Tunisia - Gabes Irrigation Project

Documaot Of The World Bank FoR omcFCL USE ONLY Rpwot Nb. P-4113-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN THE AMOUNT EQUIVALENT TO US$27.7 MILLION TO THE REPUBLIC OF TUNISIA FOR A GABES IRRIGATION PROJECT May 31, 1985 I & d.cumeu ha a reualdedm didirIem and mm be mii by recilmml gu1Y In the Peifommanc Of &edWal daUtw ias acgmmla =ay not oghuiwbe be dbdclosd witheu WwrM Bank avlhorkaiom.  CURRENCY EQUIVALENTS CY 1984 February 1985 Currency Unit = Tunisian Dinar (D) TD US$1 = TD 0.7768 TD 0.9037 TDI = US$1.2873 US$1.1066 The exchange rate used in the Staff Appraisal Report is US$ = ID 0.75. Fiscal Year = Calendar Year ACRONYMS AND ABBREVIATIONS AIC = Association of Coumon Interest BNT = National Bank of Tunisia CTV - Local Extension Center DGR = Department of Rural Engineering DPSAE = Department of Planning, Statistics and Economic Analyses DRE = Department of Water Resources DRS = Department of Soil Resources GIAF = Association of Fruit and Citrus Farmers and Traders GIH = Group of Hydraulic Interest GIL = Association of Vegetable Producers and Traders IRA = Arid Zones Institute MOA = Ministry of Agriculture MOF = Ministry of Finance O&M = Operation and Maintenance OMV = Irrigation Development Office OMVGM = Gabes and Medenine Irrigation Development Office PMU = Project Management Unit STIL = Tunisian Milk Processing Company T&V = Training and Visit  FOR OFFICIAL USE ONLY REPUBLIC OF TUNISIA GABES IRRIGATION PROJECT LOAN AND PROJECT SUMMARY Borrower Republic of Tunisia Amount US$27.7 million equivalent Terms 17 years, including 4 years of grace, at the standard variable interest rate. Project Description: The proposed Project would rehabilitate 42 selected oases of the Gabes Governorate, expand three existing oases and create a new one. To this end, the Project would include (a) replacement of deep wells and provision of pumping equipment, and construction of piped water distribution systems; (b) orchard and crop reconversion and intensification; (c) provision of equipment and staff to the executing agency, the Gabes and Medenine Irrigation Development Office (OMVGM); (d) provision of technical assistance to OMVGC and to existing farmer associations; and (e) provision of credit to farmers for onfarm development. The project would directly benefit about 7,700 farm families, among the poorest in'Tunisia. The principal risk related to slow adoption by farmers of new cropping patterns is inimized by the provision of suitable extension services. Estimated Project Costs: Local Foreign Total (Us$ million) Investment Costs Buildings 0.6 0.4 1.0 Irrigation and on-farm works 10.9 14.1 25.0 Equipment 2.0 3.1 5.1 Studies, training, technical assistance 0.1 0.1 0.2 Onfarm development (credit) 1.7 1.4 3.1 Incremental operating costs 4.2 2.1 6.3 Total Base Costs 19.5 21.2 40.7 Physical contingencies 2.0 2.5 4.5 Price contingencies 7.2 5.9 13.1 Total Project Costs 28.7 /a 29.6 58.3 /a /a Includes $14.3 million of taxes and duties. This document has a restricted distribution and may be used by recipients only in the performance of their official dudes. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Financina Plan: Local ForeiRn Total (Us$ million) World Bank - 27.7 27.7 BNT 1.0 1.9 2.9 Beneficiaries 5.0 - 5.0 Government 8.4 _ 8.4 Net Project Costs 14.4 29.6 44.0 Taxes and Duties 14.3 - 14.3 Total Project Costs 28.7 29.6 58.3 Estimated Disbursements: Bank FY 1986 1987 1988 1989 1990 1991 1992 (US$ million) Annual 1.0 2.0 3.0 6.7 8.5 4.5 2.0 Cumulative 1.0 3.0 6.0 12.7 21.2 25.7 27.7 Economic Rate of Return: 21% sI// Staff Appraisal Report: No. -TUN, dated May 30, 1985 Map No. IBRD 18405 IBRD 18490  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 GABES IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed loan for the equivalent of US$27.7 million to the Republic of Tunisia to help finance a Gabes Irrigation Project. The loan would have a term of 17 years, including 4 years of grace, at the standard variable interest rate. PART I - THE ECONOMY -' 2. A special economic report entitled "Tunisia - Review of the Sixth Development Plan (1982-86)" (No. 4137-TUN), in two volumes, was distributed to the Executive Directors on March 16, 1983 and June 29, 1983. An economic mission to review the performance of Plan implementation at mid-term Wisited Tunisia in April 1984; its findings are reflected in this part and the country data sheets, attached in Annex I. 3. Tunisia is a medium-size, middle-income country with a population of 7 million and a per capita income of about $1200.