Tunisia - Second Natural Gas Pipeline Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2815-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SOCIETE TUNISIENNE DE L'ELECTRICITE ET DU GAZ WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA FOR A SECOND NATURAL GAS PIPELINE PROJECT May 15, 1980 This document bas a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  REPUBLIC OF TUNISIA CURRENCY EQUIVALENTS 1 Tunisian Dinar (DT) = US $2.5 1 US Dollar o 0.4 DT FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 kilometer (km) = 0.62 miles 1 metric ton = 2,204 lb 1 ton of oil equivalent (toe) = 39.7 million British Thermal Units (btu) 1 ton of crude oil (360 API) = 7.45 barrels 1 barrel of oil = 42 US gallons 1 cubic meter (m3) = 35.3 cubic feet 1 million cubic meters Hassi R'Mel gas = 1000 toe 1 million cubic meters El Borma gas = 1100 toe Megawatt (MW) = 1000 kilowatts PRINCIPAL ABBREVIATIONS AND ACRONYMS USED LNG - Liquified Natural Gas LPG - Liquified Petroleum Gas (a mixture of propane and butane) ENI - Italian State Oil and Gas Company (Ente Nazionale Idrocarburi) ETAP - Tunisian Petroleum Company (Entreprise Tunisienne d'Activites Petrolieres) SNAM - State Pipelines Management and Gas Distribution Company (Societa Nazionale Aziende Metanodotti), a subsidiary of ENI SOFREGAZ - French Gas Research and Engineering Company (Societe Francaise d'Etudes et de Realisation d'Equipements Gaziers) 'SONATRACH - Algerian National Company for Hydrocarbons (Societe Nationale pour la Recherche, la Production, le Transport, la Transformation et la Commercialisation des Hydrocarbures) SOTUGAT - Tunisian Trans-Tunisia Gas Pipeline Company (Societe Tunisienne du Gazodue Transcontinental) STEG - Tunisian Electricity and Gas Company (Societe Tunisienne de l'Electricite et du Gaz) TESA - Tunisia Engineering (S.A.)  FOR OFFICIAL USE ONLY TUNISIA SECOND NATURAL GAS PIPELINE PROJECT Loan and Project Summary Borrower: Societe Tunisienne de l'Electricite et du Gaz (STEG). Guarantor: Republic of Tunisia. Amount: US$37 million equivalent. Terms: 17 years including 4 years of grace, with interest at 8.25 percent per annum. Project Description: The project will help supply natural gas from the Algeria-Italy pipeline to industrial users and power plants in Tunisia's major cities. It comprises a system of 330 km of main pipelines to Tunis, Sousse, Gafsa and Tadjerouine, and about 170 km of branch lines. It also provides for the conversion of cus- tomers' equipment to enable them to use gas as well as oil. The project includes consultancy services for project design, engineering and management, as well as studies on the technical, financial and economic feasibility of supplying natural gas to small scale industry and domestic consumers, and optimization studies for Phase II of the pipeline system. Further- more, a training program will be carried out in Tunisia and abroad, for the management, technical and operational staff for the purposes of the project. Benefits and Risks: The project will substitute natural gas, imported on favorable terms, for higher cost fuel oil, thus yielding a net foreign exchange saving of not less A than $120 million a year. It will contribute to the improvement of air quality in Tunisia's cities. The risks associated with the project relate to dependency on a single pipeline and a single supplier for some 50 percent of Tunisia's energy supplies, the possibility of having to pay for gas even if not taken (such as could arise should there be a major unforeseen slow- down in the economy), and the risk of not finding outlets on the international market for all fuel oil to be exported. However, these risks are circumscribed and therefore not likely to endanger the viability of the project. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Estimated Cost: US $ Million Local Foreign Total Pipelaying 16.0 16.0 32.0 Linepipe - 11.7 11.7 Valves, fittings and metering 1.7 11.0 12.7 Conversion 2.5 5.0 7.5 Land and right of way 0.5 - 0.5 Studies and consultant services 1.8 2.0 3.8 Physical contingencies 1.6 2.7 4.3 Price contingencies 4.1 7.1 11.2 Taxes 4.3 - 4.3 Total 32.5 55.5 88.0 1/ Financing Plan: US $ Million Local Foreign Total Bank 37.0 37.0 Government Equity 19.0 2.0 21.0 2/ Export credits 12.0 12.0 Other 13.5 4.5 18.0 Total 32.5 55.5 88.0 Estimated Disbursements US $ Million FY 1981 1982 1983 Annual 20.0 14.0 3.0 Cumulative 20.0 34.0 37.0 Rate of Return: About 50 percent. Staff Appraisal Report Report No. 2878-TUN of May 1, 1980 1/ Excludes $4.0 million of interest during construction which will be _A provided by the Government. 2/ In addition, the Government will provide $4 million to cover interest during construction, bringing its contribution to a total of $25 million.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SOCIETE TUNISIENNE DE L'ELECTRICITE ET DU GAZ FOR A SECOND NATURAL GAS PIPELINE PROJECT 1. I submit the following report and recommendation on a proposed loan to the Societe Tunisienne de l'Electricite et du Gaz (STEG) with the guarantee of the Republic of Tunisia, for the equivalent of US$37.0 million to help finance the foreign exchange cost of a Second Natural Gas Pipeline Project. The loan would have a term of 17 years, including 4 years of grace, with an interest rate of 8.25 percent per annum. Financing for the remaining foreign exchange cost of US$18.5 million would be obtained through export credits (US$12.0 million) and from the Government (US$2.0 million) and from commercial sources (US$4.5 million). PART I - THE ECONOMY 1/ 2. An economic mission visited Tunisia in June 1978. Its report entitled "Economic Position and Prospects of Tunisia" (No. 2201-TUN) was issued on November 16, 1978. This part reflects its findings and those of an updating mission which visited Tunisia in July 1979. Country Data sheets are attached in Annex I. 3. Tunisia is rather poorly endowed with agricultural resources. Much of the country is arid or semiarid. Agricultural activity is concentrated along the coast in the North but continues to play an important role in Tunisia's economic structure. The main crops are wheat and olives. These crops are subject to sharp annual output fluctuations because of irregular rainfall in the case of wheat and a natural production cycle for olives. Tunisia's most important raw materials are phosphates and petroleum. The large phosphate deposits are of low quality. Known oil reserves are rela- tively small. Industrial development, although rapid, has been hampered by shortages of industrial entrepreneurs, the small domestic market and difficul- ties in marketing Tunisian products abroad. The most important sector is services; during 1970-78 it generated about half of GDP, a quarter of that sector's contribution consisting of government services. Tourism has developed rapidly during the 1970s. Workers' remittances have become a significant item A in the balance of payments, generating about 12 percent of current account receipts during 1970-78. 4. Tunisia's economy has performed remarkably well during 1970-78. Real GDP grew at an average annual rate of 8.1 percent, nearly twice as fast as during the 1960s. Per capita GNP in 1978 reached $998, which in real terms is some 67 percent above its level of 1969. Tunisia was one of the few countries in the world whose per capita GNP during 1970-76 increased at an average annual rate of 6 percent or more. 1/ Substantially the same as Part I of the President's Report No. P-2778-TUN of April 18, 1980 for a Fourth Highways Project.  -2- 5. This performance was partly attributable to improved economic man- agement, and partly to fortuitous factors. In 1969, Tunisia changed its inward-oriented investment strategy dominated by state activities. The new policy orientations, announced during the 1970s, resulted in a change towards a more open and export-oriented economy in which private initiative could play an increasing role. A number of decontrol measures were introduced, albeit slowly. Overall, the new policy orientation proved beneficial for the country. In addition, the economy benefited from favorable weather conditions resulting in good agricultural crops while the change in world market prices during 1973/74 brought sizeable windfalls as the terms of trade improved sharply. This allowed domestic savings to increase to 21 percent of GDP during 1970-78, compared with 15 percent during the 1960s. Tunisia's dependence on external financing declined from about 32 percent of investment in 1969 to 29 percent in 1978; the share was as low as 15 percent during 1973-76, when gains from the terms of trade were at their peak. The balance of payments had been in continuous overall surplus since 1967. But after 1975, this was no longer the case as the terms of trade began to deteriorate while imports continued to increase rapidly. In 1978 there was another turnaround and reserves increased in the wake of heavy capital inflows. However, Tunisia's debt service payments in relation to exports of goods and non-factor services (debt service ratio) in 1978 were still a low 10.9 percent, compared with 20 percent in 1970. 6. Rapid economic growth allowed Tunisia to make substantial social gains during the 1970s. By 1976, primary school enrollment had reached 100 percent and secondary enrollment 20 percent of the relevant age groups. Education is free through university. Public health services have been expanded, with many services provided free. A family planning program has been introduced and since 1973 has met with substantial success. The birth rate declined from 43.8 per thousand in 1966 to 32.0 per thousand in 1978 while the rate of natural population growth declined from 3.0 to 2.6 percent in the same period. Attempts have been made to reduce regional imbalances and to improve the lot of the poor. The share of the population living in absolute poverty declined from 30 percent in 1966 to 18 percent in 1975. However, important disparities remain between income levels among individuals and regions. In coping with the social aspects of development, Tunisia is con- fronted with strongly increased aspirations of its population in the face of limited natural and financial resources. 7. The most important problem for the Tunisian economy is widespread open and hidden unemployment. In 1978, about 13 percent of the labor force-- some 231,000 people--were unemployed and the unemployment rate is rising. In addition, there is considerable hidden unemployment in agriculture which A provided 39 percent of employment in 1978. If one considers that about 40 percent of this labor force does not have full time jobs, the effective overall unemployment rate is more like 25 percent. An increasing number of young people born during the high birth rate years are reaching working age and a growing number of women are joining the labor force. About half of the registered unemployed are young people seeking their first employment. These are mostly relatively educated people whose job aspirations cannot be met. 8. During 1970-78, agriculture provided more than 40 percent of total employment, 25 percent of merchandise exports and 17 percent of GDP. Food processing accounted for another 4 percent of GDP and comprised 35 percent  - 3 - of value added in manufacturing. Agricultural production rose substantially, largely as a result of favorable weather. Current policy, which emphasizes projects that make a rapid and direct contribution to production, recognizes various constraints on agricultural development: insecurity of land tenure; inadequate access to agricultural credit; inadequate extension services; insufficient agricultural education; and underutilization of irrigation investments. Under the Fourth Plan (1973-76) about $140 million was allocated to a rural development fund executed by the provincial administrations. These rural development efforts are being continued under the current Plan (1977-81). 