cost accounting and inventory control raave been introduced; the Production Department has been reorganized and the modernization program formulated by a planning unit established within it. Better coordination among operating units has been achieved along with higher motivation and improved productivity and safety consciousness. Training, budget control, safety and planning have all been improved. However, GAFSA has still not achieved fully integrated corporate financial planning. Accord- ingly, assurances were obtained that GAFSA would consult the Bank annually on updated 5-year investment programs for all its operations, and submit a plan of action to improve its corporate and project financial analysis for Bank review by July 1, 1975 and thereafter implement it (Loan Agreement Section 5.04).  - 10 - Financial Position of GAFSA 35. GAFSA's financial record has been poor since 1967. Only in 1972 did riine production surpass 1966 levels. The company's net income dropped from D 1.7 million in 1966 to a record net loss of nearly D 4 million in 1972. In 1973 there was some improvement due to an increase in prices and, to a lesser extent, in production which, however, still resulted in a loss of D 3.7 million. The basic reasons for GAFSA's substantial losses were declining prices for phosphate rock during the 1960s and early 1970s, and high produc- tion costs and virtually no cost-saving investments for nearly two decades. GAFSA's poor position was shown by its lack of working capital (the current ratio was below 0.7 until 1973) and an unfavorable debt-equity ratio. The Government has made several capital contributions to the company since 1970 as part of successive financial consolidations. In implementation of the most recent of these (in 1974) it will make a contribution, already voted by the shareholders, of D 5 million to GAFSA's equity. The Government will also convert D 6.5 million in credits to GAFSA into equity. With these contributions, and after writing off past losses, GAFSA's capital will total D 12.7 million. 36. For the first time since 1966 GAFSA is expected to realize a posi- tive net income, amounting to D 34.1 million, in 1974. The main reason is the large increase in phosphate prices for 1974 over 1973, and to a lesser extent an increase in production. GAFSA's capital position will also be much improved. Net income in future years is expected to decline under the impact of the pro- jected drop in phosphate prices and increasing operating costs. The importance of the cost-reducing modernization program is shown by the fact that even with full production from Sehib, the existing mines will contribute 71 percent of GAFSA's total sales. 37. GAFSA's annual accounts have been audited by a competent local auditing firm. Assurances were obtained that the accounts would at all times be audited by independent auditors acceptable to the Bank (Loan Agreement Section 5.02). GAFSA's 1974-1978 Investment Program 38. GAFSA's investment program during the years 1974 to 1978 is domi- nated by two large programs and also contains a number of miscellaneous re- placement investments. At four of its existing mines and the related treatment plants GAFSA will carry out a modernization program costing an average of $10 million annually (see next section). At the same time the company will proceed with the exploitation of the Sehib deposit, which is the principal part of the project for whiclh a Bank loan is proposed (para. 41 et seq.). The Modernization Prograr 39. The modernization program was drawn up in 1973 by a newly established planning unit at the request of the Bank. It aims to improve the efficiency and safety, lower the costs and increase the productivity of GAFSA's operations and is essential to strengthen the company against the day when phosphate  - 11 - prices decline from their current high levels, since GAFSA faces competition fror lower-cost Moroccan and other producers. The program will permit an in- ccrease of about 20 percent in the output from existing mines, to reach a level of 3.9 million tons of saleable product by 1977. This output should be pro- duced at costs of operation up to 30 percent lower in the mines and up to 20 percent lower in the treatment plants than at present. 