Tunisia - Grain Distribution and Storage Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. P-3120-T REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA FOR A GRAIN DISTRIBUTION AND STORAGE PROJECT September 16, 1981 This document has a restricted distribution and may be used by reciplents only in the performance of their officiai duties. Its contents may not otherwise be disclosed wlthout World B*nk authorization.  REPUBLIC OF TUNISIA CURRENCY EQUIVALENTS Currency Unit - Tunisian Dinar (D) The exchange rate of the Tunisian Dinar is floating. The rate used in the President's and Staff Appraisal Reports, which approximates the current rate, is: US$l = DO.400 Dl = US$2.50 Dl million = US$2.50 million WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet 1 kilometer (km) = 0.62 miles 1 sq. kilometer (km2) = 0.386 sq. mile - 100 ha. 1 hectare (ha) = 2.47 acres 1 kilogram (kg) = 2.2 pounds 1 metric ton (m ton) = 2,205 pounds 1 quintal (q) = 100 kg (220.5 pounds) 1 cubic meter = 35.315 cu. ft. FISCAL YEAR Republic of Tunisia Calendar year Office of Cereals = October 1 - September 30 ACRONYMS AND ABBREVIATIONS BNT Banque Nationale de Tunisie (National Bank of Tunisia) CCGC Cooperative Gentrale des Grandes Cultures (Central Cooperative for Basic Crops) CGC Caisse Generale de Compensation (Price Equalization Fund) COCEBLE Cooperative Centrale de Ble (Central Wheat Cooperative) FAO/CP IBRD/FAO Cooperative Program Oc Office des Cereales (Office of Cereals) OPNT Office des Ports Nationaux Tunisiens (Tunisian National Port Authority) PCC Project Coordination Committee PDG President Director General PMU Project Management Unit PPAR Project Performance Audit Report SNCFT Societe Nationale des Chemins de Fer Tunisiens (Tunisian National Railroad Company)  FOR OFFICIAL USE ONLY REPUBLIC OF TUNISIA GRAIN DISTRIBUTION AND STORAGE PROJECT Loan and Project Summary Borrower: Republic of Tunisia Beneficiary; Office of Cereals (OC) Amount: US$42 million equivalent, in various currencies Terms: The loan would be repayable over 17 years, including a 4-year grace period with interest at 10.6 percent per annum. Relending Terms: The Government would onlend US$42 million to OC on the same terms and conditions as those of the Bank loan; Government would bear the foreign exchange risk of the loan. Project Description; The primary objective of the proposed project is to expand storage and throughput capacity, improve the related domestic transport system and largely complete the conversion from bag to bulk handling in Tunisia's distribution system for imported grain to meet the rapidly rising demand for industrially milled grain. In addition, the project would provide assistance for strengthening the technical capacity and financial management of.OC, and in preparing a second project aimed at similar improvement of the distribution system for domestic grain. The project consists of: (a) rehabilitation, adaptation for imports, and expansion to 30,000-ton capacity of the existing port silo at Bizerte, and construction of a 30,000-ton port silo at Ghannouch (near Gabes); (b) construction of three storage silos at Sfax (20,000 tons), Beja and Gafsa (10,000 tons each), and expansion from 8,000 tons to 28,000 tons of the storage silo at Kalaa Seghira (near Sousse); (c) rehabilitation of the Manouba (near Tunis) storage silo (50,000 tons); (d) construction and rehabilitation of silo rail sidings; (e) acquisition of about 50 bulk rail hopper cars; and (f) technical assistance, and training. Benefits and Risks; The proposed project would help reduce the congestion, handling costs, ocean freight and demurrage charges and grain losses incurred at the country's five main ports as well as the cost of This document has a restricted distribution and may be used by recipients only in the performance of their officiai duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii domestic transport and handling of imported grain. Other benefits would include better control by OC over the timing of purchase of imported grain, improved use of silo capacity as well as better management and maintenance of silos. The technical assistance and training included in the project are expected to minimize the risks of inadequate management of handling, storage and transportation facilities which might affect benefits. Estimated Costs: Local Foreign Total --------US$ Million--------- Construction and Rehabilitation of Port Silos 14.7 12.4 27.1 Construction of Storage Silos 14.0 8.4 22.4 Rehabilitation of Storage Silo 2.1 2.2 4.3 Port Construction and Dredging 0.6 0.9 1.5 Construction and Rehabilitation of Railway Sidings 2.7 1.7 4.4 Bulk Hopper Cars Purchase 0.8 2.5 3.3 Engineering 2.2 1.3 3.5 Technical Assistance 0.7 0.7 1.4 Total Base Cost 37.8 30.1 67.9 Physical Contingencies 5.7 4.5 10.2 Price Contingencies 8.3 7.5 15.8 Total Project Cost 51.8 /1 42.1 93.9 Financing Plan: Local Foreign Total -------US$ Million--------- Bank - 42.0 42.0 Government 51.8 0.1 51.9 TOTAL 51.8 42.1 93.9 Estimated Disbursements: FY82 FY83 FY84 FY85 FY86 ------------US$ Million----------- Annual 0.7 12.9 16.9 8.5 3.0 Cumulative 0.7 13.6 30.5 39.0 42.0 Economic Rate of Return; 16 percent Staff Appraisal Report: No. 3503-TUN, dated September 1, 1981 MAP. IBRD 15783 /1 Including $14.7 million of import duties and taxes.  