9. During the 1960s, manufacturing production in Tunisia increased by 8 percent annually. This growth rate accelerated during 1970-78 to 10 percent annually, due partly to record years for the olive oil processing industry and to favorable developments in the textile and chemical industries. The early thrust of industrialization came from large import substitution projects. These suffered, however, from the small domestic market and shortages of experienced staff and management. Since 1970, more emphasis has been put on export-oriented private industries, particularly in food processing, textiles and mechanical and electrical industries. Foreign and domestic private invest- ment is now stimulated by a comprehensive incentive framework and facilitated by streamlined approval procedures of the investment promotion agency. Apart from finance, foreign investors are expected to contribute know-how and over- seas marketing capability. Although an agreement between Tunisia and the European Economic Community signed in April 1976 provided for duty free entry into the Community of nearly all Tunisian industrial products, import restric- tions on some of them were imposed in 1977 and 1978. The Government has estab- lished a special fund to encourage growth of small industries and industrial decentralization, and it has started a program to establish industrial estates. 10. The development of tourism in Tunisia is relatively recent. Foreign- visitor arrivals reached 1.1 million in 1978, with an average annual rate of growth during 1970-1978 of 13 percent -- sharply higher than that of the Mediterranean tourism market as a whole. Since 1970, tourism has become a major source of foreign exchange earnings, reaching $412 million in 1978; this was slightly more than earnings from all manufacturing exports and was exceeded only by petroleum exports. The rapid development of tourism in Tunisia has created new demands on infrastructure (particularly recreational facilities), trained manpower, and related services, which have been met only partly. The Government is endeavoring to alleviate these constraints through a variety of measures including revised investment incentives, increased marketing and training efforts, codes to enforce quality standards, more stringent zoning 4 laws, and development of recreational facilities. 11. The main objectives of the current Five-Year Plan (1977-81) are: (i) full employment of the additions to the labor force; (ii) self-sufficiency in major foodstuffs (defined as a balanced trade account for agricultural goods); (iii) increases in the standard of living; and (iv) social stability through incomes policies and wage and price harmonization. The Plan foresees an average annual rate of real GDP growth of 7.3 percent. This is somewhat below the 9.2 percent achieved during 1970-76, mainly because the fortuitous factors prevalent during the early 1970s were not expected to continue.  Investment is projected at TD 4.2 billion ($9.8 billion) in current prices during the Plan. In real terms, average annual investment would be 54 percent greater during 1977-81 than during the preceding Plan. Nonetheless, the targeted average annual rate of growth of real investment during the Fifth Plan is only 4.1 percent, as this rate is influenced by the very high invest- ment level achieved in the base year, 1976. 12. The Fifth Plan's strategy emphasizes in particular export-oriented industrial development and agricultural growth. Special attention is given to employment creation and to balance of payments considerations. Substantial investments are to be made in hydrocarbons, manufacturing, water development, transport and housing. The Plan prescribes increased domestic production and processing of Tunisia's mineral resources (phosphates, petroleum) to raise the value-added component of exports as much as possible. Private sector initia- tive is expected to dominate investment in textiles, mechanical and electrical industries, and tourism. It is in these activities that the authorities expect most employment creation to take place. Employability of the labor force is to be increased through education and training programs. Efforts towards regional development are to be pursued through establishing regional planning structures, strengthening regional administration and developing incentives for the decentralization of productive activities. The strategy proposed for the Fifth Plan does not represent any major departure from the strategy pursued successfully during the preceding Plan. 13. Tunisia's existing resource base, its institutional and infrastruc- tural framework, its good performance in the earlier part of this decade, and the desire of the authorities to support further development with appro- priate policy measures and institutions are fundamental factors pointing towards continuing rapid economic growth during the Fifth Plan. The 7.3 per- cent growth target is in line with the possibilities of the economy although the actual performance may fall somewhat short of this target in the wake of the recent slowdown of the international economy. The investment priorities formulated in the Plan are considered necessary to support the sectoral strategies. There are, however, some less favorable signs. Tunisia will have to rely increasingly on its own resources since the fortuitous circumstances of the early 1970's are unlikely to be repeated. As the resource base is relatively narrow, available resources need to be more efficiently deployed. Achieving the Plan targets presupposes the timely introduction and successful execution of measures to: (i) strengthen the absorptive capacity for invest- ment, especially for labor intensive projects; (ii) promote exports; (iii) base economic management on an efficient price and incentive system and improve productivity; and (iv) mobilize the resources needed to realize the comprehensive social development targets while maintaining domestic and external financial stability. The Tunisian authorities have begun to intro- duce measures in these respects. To increase the absorptive capacity for investment, institutions like the Investment Promotion Agency and the National Center for Industrial Studies were strengthened. The activities of the Export Promotion Center were widened to include investigations on non-traditional markets, especially in the Middle East and Japan.  -5- 14. Substantial efforts in domestic and external resource mobilization in particular will be of crucial importance to finance the planned level of investment. On the domestic side, there is a need for increased savings and improved financial intermediation. The Government sector, in particular, will again be called upon to contribute substantially to the savings effort. The Plan suggests that this should be done by prudent expenditure policies ar.d increased revenue collections (selective tax increases and better tax collec- tion). Measures to this end have been taken by curtailing the growth of budgetary expenditures, increasing taxes on real estate and luxury consumer goods and making payment of taxes a pre-condition for obtaining administra- tive licences of all kinds. In addition, the public enterprise sector will have to increase substantially its contribution to public savings through better management and especially through cost-related increases in the sale prices of selected enterprises. Steps in this direction have been initiated through tariff raises on water, power and port services. Externally, Tunisia would have total financing requirements (disbursement basis) of some $3.1 billion during the Fifth Plan, of which $1.3 billion have already been obtained during 1977-78. Given the country's creditworthiness, Tunisia should be able to mobilize the remaining $1.8 billion of such financing without straining the country's debt servicing capacity (para. 16). 15. Since the early 1960s, Tunisia has obtained large amounts of offi- cial aid. A Consultative Group chaired by the Bank provided a forum for aid- coordination among major donors in the past. During 1970-78, annual loan commitments from public sources averaged $395 million, or about $47 per capita. About 50 percent of these commitments came from bilateral public sources, chiefly from France, Canada, and the Federal Republic of Germany. About 15 percent of the bilateral aid came from oil-producing countries, whose share increased rapidly from 8 percent in 1970 to 29 percent in 1978. Commit- ments from the Bank Group during 1970-78 accounted for 20 percent of total public commitments. Most aid has been obtained on relatively soft terms; in 1978 the average terms of borrowing were 5.4 percent interest and 20 years maturity, including 5 years of grace. During 1970-78, Tunisia also received annually some $40 million in grants. Loan commitments from private sources averaged $125 million a year. While direct foreign private investment has been comparatively small, it has gained momentum since 1974 following incre- ased activity in the petroleum sector and new incentives offered to foreign investors in manufacturing. Net direct foreign investment increased from $19 million in 1969 to $96 million in 1978, with most of it going to the petroleum sector. 4 16. At the end of 1978, total foreign debt (disbursed and outstanding) was estimated at about $2.4 billion, or 41 percent of GDP. The debt service ratio in 1978 was 10.9 percent, compared with 20 percent in 1970. This sig- IV nificant decline in the debt service ratio was mainly due to the sharp increase in export earnings following the changes in world market prices in 1973/74. External borrowing at the rate projected for 1977-81 (para. 14) would increase debt service obligations to around 14 percent of exports of goods and non- factor services by 1981 and 15 percent by 1986, according to current Bank projections. At these levels, the debt service burden would be manageable, particularly when seen in the light of Tunisia's long record of prudent and  - 6 - skillful balance of payments and external debt management. Tunisia is there- fore considered creditworthy for further Bank lending. PART II - BANK GROUP OPERATIONS IN TUNISIA 17. Since 1962, Tunisia has received a total of thirty-nine loans and eleven credits amounting respectively to $672.6 million and $70.1 million, net of cancellations. 1/ Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1980, and notes on the execution of ongoing projects. While disbursements of some loans and credits have been slower than foreseen at appraisal, on the whole project execution has been satisfactory. In a number of sectors, important institutional improvements have been achieved and autonomous agencies have been created or strengthened. 18. The Bank's lending strategy in Tunisia aims at supporting Government efforts to (a) increase employment, (b) encourage more balanced growth and distribution of income among regions and income groups, (c) promote export- oriented policies and investments, and (d) provide selective support for the development of infrastructure and for institution building in key public services. The main supporting feature of this strategy is to support the Tunisian authorities in timely and well-coordinated preparation of projects, with emphasis on technical assistance. The Bank is also cooperating with the Government in its efforts to increase the mobilization of domestic and foreign resources, in part through encouraging project cofinancing; the latter is particularly important in view of the extent of Tunisia's external resource needs, the large size of many priority projects and the limited availability of Bank resources relative to the country's needs. 19. Within this broad framework, past lending emphasized support for long-term investments in infrastructure and social development. Lending for urban and social development, including water supply, sewerage, education, family planning, urban low-cost housing, and the Tunis planning and public transport project has accounted for 28 percent of Bank/IDA commitments in Tunisia since 1971. Lending for transport, power and tourism infrastructure has accounted for 36 percent. Agriculture and fisheries have received 20 percent of total commitments. Industrial and hotel financing, through the Banque de Developpement Economique de Tunisie (BDET), has accounted for 12 percent, and the Gafsa phosphate development project for 4 percent. 