40. The program involves improvement of working conditions, ventilation and safety, mechanization of extraction and haulage operations, and expansion of capacity in the mines; modification and replacement of process equipment to increase the efficiency and capacity of the washing and air classifying plants; replacement and upgrading of internal railway transport equipment; and upgrading of the workshops and materials handling facilities. The gen- eral nature of the program as defined is technically sound; however, some work remains to be done to make detailed choices of subprojects. This would be done by the unit which prepared the program. GAFSA has agreed to strengthen its staff for planning and implementing the program (Loan Agreement Section 4.02). The modernization program would be updated annually in consultation with the Bank (Loan Agreement Section 5.04). The Kuwait Fund for Arab Eco- nomic Development has approved a loan (para. 48) towards the financing of the program, the rest of which would be financed by GAFSA. Project Description 41. The project involves developing the Sehib deposit in southern Tunisia, near Gafsa, to produce two million tons per annum of phosphate rock through underground mining by the longwall method (see para. 42 below). The deposit has sufficient ore reserves to permit twenty years of mining, The product would be upgraded by washing to produce 1.6 million tons of marketable product for export. The project includes underground mining and haulage eauipment, a 6 km conveyor from the mine, a washing plant, water and power supply, workshops, offices, open and covered storage facilities, service and repair shops for the maintenance of equipment, housing for supervisory personnel and some minor roads. Finally, a study of the development of the Gafsa region would be carried out under the project. In addition, the national railway company, SNCFT, will provide a 13 km spur line to Sehib, a station and loading facilities at Sehib, additional rolling stock and some upgrading of the main line to the port of Sfax to handle GAFSA's increased output. 42. In the selected longwall mining method a plow, moving along an armored conveyor, cuts the rock from a face 70 to 100 meters wide in repeated passes. Hlydraulic-powered props support the roof in the immediate vicinity of the plow only and advance with it. The cut rock is transported by the face conveyor to feed into the main mine haulage system. This method achieves high extraction rates. It would be a marked improvement over existing methods in GAFSA's mines. Extensive trials at Sehib have demonstrated the technical viability of the longwall method but also the need for modification of the equipment to counter roof control problems. A modified system, for which roof control and production performance guarantees have been given, will be in- stalled in late 1974. While there is some risk involved in using the long- wall method, it is considered this has been minimized.  - 12 - Proj ect Execution 43. Construction of the Sehib project will be carried out by GAFSA with the assistance of supervising consultants acceptable to the Bank (Loan Agree- ment Section 3.02). Heurtey (France) prepared the feasibility study of tile project and conducted the preliminary engineering. Under a new contract ex- pected to be signed in July 1974 after consultation with the Bank, Heurtey will complete the detailed engineering and supervise procurement. They will also supervise construction and installation of both underground and surface facil- ities, with assistance from Sofremines (France) for the underground facilities. 44. Skill levels needed by both underground and maintenance personnel at Sehib will be considerably higher than in the case of GAFSA's other opera- tions in view of the more mechanized mining method to be employed. For mining, on-the-job training has been carried out for the last two years and the men so trained will help provide on-the-job training for the other miners required. At least four senior engineers are being hired for the Sehib operations, along with other more junior staff. To handle the new longwall equipment, nine underground foremen with specific experience will be required. These foremen are not available in Tunisia and it is expected they will be recruited under a contract with the French State Mining Company. GAFSA has agreed to determine and implement a staffing plan for its Sehib facilities in consultation with the Bank (Loan Agreement Section 4.01(b)). 