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 REPUBLIC OF TUNISIA FOR A GRAIN DISTRIBUTION AND STORAGE PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Tunisia for the equivalent of US$42 million to help finance the foreign exchange cost of a Grain Distribution and Storage Pro- ject. The loan would have a term of 17 years, including 4 years of grace, with an interest rate of 10.6 percent per annum. The Government would on- lend the total loan amount to the Office of Cereals (OC) on the same terms and conditions as those of the Bank loan. The Government would bear the foreign exchange risk. PART I - THE ECONOMY 1/ 2. The last Economic Report entitled "Economic Position and Prospects of Tunisia" (No. 2201-TUN) was issued on November 16, 1978. An economic mission visited Tunisia in June 1980 and this part reflects its findings. Country Data sheets are attached in Annex 1; present economic projections are provisional and strongly depend on the outcome of an ongoing study on the future of domestic oil production and energy demand and on the economic policies that will be adopted for the Sixth Development Plan (1982-86). 3. Tunisia is rather poorly endowed with natural resources. Much of it is arid or semi-arid. The limited areas where dry-land agriculture is possible are subject to severe year-to-year fluctuations in rainfall. The adverse effects of climatic fluctuations are alleviated by expanding ir- rigation. Tunisia's most important raw materials are phosphates, petrol- eum, and natural gas; however, the known exploitable reserves of oil and gas are small, and phosphate deposits are of relatively low quality. There is considerable tourism potential, and efforts have been made to develop it rapidly over the last decade. 4. Since independence in 1956, Tunisia has undertaken a massive ef- fort towards development of its human resources, paying special attention to education and training as basic prerequisites for modernization. As a result, the adult literacy rate has increased from under 15 percent at the time of independence to 55 percent by 1980; the health and nutrition status of the population improved, average calorie supply per capita increased from about 80 to 112 percent of requirements, and life expectancy at birth increased from about 48 years in 1960 to 57-years in 1978. 1/ Part I is substantially unchanged from that in President's Report No. P-3068-TUN of May 11, 1981 for a Textile Rehabilitation Project.  5. Tunisia's economy depends on rural activities to provide employ- ment, but on petroleum and phosphate exports to provide foreign exchange earnings. Manufacturing is rapidly becoming important in both respects. The relative sectoral composition of GDP shows a diversified economic structure. From the employment point of view (the country's most pressing social problem), Tunisia remains an agricultural economy, with the rural sector providing work for about one out of every three Tunisians in the labor force. The direct employment effects of petroleum extraction, phos- phate mining and tourism are small, although these sectors make a vital contribution to GDP, public revenues, savings and exports. From the export point of view, Tunisia is largely a petroleum and mining economy with those two activities providing 37 percent of the country's foreign exchange earn- ings; all manufacturing activities and tourism together provide another 43 percent. The Main Economic Sectors in 1979 (in percent) GDP /1 Employment Exports /2 Agriculture 16.2 35.0 6.8 Energy/Mining 12.1 1.8 37.1 Manufacturing 12.1 21.8 22.5 Tourism 4.8 1.5 20.2 Construction and Services 41.2 25.4 13.4 Government Administration 13.6 14.5 - 100.0 100.0 100.0 /1 At factor cost. /2 Goods and non-factor services. Recent Economic Developments 6. Tunisia's economy has grown relatively fast in recent years. GDP, in constant prices, increased at an average annual rate of 6.5 percent from 1976 to 1979. Although this is somewhat less than the 8.6 percent growth rate for the 1969-76 period, Tunisia's GDP growth of 8.0 percent for the entire decade 1969-79 places it among the top 10 middle-income countries; it also marks a substantial improvement over the relatively low growth (4 percent per annum) experienced during the 1960s. GNP per capita reached $1,120 in 1979, which, in constant prices, is about 73 percent above the 1969 level. 7. The impressive growth achieved from 1969 to 1976 was largely at- tributable to changes in economic management introduced at the beginning of this period. In agriculture, stronger Government efforts to stimulate pro- duction, reoriented towards promotion of individual farming, together with  favorable weather conditions, resulted in a near doubling of production, a remarkable turn-around from the slow, but continuous, decline in agricul- tural production during most of the 1960s. In manufacturing, the degree of Government control declined, and more incentives were given to private initiative. An increasingly export-oriented investment strategy, coupled with a dynamic marketing effort, led to a rapid growth of production, par- ticularly in textiles, while tourism was promoted with marked success. 8. During the second half of the 1970s, the situation was quite dif- ferent, not so much in terms of overall growth (which slowed down slight- ly), as in terms of the underlying growth factors: output in agriculture has virtually stagnated since 1976, partially as a result of bad weather conditions; textile production declined in 1978, and tourism development slowed down because of the 1977 slump in the European tourist market. By contrast, petroleum production and, to a lesser extent, phosphate process- ing expanded making these two sectors the main engine of economic growth over the 1976-79 period. After an exceptional low level in 1976, oil pro- duction increased by over 12 percent per annum up to 1979; more important, however, were the large profits reaped by Tunisia from the successive in- creases in crude oil prices, starting in 1974. These large additional foreign exchange earnings enabled the country to increase its investments, from an average of slightly over 20 percent of GDP before 1975, to nearly 29 percent thereafter, and expand its public services at a rapid rate. These two factors, in turn, triggered a rapid growth in the construction industry and in local manufacturing of construction materials. 