20. Projects in various stages of processing for consideration in the remaining months of this and in subsequent fiscal years include those for agricultural credit to small and medium farmers and agroindustries, agricul- tural development in the Northwest, population and health, vocational training and development of small-scale, textile, and electrical and mechanical indus- tries. 1/ This includes a loan of $36.5 million for the Fourth Highway project considered by the Executive Directors on May 13, 1980.  21. The Bank Group accounted for about 13 percent of total public commitments to Tunisia during 1970-78. The Bank Group's share of total debt outstanding and disbursed at the end of 1978 (including loans from private sources) was 11 percent and of debt service during 1978 was 12 percent. The Bank Group's share in Tunisia's disbursed external debt by 1986 is expected to remain unchanged at about 11 percent, and its share in debt service would remain at about 12 percent. 22. IFC has invested in NPK Engrais (a fertilizer plant), in Banque de Developpement Economique de Tunisie (BDET, Tunisian Development Finance Company), in Compagnie Financiere et Touristique (COFIT, a company to promote and invest in tourism projects), in Societe Touristique et Hoteliere RYM (a large hotel development) and in Industries Chimiques du Fluor, which will produce aluminium fluoride from local fluorspar for export, and in the Sousse-Nord integrated tourism development project. IFC's net commitments in Tunisia total $14.5 million, as of March 31, 1980. PART III - THE ENERGY SECTOR The Context 23. Hydrocarbons are the major source of energy in Tunisia, representing 95 percent of the commercial energy market, of which 81 percent is oil and 14 percent gas. For the foreseeable future, Tunisia will have to depend on these sources of energy as opportunities for greater use of hydropower (1 percent) and coal (4 percent) or renewable sources are limited. The country is currently a net exporter of oil. It exports its total domestic production of 5 million tons of high quality oil at a premium, and imports 2 million tons of lower cost crude oil for local refining and consumption, thus yielding a substantial net benefit in foreign exchange. 24. Petroleum consumption, which has been growing at 8 percent per annum since 1971, is now 1.8 million tons per year, and is expected to maintain the same growth rate through the 1980s. During this decade, production from known oil reserves will sharply decline. The two major oil fields, El Borma and Ashtart, will be fully depleted by the end of the 1990s. Indigenous gas production from active wells is expected to cease by 1986. For both strategic and economic considerations, the Tunisian Government has deferred exploitation of the Miskar gas field. Given the estimated consumption growth, the forecast A decline in crude oil production is expected to result in a net import position by the mid-1980s. In order to maintain, to the extent possible, oil exports at their present level, Tunisia intends to substitute natural gas for fuel oil. Natural gas could potentially meet more than 50 percent of the country's increasing energy requirements particularly in the heavy industry and power sectors. 25. As of 1982, and under a long-term contract, Tunisia will purchase natural gas from Algeria's Hassi R'Mel field. In addition, royalties will be derived from the gas transiting through its territory in the Algeria/Italy  - 8 - Intercontinental Gas Pipeline. The availability in large quantities of favor- ably priced natural gas and its substitution for oil will help ensure energy supply up to the 1990s and, by making more fuel oil available for export, will reduce the impact of the decline in crude oil production on the balance of payments. This is, however, a major undertaking which will require highly integrated planning as it will drastically affect the supply pattern and the structure of the industrial energy sector. The Government is preparing a national energy strategy to deal particularly with two major issues: the expansion, to the extent possible, of the country's energy resource base and the elaboration of a long-term energy pricing policy. Energy Resources 26. Hydrocarbons. Tunisia's oil and gas reserves are concentrated in three major fields: the two oil fields, El Borma, in the southwestern desert area bordering Algeria, and Ashtart, offshore in the Gulf of Gabes, have been operational since 1966 and 1974 respectively. The Miskar gas field, a reservoir of 30 billion m3 recoverable gas (27 million tons oil equivalent (toe)) discovered offshore, near Ashtart, represents a major untapped reserve. El Borma, currently producing 2.3 million tons of oil per annum is 62 percent depleted and will be fully depleted by the early 1990s. Ashtart, also produc- ing 2.3 million tons per annum, is 27 percent depleted and expected to last until the late 1990s. Six other minor fields, yielding together 0.4 million tons of oil per annum, will cease production by 1995. Commercial gas produc- tion, mainly associated gas (gas produced together with oil) transported from El Borma to the Gabes area and from a small reservoir at Cap Bon to Tunis, has peaked at 385,000 toe in 1979; it is sharply declining and will be depleted by 1986. There has been no major oil or gas find since the discovery of Miskar gas by Elf Aquitane in 1974. No definite plans exist for the exploitation of four small oil fields discovered between 1974 and 1977, representing together an estimated recoverable reserve of 14 million tons; one of them is in a disputed territory bordering Libya. Three minor gas fields, located in the vicinity of Miskar, are still being evaluated. 27. Other Resources. Hydropower potential is relatively small. The total installed capacity represents four hydroplants of about 29 MW concen- trated in the northwestern part of the country. A further 25 MW will be developed when the Sidi Salem plant, part of a multipurpose project in which the Bank is participating, will be completed. The total requirements of coal for steel processing are imported. There are some lignite (brown coal) depo- sits in the Cap Bon area, but their importance has not yet been assessed. Serious efforts are being made to promote research, studies and other activi- ties to assess and test the potential of renewable and non-conventional sources of energy but the eventual exploitation of these new energy sources is not expected to have a significant impact on the sector during this decade. 28. A recently established National Commission on Energy has designed an energy conservation program for the industrial sector and commissioned preliminary studies on the assessment and exploitation of renewable and non-conventional sources of energy. Preliminary basic data has been gathered on the possible uses of biomass, conversion of wood and agricultural wastes,  - 9 - of biogas, geothermal and wind energy. Solar and nuclear energy have attracted a considerable amount of interest. A number of studies and experimental acti- vities are under way with the assistance of France's Elf Aquitaine, the U.S. Agency for International Development, the European Economic Community and the United Nations Development Program. As for nuclear energy, the Tunisian Government is looking into the possibility of extracting uranium from phos- phates, and the Societe Tunisienne de l'Electricite et du Gaz (STEG) has undertaken preliminary economic and technical studies for the construction of a nuclear power plant. The Government has requested for this purpose the assistance of the International Atomic Energy Agency and is currently planning to launch, in 1985, the construction of a first nuclear plant which would be operational by 1995. Energy Supply and Demand 29. Since 1971, total commercial energy consumption has increased by an average of 9 percent per annum from 1.2 million toe to 2.3 million toe in 1978. GDP increased over this period at a similar rate, giving an energy/GDP growth in line with the norm for middle income countries. During the same period, Tunisia's crude oil and gas production increased from 4.1 million toe to 5.3 million toe, allowing an increase in net exports. The Bizerte refinery operating on imported high sulphur crude oil has produced 1.2 million tons per annum through the 1970s. The growth in petroleum products demand has exceeded domestic production and was met by imports, particularly of gas oil and fuel oil. 30. The power and industrial sectors consume 56 percent of total commer- cial energy (94 percent of fuel oil and 28 percent of gas oil), and this proportion is expected to grow further over the next 10 years as a result of the strong emphasis on heavy industry in the current Development Plan. Energy demand for power and industry is expected to rise from 1.3 million toe in 1978 to 3.4 million toe in 1990. The Bizerte refinery expansion will cut the import bill, especially for middle distillates (gas, oil, kerosene and heat- ing oil) as supply patterns for these products allow only limited substitution by natural gas. Eighty-seven percent of the total power and industrial sector demand could be supplied by gas. Substitution of natural gas for oil products will result in petroleum products consumption of less than 2 million tons in 1985, and only 2.7 million tons by 1990 assuming the purchase of Algerian gas as envisaged under the proposed project (para. 43) and additional purchases of 800,000 toe per annum starting in 1986. By 1990, the proposed refinery capacity at Bizerte will have reached 4 million tons; large quantities of fuel A oil will therefore have to be exported. Government Organization and Policies 31. The energy sector operates under the Department of Energy of the Ministry of Industry, Mines and Energy; as a result of a recent (April 23, 1980) Cabinet reshuffle this Ministry, merged with the Ministry of Commerce to become the Ministry of National Economy. The functions of the Department of Energy have been to approve projects, to negotiate exploration and development agreements, to establish standards for the operation of the sector and to  - 10 - approve fuel prices and power tariffs. The abundant supply of hydrocarbons over the last decade and the lack of alternative sources of energy led to a limited government role in energy planning and coordination. Recent policy measures have consisted in strengthening the Department's planning struc- ture and capabilities and reinforcing control over the oil and gas sectors (paras. 32 to 35). 32. Planning and Control. Under the Second Power loan (No. 1355 of January 12, 1977), the Government had agreed to undertake a pricing policy study for oil, gas and power. The scope of this study has since been expanded into a sector planning study for preparing an energy master plan covering all potential sources of energy as well as detailed demand analyses. A consultant firm, Gordian Associates of London, has been contracted to conduct this study and develop an energy planning model which is expected to be ready by the end of 1980. The Bank will review the results of the study and discuss them with the Government. 33. The Government controls the energy sector in many ways. For each state company it appoints the president and members of the board, incorporates investments in the national plan, controls the provision of long-term finance and approves salary scales and prices. As regards oil and gas exploration, control is exercised through a licensing system, entailing minimum work obligations, and requiring regular renewal. Production is also controlled through the licensing system. At the retail level, the Government sets petroleum prices and the allowable distribution costs, and power tariffs. 