45. Detailed engineering began in July 1974. At the same time Beurtey began updating the tender documents for international competitive bidding, which were prepared in 1970 and require only minor modifications. Procurement of major equipment items should be completed by July 1975. The washing plant is expected to be commissioned by mid-1977. The development of the mine is already underway. The first longwall will be installed in early 1975 with the others starting up from mid-1976 to early 1977. Project Cost and Financing 46. The total cost of the Sehib project is estimated at $64.2 million including interest during construction ($2.5 million). The foreign exchange component of project cost is estimated at $44.3 million, or 69 percent of the total cost. The regional development study is expected to cost a further $0.5 million ($0.3 million in foreign exchange). Equipment estimates are based on quotations from suppliers received between December 1973 and February 1974 for orders to be placed in late 1974. Civil works estimates are based on February 1974 inquiries among potential Tunisian contractors. Physical con- tingencies at a rate of 10 percent have been included. Price contingencies have been established assuming an increase over past low inflation rates for local purchases, to 10 percent per annum, and inflation rates of 13 percent per annum on imported goods and services, after 1974. 47. The modernization program is estimated to cost $51.3 million over che five years 1974 to 1978, including interest during construction of $0.9 million, with a foreign exchange cost of $33.5 million. Miscellaneous replace- ment investments would total $6.4 million to 1978. Total financing needs for  - 13 - GAFSA's investment program up to 1978 are $121.9 million (D 53.0 mil'lion) and would be provided as follows: ($ million) Local Foreign Total Percent Proposed 3.BE1D Loan (for Sehib project) - 23.0 23.0 18.9 Kuwait ^'-und loan (for modernization program) 6.9 6.9 5.3 Government (as equity) 11.5 - 11.5 9.5 GAFSA (cash generation) 28.1 52.4 80.5 66.3 39.6 82.3 121.9 100.0 48. The proposed Bank loan would provide $23.0 million toward the finance needed for the Sehib project. The Kuwait Fund for Arab Economic De- velormeiut has approved a loan to Tunisia of 2 million Kuwaiti dinars (equiva- lent to 86.9 million) for the modernization program. It would be repaid in 15 years including 3 years of grace, with interest at 4 percent per annum. This money would be relent to GAFSA for 12 years including 2 years of grace, with interest at 8 percent per annum. The Government would (para. 35) make a D 5 million ($11.5 million) equity contribution to GAFSA. Over the period i974-19 78, GAFSA is expected to contribute D 35 million ($80.5 million) or 66 percent of the finance required for its investment program. This relatively hi-h proportion is made possible by GAFSA's expected large receipts. There is a comfortable safety factor in the projection of revenues as against financing needs, and the sales projections are themselves based on relatively conservative price assumptions (para. 26). The Government has guaranteed to ensure that CAFSA has sufficient funds to complete both the Sehib project and the moderni- zation program (Guarantee Agreement Section 2.02). Ki. rTo maintain GAFSA's sound financial structure, agreement was reached that the company would at all times maintain a debt-equity ratio not exceeding 55:45 and a zurrent ratio of not less than 1.3:1. GAFSA also agreed not to dIstribute dividends, other than a 5 percent annual dividend provided fcr by its statutes, unless full provision has first been made for the investment needs of both Sehib and the modernization program in addition to meeting the current ratio test. Finally, GAFSA agreed to consult the Bank before making investments in any year exceeding $5 million (other than for Sehib, the moderni- zatioio program and normal renewals), until the Sehib project and the moderniza- tion prcgram have been completed; and exceeding $15 million thereafter (Loan Agreement Sections 5.05, 5.06, 5.09 and 5.10). Procuremrent and Disbursement 5R). All equipment