9. In spite of the considerable increase in domestic demand, particu- larly in investments, the balance of payments situation remained favor- able. Even in constant prices, exports grew marginally faster than im- ports. In addition, the terms of trade improved significantly, due to higher export prices for oil and low import prices for grain. As a result, the resource gap remained relatively small, and domestic savings financed on average over 72 percent of the greatly increased investment effort. The current account deficit of $500-600 million (1978/1979) was easily financed: grant aid and private investments accounted for about 30 per- cent, while the remainder was covered by long-term foreign borrowing. The increase in lending to Tunisia from public sources allowed it to reduce borrowing from financial markets and suppliers' credits. During the 1970s, therefore, total foreign debt disbursed increased little relative to GDP and the debt service ratio improved (para. 18). Net foreign exchange re- serves increased in seven out of the last ten years, but still represented only 1.5 months of imports at the end of 1979. 10. Since independence, the public sector has played a major role in mobilizing and redistributing domestic resources. General budgetary revenues were equivalent to one-third of GDP in 1978 and 1979, one of the highest shares among middle-income countries. Over one-fourth of these revenues were saved, and public savings financed close to two-thirds of total government capital expenditures. This comfortable public finance situation has led to a fast increase in subsidy payments to private consu-  -4- mers and public enterprises. Such transfers have nearly doubled over the last four years, accounting for 16 percent of total current budget outlays, or 4 percent of GDP. This level of subsidies, to cover the increasing operational deficits of public enterprises may not be sustainable in the long term; similarly, consumer subsidies for basic necessities will have to concentrate more systematically on the needy. Medium-term Prospects 11. The objectives of the Fifth Development Plan (1977-81) have a good chance of being achieved, except for the employment creation targets. The actual GDP growth will be just short of the planned rate of 7.3 percent per annum, while the investment objective of $9.8 billion in current prices, or 30 percent of GDP, will be fully met. Completion of some large projects in the public sector (steel, cement, expansion of the oil refinery) will, how- ever, be delayed. Private sector investments, both foreign and national, are likely to exceed Plan targets. The Government welcomes this shift from large capital-intensive projects in the public sector to medium-scale industries as a means to speed up employment creation. Open and hidden unemployment is currently considered the most serious problem for the Tunisian economy. During 1977-79, the domestic non-agricultural economy could only absorb three-fourths of new job seekers. In view of this, and of the fact that migration to Libya and Europe is decreasing rapidly, the overall unemployment and underemployment rate, estimated at between 20 and 25 percent, has not declined markedly. 12. The Sixth Development Plan (1982-86) is presently under prepara- tion. Employment generation, food self-sufficiency, and more rapid growth in the three most backward regions of the country (North-West, Center-West, and South) are likely to be among its major objectives. The outlook for overall economic growth during this period and beyond, will depend upon future developments in the oil and natural gas sector. Based on known reserves, it is generally expected that oil production will decline after 1981 from its present level of 5-6 million tons per annum and will come to an end during the late 1990s. The possible exploitation of some of the smaller fields that may soon become profitable will not delay the declining production trend by more than a few years. Some off-shore fields cannot be exploited for the time being, because they are located in areas disputed by Libya. Gas production in presently exploited fields (385,000 tons of oil equivalent--toe--in 1979) is expected to cease around 1990. Royalties from the Algerian/Italian pipeline will provide an additional supply of natural gas, rising from 200,000 toe in 1982 to 800,000 toe in 1986 and there- after. Negotiations with Algeria on the purchase of additional quantities of natural gas are proceeding, but have so far been inconclusive. The Government is therefore considering the exploitation of the off-shore gas field of Miskar, despite its high production cost. The optimal use of all these resources is being studied with foreign assistance, within a compre- hensive long-term policy framework.  -5- 13. While detailed macroeconomic growth projections beyond the mid- 1980s will have to wait for the outcome of these studies, there can be little doubt that--except in the unlikely case of large new oil discoveries--Tunisia will face the consequences of a decline in oil and gas production over the next 10-15 years, and become a net importer of hydro- carbons, perhaps as early as 1987-88. The Government is fully aware of these developments. It agrees that the situation will require significant policy changes in the near future and is analyzing the areas where these changes will have to take place in the context of the preparation of the Sixth Plan. Unlike many other developing countries, however, Tunisia has enough lead time to introduce these changes gradually until the mid-1980s. This will reduce the associated economic and social strains, and should avoid major balance-of-payments problems. Assuming that the necessary measures will be implemented, it is reasonable to expect an overall GDP growth of about 7 percent in constant prices, until at least 1985. 14. The expected decline in oil production and exports is likely to have an impact on external debt and domestic savings, particularly public savings. Changes in demand management will thus be required to avoid balance-of-payments difficulties and maintain satisfactory economic growth. In the public sector, the necessary restraint in current budget expenditures will require a reassessment of present price and subsidy policies, in particular for energy, basic foodstuffs, and transportation. Considering the complexity and the pervasiveness of the present subsidy system, and the impact its dismantling will have on domestic inflation and on the standard of living (particularly on the 17 percent of the population still living in absolute poverty), the introduction of changes into the system will be a difficult endeavor, but ought to be initiated without delay. As part of this effort, the subsidies to public enterprises, to a large extent stemming from managerial inefficiencies, ought to be phased out. In addition, interest rate and fiscal policies will have to be used more effectively to restrain final consumption, particularly of imports, and to stimulate savings. Finally, wage and salary policies will have to keep labor cost increases in line with productivity increases, particularly since Tunisia will have to stimulate tourism and make a greater effort to improve its competitiveness in international markets by promoting exports of manufactured goods other than textiles. 15. A successful and timely implementation of these policy changes, however, cannot prevent a decline in the domestic savings rate. This, in turn, will require a corresponding adjustment in the investment rate below the present average of 29 percent of GDP, so as to maintain a manageable spread between domestic savings and investments. More resources will have to be allocated to labor-intensive projects, particularly to small and medium manufacturing enterprises, in order to ease the unemployment problem and reduce income disparities, between rural and urban areas as well as within each of these areas. While investmen.ts in education, health, hous- ing and water supply will have to continue, they should be focussed more on the most needy income groups, provided at lower costs (health, shelter), and made more relevant to the needs of the economy (education, training).  -6- Social Issues 16. In general, Tunisia's social performance has been impressive. Since independence, the country has come a long way towards meeting the basic needs of its population and reducing absolute poverty. About 16 per- cent of GDP is now devoted to social programs, although too many of the benefits still accrue to the upper income groups. Education expenditures rank first among budgetary outlays. The comprehensive education system provides free access for all students, and the gross enrollment rate has reached 100 percent for primary education and 22 percent for secondary edu- cation. The performance of the system, however, could be improved by: (a) expanding vocational training programs and improving their relevance and coordination with labor demand; and (b) catering more to poorer and rural groups. Public health services are second among social expenditures, and their overall beneficial effect is reflected in the improvement of the vital statistics (para. 4). There remain, however, regional disparities in the availability of hospital beds, doctors, and nursing personnel and the medical referal system is not properly functioning. As a result, the rural poor are often excluded. Closely linked to nutritional deficiencies, in- fant mortality is still high. So far health services have concentrated largely on curative medicine. To achieve better and faster results, the Government is planning to allocate more resources to preventive medicine and nutrition education. Finally, Tunisia faces a difficult housing situa- tion. Subsidized housing, the cornerstone of public intervention, has not reached the most needy groups. The housing demand from households above the poverty limit should be satisfied by the private sector; to this end, adequate incentives need to be provided. 