34. Exploration and Production. The fully Government-owned Tunisian Company for Petroleum Activities, ETAP (Entreprise Tunisienne d'Activites Petrolieres), is the principal company for petroleum exploration and produc- tion. It participates in hydrocarbon exploration and development activities, markets most Tunisian oil abroad and imports crude oil for refining and other petroleum products for local consumption. It has wide coordinating powers for the whole sector. The Government has created a favorable climate conducive to foreign participation in exploration. Over 90 percent of the prospective areas are currently licensed to fifteen overseas companies; the Government retains the option of a 50 percent share in oil and gas discoveries. The three production companies in the sector are 50 percent Government owned. One of them operates El Borma, a second Ashtart and the third a number of small gas and oil fields. The state-owned Tunisian Refineries Company (Societe Tunisienne des Industries de Raffinage) owns and operates the country's only refinery. It will also own and operate the expanded refinery under construc- tion at Bizerte. e 35. Transmission, Distribution and Marketing. STEG, a wholly-owned state enterprise, has major responsibility for electric power generation and distribution providing 90 percent of the country's requirements in this sector. STEG is also in charge of distribution and marketing of gas. The introduction of Algerian natural gas will considerably enlarge STEG's gas activities. The distribution of oil products is handled by twelve companies, of which the largest is the state-owned National Company for Petroleum Market- ing (Societe Nationale de Distribution Petroliere) servicing 40 percent of the market. Esso, Shell and Mobil share 35 percent of the market.  - 11 - 36. Sector Investment Program (1977-1981). The investment program for primary energy under the Fifth Development Plan (1977-81) was to absorb $1,330 million, i.e. 17 percent of Tunisia's total capital investments, which is high for a country at this stage of its development. Half of the $260 million budgeted for exploration during the Plan period have been spent during the two first years; expenditure over the five years is likely to reach $400 million, to be financed almost entirely by the foreign oil companies. The Plan included a provision of $162.5 million for the expansion of the refinery at Bizerte, to be financed 65 percent from foreign sources. Expenditures will be carried over beyond 1981 for the completion of this investment. The plan also provided $290 million for oil field development, mainly for a program of water injection at El Borma. The largest investment in the Plan, $620 million, was for Miskar and its related on-shore distribution system (paras. 26 and 39). Seventy-five percent of the costs were expected to be met from overseas sources. The deferral of the Miskar gas project will decrease actual investment expenditure during the Plan period by about $500 million. The electricity industry is planned to absorb $500 million to be financed through foreign loans, customer contribution and internal cash generation. Implementation of the Plan in the power sector is proceeding according to schedule. 37. Energy Pricing: Problems and Policies. The major issue to which the Government will have to address itself during the next few years is related to the elaboration of an overall energy pricing strategy which would appropriately induce the needed restructuring of the energy sector. Domestic prices for LPG and premium and regular gasoline exceed world market prices while prices of middle distillates and fuel oil are highly subsidized, both to keep down the general price level and to assist Tunisian industry. These products are presently priced in a range of 33 percent to 67 percent below international levels. Kerosene, heating oil and the gas oil used for fishing and agriculture represent a relatively small percentage of domestic demand. Furthermore, kerosene consumption is expected to diminish as rural electrifica- tion expands. The main issue is the volume of subsidies to fuel oil and gas oil which are both used in large quantities by the industry and power sectors. Overall pricing policies for all petroleum products will be reviewed and discussed with the Government by the end of this year upon completion of the on-going consultant sector planning study (para. 32). Fuel oil and gas pricing policies are addressed in the context of the proposed project (paras. 52 and 53). Role of the Bank in the Energy Sector A 38. The Bank has been involved with STEG in both the primary energy and power sectors since 1971. Three loans totalling $34 million have been made during the 1970s. The first loan (724-TUN of February 1971) financed the construction of a compressing and treatment plant at the El Borma oil field to collect the gas being flared and transmit it through a high pressure pipeline to the Gabes industrial area. In spite of difficulties related to the compression and treatment plant, taxing STEG's inexperienced maintenance staff, the project was satisfactorily completed in 1972. The audit rate of return on the project, 72 percent, was substantially higher than estimated at appraisal, primarily due to higher oil prices. The First Power Project (815- TUN of April 20, 1972) was a follow-up to the previous project since it helped  - 12 - to put to productive use the gas recovered from El Borma by financing the construction of two 20 MW gas turbines. It also financed the expansion of the distribution and transmission system and consultant services for the construc- tion of future plants and for institutional development. In spite of diffi- culties, reviewed in the Project Performance Audit Report (PPAR No. 2521 of May 24, 1979) related to the operation of the gas turbines and which are not unusual in this type of climate and in countries of similar level of techno- logical development, the project has been satisfactorily completed. The PPAR concluded that the increase in the oil price after 1972 contributed to the high rate of return of the project, that the consultants employed under the project helped toward improving STEG's organization and efficiency and that the project's financial objectives were largely met, partly due to the intro- duction of a new tariff structure based on marginal cost. The Second Power loan (1355-TUN of January 12, 1977) is near completion. It financed the gas turbines component of STEG's 1977-1981 Development Plan, which comprised the generation of 150 MW of combustion turbine capacity in seven units of equal size to be installed in different locations. The funds made available through these loans provided STEG with a valuable experience in the operation and management of a high pressure gas pipeline and assisted this company in maintaining its least cost development strategy in the power sector. As a result of its consistent association with the Bank over the last ten years, STEG has developed into an efficient and well-managed company. PART IV - THE PROJECT Background 39. In 1974, the Miskar gas structure was discovered offshore in the Gulf of Gabes and was delineated steadily between then and 1978. During an appraisal of the Miskar project, in 1977, the Bank suggested that Tunisia investigate the feasibility of purchasing gas from Algeria as an alternative to investing $600 million in a single gas field. Tunisia had shown interest in importing gas from Algeria since the signature of the Algeria/Italy gas supply contract in 1973. By 1977, the terms of a gas pipeline transit contract had been agreed between Tunisia and the Italian state oil company, ENI. Nego- tiations for the purchase of Algerian gas and delineation of Miskar proceeded simultaneously, providing Tunisia with two feasible alternatives. Provisional agreement on purchase terms was reached at the same time as determination of the overall Miskar reserves proceeded. Reserves turned out to be lower than was hoped for. This, taken together with strategic and economic risk con- k siderations, led the Government to proceed with the gas purchase plan, and to defer Miskar exploitation to an unspecified date. 40. In mid-1979, the Government requested Bank assistance to help finance a project which would supply major industrial centers with natural gas drawn from the Algeria/Italy gas pipeline. The project was prepared by STEG with the assistance of a French firm of consultants, SOFREGAZ, in association with the Tunisian firm TESA. It was appraised in October/November 1979. The Government and STEG have provided information on all aspects of the project in order to enable the Bank to evaluate the project's technical, economic and  - 13 - financial feasibility. Negotiations were held in Washington from April 21 to May 2, 1980. The Tunisian delegation was headed by Mr. Salah Jebali, President Director General of Societe Tunisienne de l'Electricite et du Gaz (STEG) and included Mr. Tahar Ennaifer of the Ministry of Planning. The main features of the project are mentioned in the Loan and Project Summary and in Annex III. Details, which have been confirmed by the Government and STEG to reflect accurately the information provided to the Bank, are given in the Staff Appraisal Report No. 2878-TUN entitled "Tunisia - Second Natural Gas Pipeline Project", and dated May 1, 1980. A map showing the location of the on-shore gas distribution system is attached. Project Objectives 41. The objectives of the project are (i) to help improve Tunisia's energy situation by substituting gas for fuel oil thereby decreasing domestic fuel oil consumption and increasing fuel oil exports and (ii) introducing energy planning and pricing measures which will permit Tunisia to develop a rational energy policy for its future, beyond the mid-1990s when, based on present expectations, it may no longer be able to rely on domestic hydro- carbons as its major primary energy resource. The Intercontinental Pipeline 42. The Algeria/Italy pipeline will extend over 2,500 km from the Hassi R'Mel gas field in Eastern Algeria to Bologna in Northern Italy. The Tunisian section of the pipeline is being constructed by SNAM, a subsidiary of the Italian State Oil and Gas Company, ENI. After commissioning in October 1981, this section will be owned by the Tunisian Trans-Tunisia Gas Pipeline Company SOTUGAT (Societe Tunisienne du Gazoduc Transcontinental), a subsidiary of ETAP (para. 34). A separate company, jointly owned by ETAP and SNAM, will manage and operate the Tunisian section of the pipeline for the first five years. Subsequently, this responsibility will be transferred to Tunisia which will have the majority share in the company. The Government will receive royalties from ENI on gas transitting Tunisia through the inter-continental pipeline. These royalties will be receivable in the form of royalty gas or cash, at the option of the Tunisian Government, rising from 200,000 tons of oil equivalent (toe) in 1982 to 800,000 toe in 1986 and remaining constant thereafter. 43. STEG intends to purchase natural gas from the Algerian Oil and Gas Company SONATRACH as of November 1, 1981, for 20 years, for delivery through the same pipeline. The purchase contract will provide for delivery of 635,000 A toe of gas in 1982 rising to 1.2 million toe by 1986. The gas would be pur- chased at the Algerian border at 60 to 70 percent of the current international price for fuel oil. Purchased gas will be subject to take-or-pay. A legal opinion certifying that the royalty and gas purchase contracts are effective and legally binding would be a condition of effectiveness of the proposed loan (Loan Agreement, Section 7.02 (a) and (b)). Project Description 44. The proposed project constitutes the first phase in the construc- tion of a gas distribution network in Tunisia. It will supply gas from the Algeria/Italy pipeline to about thirty industrial customers and the power utility, about in equal proportions. The project would include:  - 14 - (a) 240 km of buried pipeline 18" to 20" in diameter, supplying gas from different points on the intercontinental pipeline to Tunis, Sousse and Gafsa, and 90 km of a 8" buried pipeline for supplying Tadjerouine, together with 170 km of branch pipelines; (b) fittings and ancillary equipment including injection and delivery terminals, cathodic protection equipment and metering; (c) conversion of the customers' oil-using plant and equipment to dual firing (oil and gas); (d) consultancy services for engineering, procurement, project management and construction supervision as well as studies; (e) training of staff. 