and machinery--independent of whether or not financed by rhe Ban1k--will- be procured through international competitive tender follow- Ing Bank guidelines. Domestic suppliers will be given a preference of 15 percent or the applicable customs duty, whichever is the lower, in bid evalua- tion, Aln exception is the longwall face equipment and the drifting equipment, which hew,!ever will rot be financed by the Bank. Because of the sDecial nature of the lon,wall equipment and the need to standardize and adapt it to Sehib's  - 14 - specific mine conditions, it will be purchased from Westfalia (Germany)-the manufacturer supplying identical equipment for the trial phase. The drifting equipment will be supplied by Austria for purposes of standardization. All civil works (none of which would be financed by the Bank) will be carried out by T,nisian contractors selected after local advertising and competitive bidding. 51. The Bank loan would be disbursed over the three years 1975 to 1977. Disbursements for the Sehib project would be made against the c.i.f. cost of an agreed list of eligible equipment and spare parts, all of which is expected to be imported. Public Infrastructure Requirements 52. GAFSA would install and finance the transmission line and transfor- mer capacitv needed for the Sehib project and purchase power from the public power company, STEG. For the Sehib plant's water requirements (for which GAFSA would install and finance the necessary facilities), the Government has agreed to provide GAFSA with a concession for exclusive use of a suitable water source not later than July 1, 1975 (Guarantee Agreement Section 2.04(b)). Railway facilities required to handle the increased output from both Sehib and the existing mines would be provided by the national railway company, SNCF'T. The African Development BBank has approved a loan of $4 million equivalent to finance wagons. The sane bank has agreed in principle to finance the track improvements and construction needed. The Government has agreed to ensure the availability of sufficient funds to SNCFT to complete the railway works, and to cause SNCFT to carry out the works in accordance with a timetable to be agreed with the Bank by December 31, 1974 (Guarantee Agreement Sections 2.01 (b) and 2.02). Employment Effects 53. The region around GAFSA in Southern Tunisia is heavily dependent or mining employment, with little alternative employment in agricultural ac- tivities in and around the desert oases. The Sehib project will create em- ployment for 660 people at full production, with vastly improved working and safety conditions and much higher skill levels than in existing mines. The modernization program will significantly improve working and safety conditions at the existing mines and plants; at the same time, however, the introduction of partially mechanized methods of mining will necessitate reducing the labor force. The net effect over the period 1974 to 1979 will be to reduce the total company labor force by 860 people. The reduction will be effected gradually over the whole period by a combination of natural attrition, early retirement, retraining for employment in GAFSA's programs of general services and housing, and retention of some temporarily-employed personnel, until the opening of the Kef Eschfair mine at the end of the period offers some additional jobs. 54. GAFSA has agreed to consult the Bank annually on, and implement an updated manpower reduction program, as well as programs for training and the expansion of social and health facilities for its labor force (Loan Agreement Section 4.03).  - 15 - Regional Development Study 55. In the longer term it seems unlikely GAFSA will be able to offer significant increases in employment to new job-seekers. Accordingly the Government has requested Bank financing of a study of alternative development possibilities in the region to be carried out by December 31, 1975 under the auspices of a regional planning institute it proposes to create in the near future. GAFSA would relend $0.3 million of the Bank loan to the Government on the original terms to help finance the execution of the study. The terms of reference and arrangements for carrying out the study would be determined in agreement with the Bank (Loan Agreement Section 3.06; Guarantee