17. Absolute poverty still affects one out of every six people in Tunisia. Over the last fifteen years, the overall number of absolute poor remained stable but declined in rural areas as a result of internal and external migration. Most of the poor are unskilled seasonal workers in agriculture and industry, small farmers, and artisans. Income differen- tials between the coast (East) and the interior (West) widened, in part because the system of price controls and subsidies as well as the tax system and budgetary expenditures had a weak redistributive impact. The Government is using the preparation of the forthcoming Plan as an occasion to focus on basic needs and poverty alleviation, with a view towards abolishing absolute poverty before the end of this century. Maintaining a low population growth rate will be an important factor for a significant alleviation of poverty. External Assistance and Foreign Debt 18. As mentioned above (para. 9), foreign borrowing remained limited during the second half of the 1970s, and a growing share of foreign funds was provided by public sources at relatively soft terms. During the 1976-79 period, foreign loan commitments averaged about $670 million per annum, two-thirds of which were in the form of Official Development Assis- tance (ODA--$450 million or some $75 per capita). About 70 percent of ODA  commitments came from bilateral sources, chiefly France, the Federal Republic of Germany and Canada, but also some oil-surplus countries, whose contributions averaged about one-fourth of total bilateral ODA. About 17 percent of total ODA was committed by the Bank Group, and some 13 percent by other multilateral sources. Borrowing terms were favorable, averaging 6.1 percent interest and 18 years maturity, including a grace period of 4.8 years. At the end of 1979, debt outstanding and disbursed was estimated at about $2.9 billion, or one-third of GDP; debt service was 10.7 percent of exports of goods and services, as compared with 17.8 percent in 1970. Direct foreign investments were small during most of the 1970s, but have gained momentum during the last five years in line with increased activ- ities in the petroleum sector and new incentives offered to foreign inves- tors in manufacturing. Such investments have increased from less than $20 million in 1969 to more than $100 million in 1976 and $165 million in 1979. 19. The balance-of-payments outlook remains favorable, at least up to the mid-1980s. Thereafter, much will depend on the policy measures initia- ted during the next few years (para. 14). The main risk would be for Tunisia to attempt to continue its policy of high investments and high current social outlays in spite of the expected decline in foreign exchange earnings and domestic savings. Pressures to that effect will certainly exist. The new Government formed in the spring of 1980, however, is aware of this danger and recognizes the need for change. Considering its long record of prudent and skillful balance-of-payments and external debt management, there is every reason to assume that Tunisia will formulate and implement the necessary reforms and, thus, will continue to remain credit- worthy for future Bank lending. PART II - BANK CROUP OPERATIONS IN TUNISIA 20. Since 1962 Tunisia has received forty-six Bank loans and eleven IDA credits amounting respectively to $891.8 million and $70.1 million (net of cancellations) of which sixteen loans and nine credits have been fully disbursed. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of July 31, 1981, and notes on the execution of ongoing projects. Project implementation is generally satis- factory. In a number of sectors, important institutional improvements have been achieved, and autonomous agencies have been created or strengthened to ensure the efficient management of the related sectors or subsectors.  -8- 21. The Bank's lending strategy in Tunisia aims at supporting Govern- ment efforts to: (a) increase employment; (b) encourage more balanced growth and distribution of income among regions and income groups with particular emphasis on rural areas; (c) promote export-oriented policies and investments; and (d) provide selective support for the development of basic infrastructure and for institution building in key public services. An important feature of this strategy is to support the Tunisian author- ities in the timely and well-coordinated preparation of projects through missions and advice by Bank staff, the assistance of the IBRD/FAO Coopera- tive Program (FAO/CP) and the use of the Bank's Project Preparation Facil- ity (PPF). The Bank is also supporting the Government in its efforts to increase the mobilization of domestic resources, and to secure cofinancing for the projects it assists. The latter is particularly important in view of the extent of Tunisia's external resource needs. 22. 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, educa- tion, family planning, urban low-cost housing, and the Tunis planning and public transport project has accounted for 28 percent of Bank/IDA commit- ments in Tunisia since 1971. Lending for transport, power and tourism infrastructure has accounted for 36 percent. Agriculture and fisheries have received 22 percent, and industrial and hotel financing, mostly through the Banque de Developpement Economique de Tunisie (BDET), 14 per- cent of total commitments. 23. In line with its lending strategy, the Bank will pursue its efforts in key sectors of the economy that offer prospects for economic and social development. It will also assist projects which enhance regional integration and help reduce the gap between income groups, and between urban and rural areas. Particular attention will be paid to employment creation and institution building. In addition to the proposed grain distribution and storage project, the lending program includes projects in various stages of processing in the agricultural sector, in industry, high- ways, urban development and education. 24. The Bank's economic and sector work will continue to focus on strengthening the macro-economic and sector base for our lending program; it will be more centered in the future on the analysis of economic issues and policies related to the necessary adaptation process from a petroleum exporting to a petroleum importing country including appropriate interest rate policies (paras. 