45. A second phase, to start up by about 1985, would extend the system by adding connecting lines from Tunis to Bizerte and Gafsa to Gabes. At a later stage Sousse would be linked to Gabes and, eventually, the Miskar off- shore field to the on-shore system. Pipe diameters have been optimized on the basis of 1990 forecast demands, to avoid compression in the initial years, and on the basis of an eventual loop system connecting Gafsa and Sousse through Gabes. The final system is expected to provide maximum operational flexibility and would be capable of receiving gas from almost any field off Tunisia's east cost. 46. The consultant companies, SOFREGAZ, in association with TESA, have assisted in preparing the project optimization, detailed design, route and technical surveys and market studies will continue to advise STEG through the construction and the initial operational stages. In addition, consul- tants will be required to (i) study the technical, economic and financial feasibility of supplying gas to small-scale industrial users and households and (ii) evaluate alternatives for a follow-up project to expand Tunisia's on-shore gas network and prepare an optimization system. Assurances were obtained at negotiations that the consultants to perform the services under (i) and (ii) above will be recruited by June 30, 1981 and June 30, 1982, respectively, and that their reports and recommendations will be forwarded to the Bank for review and comment by June 30, 1982 and December 31, 1982, respectively (Loan Agreement, Section 3.02). The Borrower 47. STEG would be the borrower and would be responsible for project implementation and its Gas Directorate would supervise and coordinate the activities under the Project (Loan Agreement, Section 3.01(a)). The company r was formed in 1962 and is today the largest commercial establishment in Tunisia, with 4000 employees and total assets of about $700 million. It is operating as a successful power and gas utility and, in most respects, func- tions as an autonomous company. STEG's Board of Directors of eight members, appointed by the President of the Republic, is headed by a President Director  - 15 - General (PDG). The current PDG took up his appointment on February 1, 1980, and is reviewing the need for a simpler organization. Assurances were obtained at negotiations that STEG will inform the Bank of any measures which would affect its structure and organization and that it will take into account the Bank's views before implementing them (Loan Agreement, Section 4.05). The top management consists of the PDG, his deputy, a Manager of Development and Coordination and a Manager of Administration as well as a number of functional directors, including one for gas. In 1972, STEG's gas division successfully completed a previous Bank financed project, the natural gas pipeline from El Borma to Gabes (para. 38). To ensure the efficient operation of the gas pipeline system STEG has developed a comprehensive training and upgrading program for its Gas Directorate's staff and management. Assurances were obtained during negotiations that by September 30, 1981, STEG will recruit and complete the training of all operational, technical and managerial per- sonnel required for operating the gas pipeline system to be established under the project (Loan Agreement, Section 3.06). Project Cost 48. The total cost of the project is estimated at US$88.0 million (excluding interest during construction of $4.0 million, but including taxes of $4.3 million) with a foreign exchange component of $55.5 million. The cost estimates are based on January 1980 prices and include inflation at 10 percent and 9 percent for 1980 and 1981. Only 6 percent has been allowed for physical contingencies reflecting the thoroughness and the advanced stage of the engineering work. Project engineering, management and construction supervision are expected to require 420 man-months, and are expected to cost $12,000 per man-month for expatriates and $6,000 per man-month for Tunisians, including all costs. These amounts are in line with the cost of similar services in the area. Financing Plan 49. The proposed Bank loan of $37 million would finance 67 percent of foreign cost of the project or about 44 percent of total cost, net of customs duties and taxes. Export credits of $12 million for equipment and materials are expected on the basis of Tunisian experience in purchasing similar items. Signed agreements on $5 million of export credits will be a condition of effectiveness for the Bank loan, while the remaining $7 million are to be arranged by October 31, 1980 the approximate date by which the equipment to be financed under these credits will be needed (Loan Agreement, Recital (B) and 4 (C) and Section 7.01). The Government will contribute $25 million equivalent to STEG towards the project as equity including $4 million for interest during construction. This contribution would cover both local expenditures ($19 14 million) and foreign exchange requirements ($6 million). Assurances were obtained during negotiations that the Government will contribute the amounts indicated (Guarantee Agreement, Section 2.02(b)). The Borrower will obtain commercial loans of $18 million equivalent to finance both local ($13.5 million) and foreign ($4.5 million) expenditures (Loan Agreement, Section 3.01(b)). The Government contribution will be made available and the commer- cial loans will be obtained according to timetables agreed to between the Bank, the Government and the Borrower, respectively.  - 16 - Procurement and Disbursements 50. All procurement will be through international competitive bidding. Prequalification of foreign suppliers for pipelaying has been satisfactorily completed. In addition a Tunisian company in a joint venture with an expe- rienced foreign contractor is expected to participate in the bidding for the works. The Bank will be informed of the joint venture's qualifications before it is formally prequalified. The bidding documents will permit the works to be let as four individual contracts or in any combination thereof. Contracts for pipelaying are expected to be signed in July 1980. The various pipelines will be commissioned between November 1981 and February 1982, with an allow- ance of one month for testing. Orders for materials and equipment amounting to US $24 million will be placed during the first five months of 1980. For bid evaluation purposes, a 15 percent margin of preference or the actual customs duties, whichever is lower, will be allowed for materials and equip- ment manufactured in Tunisia. Foreign suppliers, however, are expected to be awarded virtually all of these contracts, as nearly all of the materials and equipment are of a very specialized nature and are not produced in Tunisia. 51. The proposed Bank loan would cover: (a) 100 percent of foreign and 50 percent of local expenditures of pipelaying; (b) 100 percent of foreign expenditures of valves and fittings of metering and conversion works; (c) 100 percent of foreign and 65 percent of local expenditures of feasibility studies on gas supplies to small-scale industrial consumers and households and of the studies for a second phase project. Retrcactive financing in an aggre- gate amount of up to $600,000 has been prcviA.ed to permit payments on sup- plies required before the expected date of signature of the legal documents (Schedule 1, para 4). The loan would be disbursed by June 30, 1983. The closing date would be December 31, 1983. Pricing Policy - Natural Gas and Fuel Oil 52. The major energy pricing problem in Tunisia is the pricing of fuel oil. Its current price at $60/ton is one-third of the price prevailing on the Italian spot market. By contrast, in 1980 prices, the delivered cost of gas to be purchased from Algeria is $120/toe. The Government has decided to increase domestic prices of all energy products to international levels as rapidly as possible while providing the energy consumers sufficient time to adjust themselves to the changing market patterns. 53. Whilst the Government does not, in principle, wish to make any subsidies to STEG for gas, it may have to provide such subsidies in cash and in royalty gas during the first two years of Algerian gas operations. However, the Government will gradually increase the price charged to STEG for royalty gas from 1982 onwards, so that by the end of 1986, full import prices would be charged for all Algerian gas sold in Tunisia, whether in cash or in the form of royalty gas. Assurances confirming the above arrangements were obtained during negotiations (Loan Agreement, Section 5.04 (a)(ii)-and Guarantee Agree- ment, Section 3.03). Assurances were also obtained that the Government will (i) review the selling price of Algerian gas every six months starting july 1981, with a view to determining its adequacy to meet STEG's rate of return and cash  - 17 - generation obligations under the Loan Agreement; and (ii) ensure that the domestic selling price of fuel oil is at least equivalent to that of natural gas (Guarantee Agreement, Sections 3.02(b) and 3.04). Achievement of the above pricing obligations and objectives will be an important factor in ensur- ing both the economic and financial viability of the project. Financial Position 54. STEG's financial accounts at present integrate its gas and power operations. With the advent of gas from Algeria, gas will assume a major proportion in STEG's overall operations. To permit proper financial control, assurances were obtained during negotiations that by January 1, 1982, STEG will establish separate internal accounts, on the one hand, for power includ- ing gas from El Borma, and, on the other hand, for Algerian gas (Loan Agree- ment, Section 5.01 (b)). All accounts will be audited by independent auditors acceptable to the Bank (Loan Agreement, Sec:tion 5.01(b)). Financial covenants under the previous Bank loan (Loan 1355-TUN) will continue to apply to STEG's power division including El Borma gas (which will be depleted by 1986). 55. The most notable features of the future gas operations are the small asset base in relation to turnover and the relatively small net profits. The rate of return of 8 percent on net revalued assets required in association with the proposed loan leads to net profits in relation to turnover of about 1 percent. Throughout the 1980s, STEG's primary financial need, with regard to its gas operation, will be to generate sufficient working capital. To achieve this aim, assurances were obtained at negotiations that (i) by October 31, 1981, STEG will introduce appropriate hilling procedures for Algerian gas sales to ensure paym-:nt of gas by its customers in parallel with the company's own payment ooligations; and (ii) STEG's selling price of Algerian gas will produce sufficient revenue to cover working capital require- ments (Loan Agreement, Sections 5.01(c) and 5.04). To ensure that the company will be able to meet its debt service obligations arising from the project, assurances were also obtained during negotiations that projected net revenues from gas operations will fully cover expected debt service payments after 1984 (Loan Agreement, Section 5.05). Project Benefits and Risks 56. The gas purchased under the project from Algeria will cost approx- imately 70 percent of the international fuel oil price at the present price relationship between gas and fuel oil. The main benefit of the project would be its effect on Tunisia's balance of payments. By substituting gas for exportable fuel oil, the project will yield a net benefit to the national economy of not less than $120 million a year, equivalent to 8 percent of Tunisia's 1978 exports. The project will provide 130 full time permanent jobs and several hundred temporary jobs during construction. The use of a sulphur free gas, apart from substantially reducing atmospheric pollution in Tunisia's cities, will reduce plant maintenance costs. The favorable cost of imported gas vis-a-vis imported fuel oil, together with the proposed gas purchase price formula, will reduce the burden on the Government's budget of subsidies on  - 18 - fuel oil. This will free budgetary funds for other high priority needs and lead to a more rational allocation of resources in the economy. The project's economic return is estimated at about 50 percent. 