Agreement Section 3.03). It is expected the study would consider possibilities for live- stock development, artisan activities, urban infrastructure needs, the input from a master plan for water resource development in the South currently under- way with Libyan financing, and opportunities for expanding and diversifying cultivation around the oases. Project Justification 56. The Sehib project will produce for export. Net export earnings at full production after 1980 will be $39-43 million per annum. The economic rate of return is little different from the financial rate of return, which is 30 percent. Even with a 20 percent increase in capital and operating costs and a six-month delay in project start-up the return declines only to 16 percent. The project would be marginal only in the event of a drop in phosphate prices in real terms of about 40 percent below January 1974 prices, an eventuality judged unlikely. However, it cannot be completely ruled out, even though such a price would be equivalent to a decline in real terms to a level about 15 percent below the levels of the late 1960s, which did not give the world phosphate industry a sufficient return to expand capacity in line with demand. Nevertheless, the Sehib project and moderniza- tion program are high priority investments, and the financial risk is accept- able. 57. The use of a capital-intensive technique (the longwall method of mining) at Sehib is justified by the great increase in productivity which it can achieve. It should help to overcome GAFSA's problem of securing suffi- cient numbers of face workers and improve the working conditions and health of the miners. At the same time the employment Sehib will provide (660 jobs) will absorb some workers freed by the modernization program. This program is necessary both for the long-term financial health of GAFSA, a high-cost producer, and to improve conditions for the work-force at existing mines. Only limited mechanization is being introduced under the modernization pro- gram. The employment reduction will be effected by measures (para. 53) which will reduce or eliminate hardship. 58. The regional development study is expected to result in the iden- tification of projects to develop infrastructure, agriculture, small industries and tourism in the Gafsa area and provide significant employment opportunities for future job seekers.  - 16 - PART V - LEGAL INSTRUaENTS AN1D AUTHORITY 59. The draft Loan Agreement between the Bank and Compagnie des Phosphates et du Chemin de Fer de Gafsa, 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 draft resolution approving the proposed loan are being distributed to the Executive Directors separately. 60. The draft agreements conform to the normal pattern for loans for industrial projects. 61. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 62. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments July 16, 1974  'X5ThRh DATA- 7011:151 A REAZ POJPILAI'I DEN31VY 1L,nO rrfliios (sud-l57~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~) ~~~32 Per lca 96 Ia.Pen 1262' eneM lead SOCiAL INDICATOR5 gerafre-c Countries TUNISI1A 'rance teo;on.r rroo;o _1975 19PC 1970 1970 GAP PER APTAf? 33$S (A11A6 BASIS) _/I 220 /bc 280 /d 3,10E6 590 230 ORtltAPHiC Crude biFrth tat (per thosoaend) 1.6 39-'I i r 1rude death rate (per thousand) 19 .4 li 19 13 17 Wnont sontality reta (Per thousend live births) ..15.1 I 50 Life expeotanc31 .t birth (years) ..52 /e71.5 58 50) Orns -ePrd-rtLur rate L..3.i /f 1.2 PPoplalo grwh ae 2.1 0.9 2.2. Prpcletion grusti rate - urban .. ~~~~~~~~~ ~ ~~~~ ~ ~~2.4. lh,' 2.1.h 5.3 Ik 0-IA u2 lb1 Atk' 23.' t3 J.5 A, 15-616 53s7 5ci7 62.9 57 4377T ismeedenco ratio/U ~~~ ~~~~~~~~ ~~ ~ ~~~~~112 1.7 06/ f i.d 2... 7-5 Vrben popeluloni ae percent of total 40/.i 1. /_ge 70 /5 5i /J 35 Li,, Frui~ plaring~: No of acceptors owalative (thssue.) .lob . - 6 Pi.ofusers (I of nannied womne) .1.2 Peroenbtag Teap a (thousagriultre1,600 /I 1,500 /2 20,1.00 [q 570 4,0Q00 /k Peroentage neerploydino rc~tr 68 71 7 15 19i 5577 -tage 'n.mpl.yod 2 ~ ~ ~~~~~~~~~~~~~~~6 9757 Pe rcn ofntoa jnoos received by highest 5%... Pr~cent ofnational oco- reneloed by highest 20 . .- Ierost Of ostloral tocoas reoeived by lowest 20% . Penrsot or' eti-uo heun- received by lowset 1.40.., MSTRINJ3TIOIN OF LAN4D OWflSNHP % 0-oad by to=1a f soet. 51 'at . 