12-14). Two major reports in 1980 on the mechanical and electrical industries and on the social aspects of development provided a better knowledge of the country's industrial development base and pros- pects in these sub-sectors, and a better understanding of income dis- parities by evaluating the Government's social policies aimed at poverty alleviation. Future reports will include a review of pricing and subsidy policies in the rural sector, of the Sixth Plan (1982-1986), and of the agricultural, education and training, urban and energy sectors.  -9- 25. The Bank and IDA accounted for about 12 percent of total public commitments to Tunisia during 1970-1979. Their share in total debt out- standing and disbursed at the end of 1979 (including loans from private sources) was 10 percent and their share in debt service during 1979 was Il percent. The Bank's and IDA's share in Tunisia's disbursed external debt by 1986 is expected to decrease to about 7 percent, and their share in the debt service would increase to about 16 percent. 26. IFC has invested in NPK Engrais (a fertilizer plant), BDET (a Tunisian development finance company), in Compagnie Financiere et Touris- tique (COFIT, a company to promote and invest in tourism projects), in Societe Touristique et Hoteliere RYM (a large hotel development), in Indus- tries Chimiques du Fluor, which produces aluminium fluoride from local fluorspar for export, and in the Sousse-Nord integrated tourism development project. IFC's net commitments in Tunisia total $12.5 million, as of July 31, 1981. PART III - THE GRAIN SUB-SECTOR 27. Background. Cereals are the basic staple of the Tunisian popula- tion's diet. Over two-thirds of consumption is represented by local and imported grain which is processed in industrial mills after entering the official marketing system controlled by the Office of Cereals (OC) (para 35). The remaining quantity is estimated to be about equally divided between consumption on-farm and sales in village marketplaces for home grinding. Prior to the mid-sixties, Tunisia was an intermittent exporter of durum wheat but since then there have been no significant exports. 28. Demand. Human consumption of industrially milled wheat increased more than twice as fast as population during 1975-80 reflecting price policy and changing tastes of Tunisian consumers and is projected to reach an estimated 1.24 million tons (from 0.95 million tons in 1980), or nearly 80 percent of total wheat consumption in 1986. Regarding animal consump- tion, concentrates are progressively supplanting on-farm barley as feed for both ruminants and poultry thanks mainly to highly subsidized prices and successful extension demonstrations of feed lot operations. Demand for feed concentrates is projected to rise from 0.31 million tons of grain raw material (excluding soybean pellets) in 1980 up to a level of 0.46 million tons in 1986. The total consumption of industrially milled grain (concen- trates plus wheat) processed through the official storage system is thus projected to rise to about 1.7 million tons in 1986. 29. Supply. (a) Production: Weather is the predominant factor in grain production, which has recently varied from a low of about 0.74 mil-  - 10 - lion tons in 1977 to a peak of 1.25 million tons in 1975 (1.17 million tons in 1980). On the assumption of average weather, no significant change in acreage, and an increase in average yields of about 10 percent over the late 1970s, overall grain production is projected to reach about 1.20 million tons by 1986, or about 20 percent over the average for the 1970s; (b) Collection: During the 1970s, the collection of grain fluctuated significantly from year to year roughly with the level of production, averaging about 0.34 million tons (about 34 percent of the harvest). Durum wheat is usually about 65 percent of the collection, bread wheat about 20 percent and barley 15 percent. OC handles about 60 percent of the official collection of domestic production, contracting out the remaining 40 percent to two grain producer cooperatives, CCCC (Central Cooperative for Basic Crops) and COCEBLE (Central Wheat Cooperative). It is expected that the grain which is presently traded outside the official market will be pro- gressively marketed through the official collection system, which is expected to absorb a 40 percent share of domestic production (or about 0.48 million tons) in 1986. 30. Imports. The result of Tunisia's rapidly rising demand for industrially milled grain and stagnant domestic production has been a growing gap in the national grain supply. It is expected that imports of bread wheat, durum wheat, barley and corn, which increased from an average of 0.33 million tons in 1971-75 to nearly 1.1 million tons in 1980, will fill the gap in supply, with average imports of about 1.23 million tons foreseen for 1986. 31. Distribution. OC grain is distributed in two circuits. Domestic purchases in the northern part of the country enter local collection cen- ters. Most of the grain is then transported by rail in bags to storage silos around Tunis and from there by truck in bags and in bulk to nearby mills. About 15 percent of the collection is carried from collection cen- ters to Tunis silos by truck, much of it in bulk. Another 15 percent is shipped from collection centers in the Le Kef region by train in bags to the cities in central and southern Tunisia. Imported grain enters through the five main ports, with about 60 percent through the La Goulette (Tunis) bulk silo and the rest in bags at merchandise quays at Bizerte, Sousse, Sfax and the new port of Ghannouch just outside Gabes. About three-fourths of imports are transported by truck, mainly to local mills around the five port cities; one-fourth of the imports move by rail, mainly from Bizerte and La Goulette to the Tunis storage silos and from La Goulette to the southern cities. 