57. The project faces no special risks. There is sufficient lead time to construct the pipeline, an experienced consultant company to supervise the works has been engaged, and the pipeline should be ready in good time. A physical risk arises from the fact that about half of Tunisia's energy supply will depend on a single pipeline. However, gas users will retain their oil storage tanks and will be able to switch to oil should there be any disruption. The financial risk arises from the take-or-pay clause of the gas purchase agreement, as gas will have to be paid for, even if not taken. How- ever, it would take a major downturn in the economy and a substantial decrease in demand for energy for this event to occur, which is unlikely. Nevertheless, the development of energy demand including the progress in implementation of high energy consuming projects will be monitored closely to take preventive action, if necessary. The political risk is a consequence of a major portion of Tunisia's energy supply coming from a single foreign country. Apart from their friendly relations, the close inter-relationships between Tunisia and Algeria in the energy field (inter alia an Algerian oil pipeline traverses the country to a Tunisian port) mitigate Tunisia"s exposure. The economic risk arises from potential difficulties in selling fuel oil in excess of 2 million tons per year in the second half of the 1980s as this commodity is widely available on the international market. However, this is unlikely to be a major problem. Ecology and Safety 58. The project has no adverse ecological impact. Agricultural activity may be disrupted temporarily during pipelaying but will revert to normal upon completion. Atmospheric pollution, which is becoming a problem in Tunisia's cities, will be reduced through use of sulphur-free clean-burning gas in place of the sulphur-bearing soot-producing fuel oil presently used. There will also be a reduction of pollution by avoiding movement of oil by road. No sig- nificant safety problems are envisaged, and an acceptable training and safety program has been arranged. PART V - LEGAL INSTRUMENTS AND AUTHORITY 59. The draft Loan Agreement between the Societe Tunisienne de l'Electricite et du Gaz and the Bank, the draft Guarantee Agreement between the Republic of Tunisia and the Bank and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. In addition to the fea- tures of the proposed project, which are referred to in the text and listed in Section III of Annex III, conditions of effectiveness consist of: (a) assurances that export credits of one amount of $5 million will be made available to the Borrower (draft Loan Agreement, Sections 7.01(a) and 7.02 (c)); and (b) certification in a legal opinion that the gas purchase and  - 19 - royalty contracts are effective and legally binding in accordance with their terms and conditions (draft Loan Agreement, Sections 7.01 (b) and 7.02 (a) and (b)). 60. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 61. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 15, 1980 Washington, D.C.  - 20 ANNEX 1 TABLE 3A Page 1 of 5 TUNISLk - SOCIAL INDICATORS DATA SHEET RAEFERENCE GROUPS (ADJU'STED AyERAGES LAND AREA (THOUSAND SQ. X.) ISIA - MOST RECENT ESTIMATE) - TOTAL i64.0 SAME SAME NEXT RICHER AGRICULTURAL 76.6 MOST RECENT GEOGRAPHIC INCOME -INCOME 1960 /b 1970 /b ESTIMATE /b REGION /c GROUP /d GFPjt?P le GNP PER CAPITA (USS) 210.0 350.0 960.0 1367.7 926.1 1748.5 ENERGY CONSUMBPTION PER CAPITA (KIL-.RAMS OF COAL EQUIVALENT) 190.0 26L.0 456.0 838.1 73Q.7 1646.7 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) 4.2 5.1 5.9 URBAN POPULATION (PERCENT OF TOTAL) 36.0 44.0 48.0 49.0 49.0 51.2 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (YILLIONS) 9.0 STATIONARY POPULATION (MILLIONS) 14.0 YEAR STATIONARY POPULATION IS REACHED 2070 POPULATION DENSITY PER SQ. Xn. 26.0 31.0 36.0 19.9 44.6 28.2 PER SQ. xnB. AGRICULTURAL LANO 55.0 67.0 77.0 99.0 140.7 100.5 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 43.3 46.2 43.0 45.6 41.3 35.4 15-64 YRS. 52.5 50.0 53.0 51.4 55.3 56.3 65 YRS. AND ABOVE 4.2 3.8 4.0 2.8 3.5 5.1 POPUL.ATION GROWTH RATE (PERCENT) TOTAL 1.8 If 2.0/f 2.3/k 3.0 2.- 1.7 URBAN *- 3.8 3.6 5.2 4.5 3.0 CRUDE BIRTH RATE (PER THOUSAND) 47.0 39.0 32.0 43.7 31.1 27.5 CRUDE DFATH RATE (PER THOUSAND) 19.0 14.0 12.0 13.5 9.2 9.1 GROSS REPRODUCTION RATE 3.1 3.4 2.2 3.2 2.2 1.8 FAMILY PLANNING ACCEPTORS. ANNUAL (THOUSANDS) .. 29.2 73.5 USERS (PERCENT OF HARRIED WOMEN) .. 8.0 18.0 .. 34.7 FOOD AND NUTRITION INDEX OF FOOP PRODUCTION FER CAPITA (1969-71-100) 122.3 98.0 125.0 90.8 104.4 102.0 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIRE2ENTS) 86.0 93.0 102.0 99.0 105.0 120.8 PROTEINS (GRAMS PER DAY) 54.0 63. O/ 67.4 63.6 64.4 80.9 OF WHICH ANIMAL AND PULSE 13.0 14.01 20.0 16.0 23.5 31.3 CHILD (ACES 1-4) MORTALITY RATE 29.0 20.0 15.0 15.9 8.6 5.1 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 48.0 54.0 57.0 53.8 60.2 65.6 INFANT MORTALITY RATE (PER THOUSAND) .. 135.0 .. .. 46.7 45.5 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 49.0 70.0 56.4 60.8 69.4 URBAN .. .. .. 83.4 75. 7 85.1 RURAL .. .. .. 34.3 40.0 43.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. .. 59.1 46.0 70.1 URBAN ,. .. 30.0 78.2 46.0 88.3 RURAL .. .. .. 26.4 22.5 33.2 POPULATION PER PHYSICIAN 10000.0 5950.0 4800.0 3677.0 2262.4 1343.2 POPULATION PER NURSING PERSON .. 730.0 1070.0 1730.6 1195.4 765.0 POPULATION PER HOSPITAL BED TOTAL 360.0/h 410.0 410.0/j21 577.0 453.4 197.6 URBAN .. 280.0 230.07i .. 253.1 260.2 RURAL .. 930.0 1040.0: .. 2732.4 1055.0 ADMISSIONS PER HOSPITAL BED .. 24.1 . 21.8 22.1 17.3 HOUSING V AVERAGE SIZE OF HOUSEHOLD TOTAL .. 5.1 /i 6.0 5.8 5.3 4.7 URBAN .. 5.1 /i 5.8 5.5 5.2 4.4 RURAL .. 5.1 7T 6.1 6.0 5.4 5. 1 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. 3.2 /i *- *- 1.9 1.1 URBAN .. 2.77 .. .. 1.6 1.2 RURAL .. 3.6 /0 .. .. 2.5 1.2 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL *- 24.0 /i .. 45.1 50.0 66.0 URBAN .. .. .. 67.9 71.7 85.1 RURAL .. .. .. .. 17.3  - 21 ANN; 1 TABLE 3APae2o TUNISIA - SOCIAL INDICATORS DATA SHEET Page 2 of 5 TUJNISIA REFERENCE GROUPS (ADJUSTED AfRAGES - MOST RECENESIA) SAME SAME NEXT HIGHER MOST RECENT GEOGRAPHIC INCOME INCOME 1960 ib 1970 /b ESTIMATE /b REGION /c GROUP /d GROUP /e EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 66.0 100.0 100.0 85.0 102.5 101.7 MALE 88.0 120.0 118.0 103.7 108.6 110.0 FEMALE 43.0 79.0 81.0 66.0 97.1 92.8 SECONDARY: TOTAL 12.0 23.0 20.0 27.6 33.5 51.2 KALE 19.0 33.0 26.0 39.2 38.4 56.4 FEMALE 5.0 13.0 14.0 20.8 30.7 43.7 VOCATIONAL ENROL. (Y OF SECONDARY) 24.0 12.0 17.0 4.3 11.5 18.3 PUPIL-TEACHER RATIO PRIMARY 61.0 48.0 40.0 32.6 35.8 27.1 SECONDARY 16.0 28.0 23.0 23.4 22.9 25.3 ADULT LITERACY RATE (PERCENT) 15.5 24.0/i 55.0 41.4 64.0 86.1 CONSUMPTION PASSENGER CARS PER THOUSAND POPUIATION 11.0 13.0 18.0 16.7 13.5 53.4 RADIO RECEIVERS PER THOUSAND POPULATION 41.0 77.0 141.0 147.9 122.7 225.9 TV RECEIVERS PER THOUSAND POPULATION 0.1 10.0 27.0 36.0 38.3 102.6 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 19.0 16.0 33.0 17.9 40.0 78.5 CINEMA ANNUAL ATTENDANCE PER CAPITA 2.0 .. 2.3 2.9 3.7 3,6 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 1400.0 1300.0/t 1700.0 FEMALE (PERCENT) 6.1 7.7 8.5 8.6 25.0 24.5 AGRICULTURE (PERCENT) 56.5 49.8 43.0 43.0 43.5 28.9 INDUSTRY (PERCENT) 17.6 21.0 23.0 23.7 21.5 30.6 PARTICIPATION RATE (PERCENT) TOTAL 27.0 23.7 23.7 26.7 33.5 33.8 MALE 50.2 44.2 44.0 46.4 48.0 51.3 FEMALE 3.3 3.6 4.0 5.1 16.8 16.3 ECONOMIC DEPENDENCY RATIO 1.4 1.8/t 1.4 1.8 1.4 1.3 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. .. 17.0 21.4 20.8 HIGHEST 20 PERCENT OF HOUSEHOLDS .. .. 42.0 48.6 52.1 57.6 LOWEST 20 PERCENT OF HOUSEHOLDS .. .. 6.0 5.3 3.9 3.4 LOWEST 40 PERCENT OF HOUSEHOLDS .. .. 15.0 15.0 12.6 11.0 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 204.0 201.3 270.0 RURAL .. .. 97.0 134.2 183.3 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 193.0 288.6 282.5 550.0 RURAL .. .. 193.0 170.0 248.9 403.4 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 20.0 22.9 20.5 RURAL .. .. 15.0 31.2 35.3 Not available Not applicable. NOTES /a The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the mast populated country in each group. Coverage of countries aaong the indicators depends un availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer co any year becween 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1977. /c North Africa & Middle East; /d Intermediate Middle Income (5551-1135 per capita, 1976); /e Upper Middle Income ($1136-2500 per capita, 1976); /f Due to emigration, population growth rate is lower than rate of natural increase; /g Av. 1964-66; /h 1962; /i 1966; /i 1972; /k Official intercensal (1966-75) estimate; /I Government hospital establishments only. May, 1979  - 22 - TUNISIA ECONOMIC DEVELOPHENT DATA SHEET Anne. Page 3 of 5 Actual Prelim. Proet 1/ Growth Rates 1972 1976 1977 1978 1981 1986 1973 1977 1982 1978 1976 1981 1986 Share af GOP A. NATIONAL ACCOUNTS (Dinars millions; 1972 constant prices) 1. Gross domestic product 1,078.0 1,396.0 1,456.5 1,572.0 1,936.8 2,655.3 6.7 6.8 6.5 100.0 2. Gains from terms of trade - 33.2 50.8 91.1 131.6 200.4 - - - 5.8 3. Gross domestic income (14Z2) 1,078.0 1,429.2 1,507.3 1,663.1 2,068.4 2,855.7 7.3 7.7 6.7 105.8 4. Imports 282.9 437.3 509.6 540.2 588.9 781.0 11.5 6.1 5.8 34.4 5. Exports-volume 270.6 310.2 327.7 328.9 413.8 570.7 3.5 5.9 6.6 20.9 6. Exports - TT adjusted 270.6 343.4 378.5 420.0 545.4 771.1 6.1 9.7 7.2 26.7 7. Resource Gap - TT adjusted (4-6) 12.3 93.9 131.1 120.2 43.5 9.9 - - - 7.6 B. Total Consumption 857.8 1,167.4 1,275.5 1,388.7 1,680.6 2,286.5 8.0 7.6 6.4 88.3 Public consunption 150.9 218.0 241.6 267.3 336.5 485.3 9.6 9.1 7.6 17.0 Private consu.ption 706.9 949.4 1,033.9 1,121.4 1,344.1 1,801.2 7.7 7.2 6.0 71.3 9. Total investment 232.5 355.7 362.9 394.6 431.3 579.1 11.2 3.9 6.9 25.1 Fixed investment 214.0 341.9 368.3 403.2 430.0 575.0 12.4 4.7 6.0 25.6 10. National Savings 209.4 241.9 218.2 272.5 370.8 540.1 3.7 8.9 7.8 17.3 11. Domestic Savings 201.7 248.0 237.2 283.0 387.8 569.2 5.3 9.4 8.0 18.0 12. GDP at current prices (USS millions) 2,259.0 4,448.5 5,007.0 5,908.2 8,836.8 16,109.8 18.5 14.7 12.8 13. Fixed investment at current prices 448.4 1,296.6 1,503.5 1,814.0 2,192.9 4,596.4 29.0 10.5 15.9 (USS H) 14. Fixed investment/GDP (current) 19.8 29.1 30.0 30.7 24.8 28.5 - - - B. SECTOR OUTPUT (Distribution in percentages; 1972 constant prices) 1. Agriculture 23.8 20.8 18.5 18.0 16.5 3T4 6 2.9 1.6 4.0 2. Industry 23.5 23.7 15.0 25.5 26.4 28.3 6.7 8.7 8.0 3. Service 52.7 55.4 56.5 56.5 57.1 57.1 7.8 7.1 6.5 C. PRICES (1972: 100) 1. Export price index (incl. NFS) 100.0 1S1.2 197.9 228.0 312.8 387.7 16.0 11.5 4.4 2. Import price index (incl. NFS) 100.0 163.7 171.4 178.5 246.7 286.9 13.1 8.5 3.1 3. Terms of trade index 100.0 110.7 115.5 127.7 126.8 135.1 2.6 2.8 1.3 4. CDP deflator 100.0 136.6 147.5 156.4 206.3 244.7 8.1 8.6 3.5 5. Average exchange rate (dinars per S) .4772 .4288 .429 .4162 .4034 .4034 0. SELECTED INDICATORS (Computed st 1972 constant prices) 1973-76 1977-81 1982-86 1. ICOR 3.2 3.6 3.4 2. Import elasticity 1.48 1.16 0.8 3. Average national savings rate/GDY 18.0 16.5 17.7 4. Marginal national savings rate/COY 9.3 20.2 21.5 5. Imports/GDY 28.2 31.0 27.9 6. Investment/MOY 21.3 22.4 20.6 7. Resource gap/GDY 6.6 10.8 8.0 E. PUBLIC FINANCE (General Gov't) 1972 1976 1977 (as S of Gso at current prices) 1. Current revemie 21.5 25.3 27.0 2. Current expenditure 17.8 19.3 20.0 3. Current surplus . 3.7 6.1 7.0 4. Capital expenditure 6.1 8.1 11.1 5. Loans and advances (net) 2.4 2.1 4.1 F. LABOR FORCE 1972 1976 1978 (in thousands) 1. Total labor force 1450 1671 1782 2. Employment 1277 1440 1522 2.1 Agriculture 589 593 595 2.2 Industry 344 437 484 2.3 Services 344 410 443 3. Unemployment 173 231 260 2/ Staff estimates 1nclujdes 29 zhoussnd Tunisians that left to work abroad.  - 23 - BALANCE OF P4AYENTS AND EXTEPNAL ASSISTANCE ANNEA I ,Millions of US dollars: current prices) Pae 4 of 5 Actual Pruli3_ projected I/ 1969 1972 1976 1977 1978 1979 19S1 1986 A. SUH4ARY OF BALANCE OF PAYMNTS 1. Exports (incl. NFS) 287.8 567.1 1,311.1 1,511.7 1,802.0 2,332.7 3,026.9 5,487. 