57/ %ownedby esallesti10%of omers ..0.577i7,. HEALTH AND NUTRITION PoPulation per ph~Fys,i.is 10,O00 Ir 5,730 If 750 1_,170 /0 13,150C If Populatton per ouretog per,son .237!D o 250 /t _,07 750f 2: 7'.o 7-7 a Populatioc Per hospital bed 360 _/.x oLa 110 230 7K 610 Per capita reloris -P-' a s % of ret.t?maeote/. 9L/ 14120 96. 9iJ Fer oepltt proteir operlY, total (grane Per dayY& ..6341 _0 3 C. aIih oniadple. L, 960 01 Jehrotnet 1-1. years P7..152 0.9 * Ause /8primary school enr ollnent ratio 74 107 L ~ 120 /f iii 55 /f Adjusted 7! secorodany school1 eltolleent ratio ii 20 /570 75 35 12 7 T Tsar' of school-ing provided, flinft sand second level 13 13 12- 12 12- Votat iosa1 enrollmeot as K of sec. ethool enrollment 24 3!.I /23 /f 1 3 If Adult litarsoy rats 6 % 55 /oara,S .. 69 /ou 26 77,. 00,0 Alerage No. of persons Per robe (urban) ..2.6 ' d0.9 61 * 2.1 / Peren o. f occupied units -tthmt piped aster .. 5 7 .t 6 p, Looseso to aionily e % of total psynulanien) ,.2t 1.r 99 .. k ,o Perceot of rovulpopotlatiwo conncted to electricity . . 98 CONSJUMPTION Radio7r-ec,ovrn per 1000 population L1 77 31 i. /f 215 610 Pseseugoc ours pr10 pp no 11 13 253 451. 15 florcpenConsumption (kwh p.c.) 75 15. 2,71 iLl 132 Newsprint canesuoption p,c. lug per year 0.3 0.1 12 1.6 0.2 lctes: Figures refer either to the lateet periods or to ancout of enviroonmental. temperature, body veights, and%T tre latest years. latest periods refer Is, prin.1ple to distribotios by age awl ee of national populatione. the years 1956460 or 1966-71p the latest yeare to prin- Protein standards (reqairmsenta) for all. nountriese am estab- ciple to 1960 and 1970. Only eigpiflcantly different lished by UZla Eoonoemic Researcb Service provide for . asiniovo periode or years are rut.otad eeparstelyr. allowance of 60 gra,ms of total protein per day, and 20 gross of /IThe Per Capita aNP eatteatee for years other than 1960 aniomal and plses protein, of which 11 gramse ahould be animal I.e at aArket prices, calculated by tbe eaans coesereion protein. These etandarda are so-ht 1eer than those of 75 teohrri0oe so5 1Lh5 19172 World Bask &tl.ae. graoe of total proteinr and 23 grms of animaal proteina an ar. /2 Aeerage camber, of daugNteare per vwontn Dr reprodastive aeerage for the wrlrd, pr-opseed by riO tn tire Third 9*rld Food age. aorvey. 13 Population growth rates are hbr the deotMes ending ins P Sose etudiese have suggested that crude deasth ratea of ctIltrer. 1960 and I956. apes 1 through 1. nay be uaed asea fLret spproxlmkttsn Isclex of A Ratio of nder 15 and 65 aood o'er age bruoacata to malnutrition. thsos in labor force b~racket of ages 15 throughr 64.. /8 Percet ageewolled of Correaponding population of school age PAO reference etadoarde represent physilogicgal re- ae defined for each country. qairmeerita for nornel activityaw health, taking 1a IJRi esteate, Wcolu'diog pustoren and forests; Ab 1961;' c computed by applying to the 1970 figure toe growth rote of tnhe 03'/-ap. In ra~l le-n fro 1960 to 1970; Id Dose sot -ulsode with the 1970 Silos figure sinus tunisiani notional ..coracto series cove been revised; Ie 1965-70; ICTh.9691 / 1963-70; /h 1956-66; Al Over 10,000 Population; /4 over 2,000 Popitloss /k 19713 /. -1956; Is l5M; /n Urban cenlters so per enrvmeratloo; In 1972; /j Males only; /4, 1966; It 1963. ~/o Xoading -ur77 so...d olse. niwread uceistar,t noose 1v go-enret -er-ce only; It l.l.uingsl1dsiveo; T, Icruldooag asosistant nuraso and aidri,ee; le Government only; /w 1962; /x lncladiog cottages and rurarl hocepitoisl 7- lP9i-66; /c ceglstsred desire; /ao 196r-62; lab Read and eflte3 /a. -Oser 5 years old; /ad UKe stotinticol nffico .siou ao; 7af, urban only; /s Feoret of hcus-e-flde; /a& Inside; '7an Percerriga of hbuaeg units otr, electr1lr iiesn7~~~oeerbzeg1.s~~ jEfl.iwe ha of private land, erluding O.T7oiiloon ha in public ownership, andj 2.1 nil.I ion lrO#AllleAtve Ula de /c,i Over 15 yours eId. c 2 Nboesber 29' ,1973  Pag 2 af 3 iaont n erlie 8U.5_ dollas") ActaRtiae EreieIted 1965 197 0 1 10 1 97)t L172 19 17 1979 1970 J573 1-929 iSS 62 13 NATIONAL ACCOUNTS .3~~~~~~~~-'Near Average&tE - 6-69 Prices an hne ae vrgeAna rot ae A Percent af 0DY Outs's D-erstic Projact 0062 1356 1641 [046 2035 2934 F.0 10.8 r.4 6 99.6 99.2 94.6' ,,,s.