32. The import circuit poses urgent problems. The La Goulette silo, the only functioning port silo in Tunisia, financed under the Second Port project (para. 42), is currently working at an annual turn-over rate of 20 (the norm is 10 to 12) at the cost of almost continuous ship occupancy of the grain quay, long ship waiting periods in the harbor, and high demurrage charges. At the other ports, the costs of congestion include not only demurrage, but also heavy fees for open-air storage of grain in bags on the quays as well as the high labor and bag costs of bag filling, weighing and handling operations. Problems include a shortage of port silo capacity; inadequate storage silo capacity outside the Tunis region; inadequate throughput capacity and poor condition of existing storage silos; insuf- ficient bulk rail. cars; insufficient bulk reception and storage capacity at  - il - mills; and inadequacies in silo maintenance, grain inventory control, transport scheduling, rail car handling, and coordination of investment planning. Most of these issues are also found in the domestie collection circuit, although grain volumes are smaller and the cost penalties of inadequate storage and handling capacities are less than in the import circuit. OC's two-stage approach to dealing with Tunisia's grain storage problems (addressing the needs of the collection circuit through a second project) reflects the priority attention given to the import circuit and takes into account the need for further institutional as well as investment analysis to ensure an efficient modernization of the present system of 150 collection centers. 33. Location of New Port and Storage Silos. It is estimated that the regional deficits (i.e., the import requirement) in mill grain supply in 1986 would be on average 0.82 million tons in the northern part of the country, 0.18 million tons in the center and 0.22 million tons in the south for an average harvest year. Given these projections, an analysis of comparative costs for transport (rail and road) and related transit hand- ling costs at storage silos as well as physical limitations (such as the already heavy traffic at La Goulette port which would hamper any expansion of its existing silo, and major unresolved problems of urban planning at Sfax) confirms the comparative advantage of the construction of a new 30,000-ton port silo at Ghannouch (near Gabes), the rehabilitation, equip- ping for imports and expansion of the Bizerte silo fram 20,000 tons to 30,000 tons, and the construction of three storage silos at Beja, Sfax and Gafsa, and the expansion of the storage silo at Kalaa Seghira (near Sousse) from 8,000 tons to 28,000 tons. The location of these storage silos (which are expected to receive both domestic and imported grains), takes into account the exis- ting and projected availability at mills of bulk receiving and storage capacity as well as the location of mills and the volume of grain to be handled in each region. Bulk shipments direct to the mills and to the four new storage silos are expected to account for about 75 percent of the total national imports foreseen in 1986. The remaining amount, coming through Bizerte and La Goulette ports, added to collections, would be handled in existing Tunis area silos, one of which, the Manouba silo, would be rehabilitated through the proposed project. 34. Transport of Grain from Port Silos. A large proportion of the grain imported through the port silos at Ghannouch and Bizerte is expected to be shipped onward by "programmed trains" to mills and storage silos. These trains would consist of bulk cars and would be used exclusively for grain traffic on shuttle runs programmed on a priority basis to maximize their cost effectiveness. Two trains with a total capacity of about 250,000 tons per year would shuttle from Ghannouch to Sfax and Kalaa Seghira. The average cost per ton of grain transported by these trains (plus the average cost of storage silo handling and re-shipment by truck to mills) is estimated to be about 60 percent of the average cost per ton for shipment direct from Ghannouch to Sfax and Sousse mills by bulk trucks. About 281,000 tons per year of grain - 127,000 tons by bulk trucks and 154,000 tons by programmed train to the Manouba silo for trans-shipment to the Tunis mills by bulk truck - would be shipped from the Bizerte port silo  - 12 - to Tunis area mils. Cost per ton of the two modes is roughly equal. The mixed-mode solution would provide flexibility and security in the vital and congested Tunis area. During negotiations assurances were obtained that OC would ensure that grain that is in excess of the capacity of the pro- grammed trains would be transported in an efficient way (Project Agreement, Section 3.01(c)(iv)). 