2. Imports (incl. NFS) 346.2 592.8 1,669.8 2,035.7 2,316.9 2,774.2 3,268.0 5,557.4 3. Resource balance -58.4 -25.7 -358.7 -524.0 -514.9 -441.6 -241.1 -70.2 4. Net factor service income -45.9 -22.7 -58.2 -42.9 -7.2 -55.9 -97.8 -222.6 1. Net investment income -24.4 -43.0 -73.9 -93.9 -132.2 -184.9 -233.5 -369.1 2. Workers remittances 21.9 62.0 143.0 168.3 216.3 235.6 264.7 354.3 3. Net other servics income -43.4 -41.7 -127.3 -117.2 -91.3 -106.6 -129.0 -307.7 5. Net current transfers 7.9 6.1 -0.5 -0.9 - - - 6. Balance on current account -96.4 -42.3 -417.4 -567.8 -522.1 -497.4 -338.9 -292.8 7. Private direct investment 19.0 36.7 102.6 92.3 96.1 110.0 137.5 221.4 8. Official grants 43.6 37.3 53.2 47.3 38.2 40.0 38.0 30.0 Public M&LT loans 9. Disbursements 92.4 139.8 224.4 643.3 636.0 599.8 537.1 714.5 10. Amortization 45.0 71.9 65.7 88.6 103.1 160.8 261.2 -526.8 11. Net disbursements 47.4 67.9 158.7 554.7 532.9 439.0 275.9 187.7 12. Short-term capital and errors and omissions 5.2 -22.4 59.9 -183.2 -110.1 - - - 13. Changes in reserves -18.8 -77.2 43.0 56.7 -35.0 -91.5 -112.5 -146.3 ( increase) 14. Net foreign eKchange reserves -4.0 192.1 304.5 247.8 282.8 374.5 545.8 1,389.4 B. GRANT AND LOAN COMMITIENTS 1. Official grants 43.6 36.7 102.6 92.3 96.1 2. Total public M&LT loans 172.8 187.7 774.5 888.6 592.5 2.1 IBRD 34.4 36.0 60.0 77.5 67.0 2.2 IDA 8.5 10.0 4.8 - - 2.3 Other multilateral - 1.0 95.8 36.4 12.3 2.4 Goverraents 71.2 106.0 454.8 341.4 251.2 2.5 of ,hich centrally planned 2.6 Suppliers 23.2 7.3 16.3 69.2 2.7 Finawnial institutions 29.1 27.5 118.8 364.1 262.0 2.8 Other 6.4 - 24.0 - C. MEMORANDUM ITEMS 1. rrent element of total comitments .. .. 34.6 23.8 18.3 2. Average interest (percent) .. .. 5.0 6.2 7.2 3. Average maturity (years) .. .. 20.8 16.4 14.1 1/ Staff estimates - Nil or less than half of unit shown EMENA CPIIB .. Not available September 1979  - 24 ANNEX 1 TUNISIA DEBT AND CREDITWORTHINESS Page 5 of 5 pages Actual Prelim. 1969 1973 1974 1975 1976 1977 1978 MEDIUM AND LONG-TERM DEBT (millions of US doilars) 1. Total debt outstanding (DOD; end of period) 501.6 826.4 938.9 1,038.1 1,171.9 1.774.3 2,424.5 2. Including undisbursed 768.3 1,306.3 1,518.5 1,762.6 2,430.3 3,321.9 4,015.6 3. Public debt service 60.4 88.7 91.5 101.6 104.3 142.3 196.6 1. Interest 15.4- 27.7 30.7 35.1 38.6 53.7 93.5 DEBT BURDEN (percentage) 1. Debt service ratio 21.0 12.4 7.3 7.6 8.0 9.4 10.9 2. Debt service and direct investment incone ratio 22.0 14.8 7.3 8.7 9.9 10.8 12.6 3. Debt service/GDP 4.6 3.2 2.6 2.4 2.3 2.8 3.3 4. Public debt service/Governrent revenue 19.2 13.9 10.9 9.2 9.3 10.5 5. Total DOD/GDP 37.9 29.7 26.7 24.2 26.3 35.4 41.0 TERMS (percentage) 1. Interest on total DOD/total DOD 1/ 3.3 4.0 3.7 3.7 3.7 4.6 5.3 2. Tctal debt service/total DO 1/ 13.0 12.7 11.1 10.8 10.0 12.1 11.1 DEPENDENCY RATIOS FOR KMLT DEBT (percentage) 1. Gross disbursements/imports (including NFS) 26.7 19.6 11.6 12.3 13.4 31.6 27.5 2. Net transfer/imports (including NFS) 9.2 8.2 4.2 5.8 7.2 24.6 19.0 3. Net transfer/gross disbursements 34.6 42.1 36.4 46.8 53.5 77.9 69.1 EXPOSURE (percentage) 1. IBRD disbursemente/Total diebursements 6.4 13.8 16.3 14.1 11.3 7.4 5.2 2. Bank Group disbursements/Total dieburseents 10.2 17.3 20.6 20.7 15.2 8.3 5.3 3. IBRD DOD/Total DOD 3.6 8.5 9.4 10.5 10.9 9.4 7.8 4. Bank Group D0D/Total DOD 6.3 12.9 13.9 15.9 16.3 13.2 10.6 5. IBRD debt service/Total debt service 2.6 9.1 12.0 13.7 16.0 1.5.0 13.6 6. Bank Group debt service/Total debt service 2.6 9.6 12.4 14.1 16.6 17.4 13.9 EX1ERNAL DEBT (disbursed only) Outetw tino. Dec. 31. 1978 (millions of US dollars) Amount Percent 1. IBRD 189.4 7.8 2. IDA 67.4 2.8 3. Other multilateral 62.6 2.6 4. Goverriments 1,214.5 50.1 5. Suppliers 102.9 4.2 6. Financial institutions 767.3 31.6 7. Other 20.3 0.9 8. Total public M&LT debt 2,424.5 100.0 9. Total public M&LT debt (including undiebursed) 4,015.6 165.6 DEBT/PROFILE 1. Total debt service 1979-1983/Total DOD end of 1978 (percent): 86.3 __ 1/ DOD at the end of previous year - Nil or less than half of unit shown EMENA CPIIB Not availeble September 1979  - 25 - A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1980) ANNEX II Page I of 8 Loan* or Credit US $ Million Number Year Borrower Purpose Amount (less Cancellation) Bank IDA b/ Undis. Twenty-four Loans and Credits Fully Disbursed 139.4 60.5 238 1971 Republic of Tunisia Population 4.8 1.5 858 1972 Republic of Tunisia Tourism Infrastructure 14.0 4.0 937 1973 Republic of Tunisia Urban Planning & Public Transportation 11.0 1.5 989 1974 SONEDE Water Supply 23.0 1.8 1029 1974 Republic of Tunisia Hotel Training 5.6 2.3 1042 1974 Compagnie des Phosphates et Chemin de Fer de GAFSA Phosphate Development 23.3 3.6 1068 1974 Republic of Tunisia Irrigation Rehabilitation 12.2 5.4 1088 1975 Republic of Tunisia Urban Sewerage 28.0 16.7 1155 1975 Republic of Tunisia Education 8.6 8.3 1188 1976 Republic of Tunisia Highways 28.0 24.6 1189 1976 Banque de D6veloppement Economique de Tunisie (BDET) Development Finance Co. 20.0 0.8 238-1 1976 Republic of Tunisia Population 4.8 1.1 1340 1976 Banque Nationale de Tunisie Agricultural Credit 12.0 6.1 1355 1976 Societ6 Tunisienne de l'Electricit6 et du Gaz Power 14.5 0.6 1431 1977 Republic of Tunisia Irrigation Development 42.0 23,0 1445 1977 SONEDE Water Supply 21.0 18.8 1504 1977 BDET Development Finance Co. 30.0 13.1 1505 1977 Republic of Tunisia Small-Scale Industrial Project 5.0 4.7 1601 1978 Republic of Tunisia Rural Roads 32.0 32.0 1675 1979. Republic of Tunisia Urban Sewerage 26.5 26.5 1702 1979 Soci6t6 Nationale d'Exploi- Fifth Water Supply tation d'Eau 25.0 25.0 1705 a/ 1979 Republic of Tunisia Second Urban Development 19.0 19.0 1746 a/ 1979 Republic of Tunisia Second Fisheries 28.5 28.5 1796 a/ 1980 Republic of Tunisia Southern Irrigation 25.0 25.0 1797 a/ 1980 Office des Ports Nationaux Third Port 42.5 42.5 TOTAL .. *636.1 70.1 336.4 Of which has been repaid .. 61.3 4.7 Total now outstanding .. 574.8 65.4 Amount Sold 14.4 of which has been repaid 7.8 6.6 Total now held by Bank and IDA b/ .. 568.2 65.4 Total Undisbursed 333.8 2.6 336.4 a/ Not vet effective b/ Prior to exchange adjustment. * In addition a loan of $36.5 million for a Fourth Highway Project . was considered by the Executive Directors on May 13, 1980.  - 26 - ANNEX II Page 2 of 8 B. STATEMENT OF lFC INVESTMENTS IN TUNISIA (as of March 31, 1980) Amount in US $ Million Year Obligator Type of Business Loan Equity Total 1962 NPK Engrais Fertilizers 2.0 1.5 3.5 1966 Societe Nationale d'Investissement Development Finance Co. 0.6 0.6 1969 COFIT (Tourism) Development Finance Co. 8.0 2.2 10.2 1970 Soci6te Nationale d'Investissement (SNI) now (BMET) Development Finance Co. 0.6 0.6 1973 Socidt6 Touristique & HMtelitre RYM SA. Tourism 1.6 0.3 1.9 1973 Soci6t6 d'Etudes & de D6veloppement de Sousse-Nord Tourism - 0.0 0.0 1975 Societe d'Etudes & de Developpement de Sousse-Nord Tourism 2.5 0.6 3.1 1974 Industries Chimiques du Fluor Chemicals 0.7 0.7 1978 BDET Development Finance Co. 1.3 1.3 Total Gross commitments 14.1 7.8 21.9 Less cancellations, terminations, repayments and sales 5.8 1.6 7.4 Total commitments now held by IFC 8.3 6.2 14.5 Total undisbursed .. -- 0.5 0.5  27 - ANNEX II Page 3 of 8 C. PROJECTS IN EXECUTION 1/ Cr. 238: Population Project; US$4.8 million credit of April 5, 1971; Date of Effectiveness: December 29, 1971; Closing Date: (Original) June 30, 1976; (Current) December 31, 1980. Cr. 238-1: Population Project: US$4.8 million Supplemental Credit of October 13, 1976; Date of Effectiveness: March 21, 1977; Closing Date: (Original) December 31, 1979; (Current) December 31, 1980. Progress in the physical implementation of the project has been slow and new delays have occurred in equipping of project facilities. The con- struction of the maternity hospitals in Sousse, Tunis and Sfax is complete; the one in Bizerte will be completed in early 1980. Twenty-five of the 29 maternal and child health/family planning centers have been completed; three will be completed early in 1980. The center at La Hafsia may have to be deleted because the Government has been unable to obtain a suitable site. Cr. 270: Fisheries Project; US$2 million credit of September 24, 1971; Date of Effectiveness: May 24, 1972; Closing Date: (Original) December 31, 1976; (Current) December 31, 1979. All the 190 boats ordered have been constructed and the remainder of the credit has been used to finance fishing gear. About 98 percent of the credit funds are disbursed, the balance is committed, and the project will close on schedule. The recovery of loans provided under the project to the fishermen remains a matter of concern as the recovery rate has been low and measures to improve the situation are only slowly succeeding. In May 1979, agreement was reached with the Tunisian Government and BNT on a program to bring the rates up to 80 percent by 1983. Ln. 858: Tourism Infrastructure Project; US$14 million loan of September 28, - 1972; Date of Effectiveness: June 29, 1973; Closing Date: (Original) December 31, 1977; (Current) June 30, 1980. The project has entered its final implementation stage. About 90-95 percent of project work is completed. The remainder is expected to be completed early in 1980. Total project cost, including price escalation allowances, is still estimated at TD 31.5 million. Of the total Bank financ- ing of $24 million (including the fully disbursed credit 329-TUN of $10 mil- lion), about 85 percent has been disbursed. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any prob- lems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  - 28 - ANNEX II Page 4 of 8 Ln. 937: Tunis District Urban Planning and Public Transport Project; US$11 Cr. 432: million loan and US$7 million credit, both of October 5, 1973; Date of Effectiveness: September 24, 1974; Closing Date: (Original) December 31, 1976; (Current) December 31, 1980. The project has been completed except for construction of a bus depot which is expected to be ready by June 1980. The project helped estab- lish and strengthen the Tunis District, the first regional planning authority in Tunisia. Work carried out by the District in the housing and transport sectors has been instrumental in bringing about substantial changes in public programs and policies, such as the adoption of measures to encourage the use of buses and restrain the use of private cars. The project also assisted the public transport company Societe Nationale des Transport (SNT) in renewing its bus fleet and railway rolling stock, improving its organization and finance, and upgrading the maintenance of its vehicles with the construction of a new bus depot. In parallel, the city of Tunis adopted a new traffic plan with a one-way street system, reserved bus lanes and restricted parking zones, which contributed substantially to the improvement of bus services in Greater Tunis. This, combined with an increase in the SNT bus fleet, and improved bus maintenance has led to an increase in the use of SNT transport facilities by about 27 per-cent above the level which would have been achieved in the absence of the project. Ln 989: Third Water Supply Project; US$23 million loan of May 29, 1974; Date of Effectiveness: September 24, 1974; Closing Date: (Original) June 30, 1979, (Current) June 30, 1980. Ln. 1445: Fourth Water Supply Project; US$21 million loan of July 5, 1977; Date of Effectiveness: January 30, 1978; Closing Date: December 31, 1982. All the water production facilities programmed under the third project are now in operation. As a result of this major increase in water production, water supply services in Sfax have substantially improved. The remaining loan amount will be disbursed for works in the city's distribution network, which are expected to be completed by March 1980. Good progress has also been achieved in the execution of the works included in the fourth project. Procurement under this project is now expected to be completed by mid-1980. Having increased the average water rates last year by about 44 percent, the borrower's financial situation is expected to remain satisfactory for the next two years. Ln. 1029: Hotel Training Project; US$5.6 million loan of Julv 17, 1974; Date of Effectiveness: November 4, 1975; Closing Date: (Original) October 31, 1978; (Current) October 31, 1980. The hotel schools at Hammamet and Sousse Nord are now open. The practice hotels attached to the schools are both to open later in 1980. Requests for disbursements of the remaining funds should be received by March 1980.  - 29 - ANNEX II Page 5 of 8 Ln. 1042: Gafsa Phosphate Project; US$23.3 million loan of October 1, 1974; Date of Effectiveness: March 14, 1975; Closing Date: (Original) June 30, 1979; (Current) December 31, 1980. Underground mining operations using the longwall method were in- tended to supply phosphate rock to the Sehib beneficiation plant which was commissioned at the end of 1979. Following the failure of the related under- ground mining tests to reach satisfactory production levels, a partial reformulation of the project is being carried out with the assistance of experienced consultants whose services are financed by the unused portion of the Bank loan. The services include: (i) 6 months' technical assistance in further testing the longwall method, (ii) a feasibility study for open pit mining of an alternative deposit from which the supply of rock to the washing plant could be supplemented, and (iii) a review of Gafsa's five-year invest- ment program and the design and implementation of an improved cost control system. Meanwhile, the Company is experiencing financial difficulties due mainly to high operating costs coupled with a large investment program which has not yet succeeded in raising production levels or reducing costs, and the accompanying heavy debt load. Ln. 1068: Irrigation Rehabilitation Project; US$12.2 million loan of December 31, 1974; Date of Effectiveness: September 18, 1975; Closing Date: June 30, 1982. Progress in construction and rehabilitation works in the Medjerda sub-project area continues to be satisfactory, except for water supply to farmers on which a common decision is expected by SONEDE and OMVVM, regard- ing the latter's contribution to the investment costs. Enforcement of the Agrarian Reform is progressing slowly, especially in the Medjerda area. In Nebhana, the land consolidation program is developing well and farmers have been settled on nearly 60 percent of the total area. OMVVM continues to encourage large owners to improve cultivation of land and marked progress has been reported in the distribution of medium- and short-term credit. Progress in construction and rehabilitation of irrigation, drainage and road networks continues to be satisfactory. Ln. 1088: First Urban Sewerage Project; US$28 million loan of February 18, 1975; Date of Effectiveness: August 15, 1975; Closing Date: (Original) December 15, 1979; (Current) December 15, 1981. The project suffered considerable delay as a result of a number of factors, some beyond the control of the project entity, ONAS. As a result, considerable cost escalation has occurred, chiefly in local cost components. However, bids for most of the works have now been received and construction is under way on all major components. The project is expected to be completed in mid-1982. One of its major benefits will be release of land for development around the Lake of Tunis, which until now has been impossible because of the pollution of the lake waters by untreated sewage. Consultants financed under the project have produced a land-use plan for the area, and acquisition of the land has begun by Government.  - 30 - ANNEX II Page 6 of 8 Ln. 1155: Third Education Project; US$8.9 million loan of August 13, 1975; Date of Effectiveness: March 1, 1976; Closing Date: (Original) June 30, 1980; (Amended Project) March 31, 1983. Implementation of this project was delayed following a change in education priorities in Tunisia. The project was subsequently amended to reduce the number of ITM centers to be equipped under the project, increase the facilities to train teachers for ITM, and increase technical assistance. The total cost of the amended project is estimated at $11.3 million and the Bank loan has been decreased by $0.3 million to $8.6 million, representing the full foreign exchange cost of the amended project. Implementation of the project is proceeding satisfactorily; construction of extensions to one teachers' college has commenced and the four other extensions are under design. Equipment procurement for the teachers' colleges and the ITM centers is proceeding satisfactorily. Ln. 1188: Second Highways Project, US$28 million loan of January 26, 1976; Date of Effectiveness: June 16, 1976; Closing Date: (Original) December 31, 1979; (Current) December 31, 1982. Civil works of Lot 10 of the Tunis-Bizerte highway are complete and in progress on Lot 9 on the same route. Works are behind schedule although quality is generally satisfactory. Construction is in progress on Lot 6 in Nabeul. Construction works of Lots 5, 7 and 11 have not started yet due to lack of local financing and problems with expropriation. The Sfax bypass has been deleted. The local financing issue has been discussed with the Ministries of Public Works and Planning and the work on remaining items will commence in 1980. The final report of the transport coordination study is behind schedule, since the Government is still discussing some of the draft recommendations with the consultants. Ln. 1189: Sixth Development Finance Company Project; US$20 million loan of January 26, 1976; Date of Effectiveness: June 7, 1976; Closing Date: June 30, 1980. Disbursements are about 6 months ahead of the schedule projected in the appraisal report. BDET has shown consistent improvements over the past three years in the key areas of management effectiveness, arrears recovery, financial practices and resource mobilization. The institution plays an increasingly important role in financing industrial development, extending about one-third of all term credit available to the industrial sector in Tunisia. Ln 1340: Second Agricultural Credit Project; US$12 million loan of November 23, 1976; Date of Effectiveness: July 19, 1977; Closing Date: December 31, 1980. About 33 percent of the loan amount is disbursed and about 55 per- cent is committed. Subloans for small farmers are being made at an accelerated pace. Under this small farmer category, lending to production cooperatives which meet the revenue criteria applied to small farmers will be taken up very  - 31 - ANNEX II Page 7 of 8 soon. Prospects are good for the commitment of funds for service cooperatives whose members are small and medium size farmers. Commitments of funds to commercial farmers and agro-industries are progressing satisfactorily but subloan applications of farmer associations for the establishment of date palm plantations have not yet been processed. The sub-loan recovery rate has been low and new procedures to remedy this have recently been initiated. Ln. 1355: Second Power Project; USS14.5 million loan of January 12, 1977; Date of Effectiveness: May 4, 1977; Closing Date: June 30, 1981. The Project has been completed and the seven gas-turbines are in operation. The consultants for the energy pricing study have been selected. It is expected that the study will be ready by the end of 1980. Ln. 1431: Sidi Salem Multi-purpose Project; US$42 million loan of July 5, 1977; Date of Effectiveness: July 31, 1978; Closing Date: June 30, 1984. For the project as a whole, progress in implementation continues to be satisfactory. Implementation of the diversion scheme of the Medjerda river during construction of the Sidi Salem dam was completed on schedule, as was the cofferdam. Progress in implementation of the railroad substructure is slightly behind schedule. The land reform and consolidation program is underway. Ln. 1504/1505: Industrial Finance Project consisting of Seventh Loan to Banque de Developpement Economique de Tunisie (BDET) and a Pilot project for assistance to SSI; Loans of $30.0 million to BDET and of $5.0 million to the Government, of January 25, 1978; Date of Effectiveness: October 13, 1978; Closing Date: December 31, 1981. The start up of the project suffered from difficulties in finalizing legal arrangements concerning the SSI Pilot Project component, which delayed effectiveness by about six months. Nevertheless, commitments under the loan to BDET have built up rapidly after effectiveness and disbursements are in line with appraisal estimates. Under the project, BDET is giving priority in its financing to projects which are located in the least developed regions, sponsored by new entrepreneurs, characterized by high labor intensity or export-orientation. Although with some delay, commitments have also begun under the SSI pilot project showing that the commercial banks' initial reluc- tance to utilize Bank funds for SSI financing is being overcome. Considerable progress has been made by the Tunisian authorities toward setting up a network of Tunisian and foreign technical assistance experts, specifically catering to the needs of SSI, as agreed under the project.  - 32 - ANNEX II Page 8 of 8 Ln. 1601: Rural Roads Projects; US$32.0 million loan of July 24, 1978; Date of Effectiveness: April 30, 1979; Closing Date: June 30, 1984. Preparation of project works in the first three of the provinces to be covered under the project is progressing satisfactorily, and tenders have been called for road works in a fourth province (Nabeul). Ln. 1675: Second Urban Sewerage Project; US$26.5 million loan of April 13, 1979; Date of Effectiveness: August 31, 1979; Closing Date: December 31, 1984. Consultants have been contracted and detailed design is progressing as planned. Ln. 1702: Fifth Water Supply Project; US$25.0 million loan of May 31, 1979; Date of Effectiveness: October 19, 1979; Closing Date: December 31, 1982. The physical execution of the project is progressing well and according to schedule. SONEDE has already prepared 9 sub-projects for a total investment cost of US$5.3 million. Ln. 1705: Second Urban Development Project; US$19.0 million loan of May 31, 1979; Date of Effectiveness: Not yet effective; Closing Date: December 31, 1983. Staffing requirements and preparation of tender documents is pro- gressing satisfactorily. Effectiveness is pending receipt of land acquisi- tion rights in three areas. Ln. 1746: Second Fisheries Project; US$28.5 million loan of July 20, 1979; Date of Effectiveness: Not yet effective; Closing Date: June 30, 1985. Loan effectiveness is pending signature of the Subsidiary Loan Agreement on behalf of the Borrower and BNT. Preparation of tender documents for port infrastructure and boat engines has begun.  - 33 - ANNEX III TUNISIA: SECOND NATURAL GAS PIPELINE PROJECT Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken by the country to About 2 years, from October prepare the project: 1977 to September 1979 (b) The agency which prepared the Societie Tunisienne de project: l'Electricite et du Gaz (STEG) with the assistance of consul- tants (c) Date of first presentation to the Bank: February 1979 (d) Date of first Bank mission to consider the project: September 1979 (e) Departure of appraisal mission: September 30, 1979 (f) Negotiations completed: May 2, 1980 (g) Loan effectiveness planned: September 1, 1980 Section II: Special Bank Implementation Actions None. Section III: Special Conditions (a) Effective and legally binding royalty and gas purchase contracts as a condition of loan effectiveness (para. 43). (b) Export credit agreements for the financing of material and equipment amounting to $5 million as a condition of effectiveness and $7 mil- lion to be arranged by October 1, 1980 (para. 49). (c) Agreement by Government to contribute the equivalent of $25 million for the finance of local expenditures ($19 million equivalent) and $6 million for part of foreign cost (para. 49). (d) Agreement on commercial loans to be obtained by the Borrower for an amount of $18 million equivalent (para. 49). (e) Semi-annual reviews of the selling prices of Algerian gas and of fuel gas starting July 1981 (para. 53).  I  IBRD 14849 FEBRUARY 1980 - d/f E s7 t r ~~~F 'V 'E A N . E A c Menzel CA8 BON _ourguiba r ' ' srborka \isUNI 3/ / ' - _ ) \ / abeul (I+ / /< Hiammamet ( oEI Kef /o 36