35. The Office of Cereals. OC - a public sector industrial and com- mercial enterprise, endowed with financial autonomy under the authority of the Ministers of Agriculture and of Planning and Finance - is the Govern- ment's national agency for grain marketing. Its main responsibilities are to buy, store, distribute and sell local and imported grain; administer the Government's price control system for grains and make recommendations for changes in grain prices and profit margins for milling; and supply technical assistance, seeds, fertilizers and other inputs to grain pro- ducers. OC's Board of Directors is composed of representatives of the Ministries of Agriculture, Planning and Finance, the National Bank of Tunisia (BNT), the two wheat cooperatives CCGC and COCEBLE, the milling industry and the farming community. It is headed by a President Director General (PDG) and is organized into four main divisions (administrative, technical, financial, and marketing). The administrative division includes a "construction service" (reporting directly to the PDG and his deputy), which heretofore has been in charge of design and contracting for the con- struction of new silos and management of relations with OC's engineering consultants. Through a recent reorganization, a Project Management Unit (PMU) has been established which has taken over these functions (para. 53). As of September 30, 1979, OC's assets and liabilities were about $400 million, about 10 percent of which was equity, 70 percent interest-free short-term Treasury loans for working capital, and 20 percent short-term credit from banks, suppliers, and other sources. Noticeably absent were medium- and long-term debt, a reflection of OC's low level of investment activity (new or replacement) prior to the proposed project. in addition to Treasury outlays, which cover most of OC's working capital needs includ- ing purchases of grain from farmers, loans to farmers, and operating ex- penses at collection centers, OC has two other major sources of funds: sales of grain to industrial mills and reimbursements from the Price Equalization Fund (CGC), a Government agency which finances the support element of the subsidized prices at which OC sells grain to the mills. CGC obtains these funds from revenues from excise taxes on gasoline, alcohol and other commodities. 36. OC is relatively autonomous in its operations which allows it to act with flexibility in commercial transactions and in control and dis- tribution of grain stocks. However, certain organizational, managerial and financial deficiencies adversely affect OC's operations, and need to be corrected to ensure cost-effective operations in the future, especially as more and more grain is handled in bulk. These problems include poor stock control and divided responsibility for domestic and foreign grain purchases (which results in inefficient silo utilization and transport management), low maintenance budgets and inadequately trained silo managers.  -13 - 37. Although legally endowed with financial autonomy, OC in practice operates within a complex governmental system of controlled prices, mar- gins, rebates, losses and subsidies (para. 39) that affect grain and grain product prices at each stage of grain handling and processing. Although law and regulation provide that CGC should compensate OC for the costs of its grain operations to the extent they are not covered by OC's official grain selling price established by the Government, OC in recent years has been only partially reimbursed for these expenditures due to CGC's own budgetary deficits. This has adversely affected OC's financial planning and cash flow management and thereby the funds available for silo main- tenance. In addition, price controls for grain and guaranteed profit mar- gins for the mills and bakeries have necessitated the creation in OC of a complex accounting system for records of financial relations with these private sector organizations, diverting both OC and these entities from controlling and monitoring actual costs of grain storage, handling and transportation. 38. OC has recently initiated efforts to improve its financial accoun- ting practices and its control of stocks. In 1978, OC began to prepare balance sheets and annual operating statements which were audited by a semi-private Tunisian accounting firm in January 1981. This group has also been asked to evaluate OC's accounting and control system, set up new book- keeping procedures, and assist OC in preparing a budget for 1981/82. The work is expected to be completed by October 1981. Also, on the basis of a study made by another Tunisian consulting firm, OC has taken preliminary steps to implement a new system for the reporting and coding of inventory data and has budgeted for the acquisition of computer facilities. Given the complexities involved in OC's financial situation, the proposed project would provide for a cost-control and financing study and the subsequent implementation by OC and the Government of a program of improvement (para. 51). The Government has recognized the problems caused by arrears and this year made special budgetary provisions allowing CGC to pay OC all past due amounts. In addition, during negotiations, assurances were obtained that the Government would cause CGC to transfer to OC within three months after the due dates all amounts owed by CGC to OC on account of payments made by OC for supporting the prices of grain and grain derivatives; failing the availability of adequate resources in CGC, the Government would promptly make such payments in the form of advances out of its treasury resources, to be recorded in the "price support" account of OC (Loan Agreement, Section 3.05). 39. Prices and Subsidies for Grain and Grain Products. Producer prices and retail prices for wheat and wheat-based products are maintained by the Government approximately in line with world market prices. However, these price levels are achieved at the farm gate partly as a result of heavily subsidized inputs. At the retail l