-' Much of Tunisia is arid or semi-arid. Only three percent of arable land is irrigated, and areas where rainfed agriculture is possible are subject to severe year-to-year fluctuation in rainfall. Nevertheless, agriculture still occupies nearly one out of every three Tunisians in the labor force. Tunisia's most important raw materials are phosphates, petroleum and natural gas. Known exploitable reserves of oil and gas are approaching depletion, and new hydrocarbon reserves are limited and require costly off-shore drilling; priority is now given to slowing down the growth of domestic consumption by conservation and pricing measures. The low quality of phosphate deposits constrains the expansion of the highly efficient Tunisian phosphate processing industry. The country also has considerable tourism potential, but after a period of rapid expansion, the sector is experiencing difficulties in maintaining competitive prices and quality standards. 4. Tunisia has undertaken a massive effort to develop its human resources, paying special attention to family welfare, education, and technical and vocational training. As a result, between the early 1960s and the early 1980s, the infant mortality rate declined from almost 160 to 65, the expectation of life at birth rose from 48 to 61 years, the adult literacy 1/ Part I is substantially the same as Part I of the President's Report No. P-4082-TUN of May 13, 1985 for an Irrigation Management Improvement Project. 2/ 1984 preliminary figure at current prices and current exchange rates.  -2- rate increased from about 15 to about 62 percent, and average caloric supply per capita increased from 83 to 116 percent of minimum standard requirements. An active family planning policy pursued by the Government led to a decrease in fertility and birth rates. Even though mortality rates also decreased, the gross reproduction rate decreased markedly from 3.5 to 2.1 percent over the same period. However, since net emigration of Tunisians abroad was sharply reduced by restrictive measures taken in the EEC countries and Libya, the growth rate of the labor force accelerated, a main reason for the rapidly growing, serious unemployment problem. Open unemployment reached 14 percent in 1983 and underemployment is extensive. These problems are particularly serious among young school dropouts. 5. During the 1970s, the Tunisian economy did extremely well. Rapid growth in the range of 7-8 percent was accompanied by substantial structural transformation as manufacturing and tourism became more diversified, and their share in total exports increased. Economic performance benefitted from substantial terms of trade gains due to the rapid price increase of oil, allowing both consumption and domestic savings to increase and investment to remain high (over 30 percent of GDP). It also benefitted from improved economic management with a cautious shift toward a more liberal, market-oriented economy. The balance of payments current account deficit, averaging 5 to 6 percent of GDP over the period, was easily financed, much of it by direct foreign investment. The only major problem was a high rate of unemployment and underemployment. 6. During the Fifth Plan (1977-81), more than half of total investments was allocated to directly productive sectors, but the direct employment effects of the leading sectors (petroleum, phosphate mining and processing, and tourism) were small and unemployment continued to increase. These sectors, however, made a vital contribution to GDP, public savings and exports. They provided 52 percent of the country's foreign exchange earnings in 1983, while manufacturing activities, except phosphate-based chemicals, provided 19 percent. 7. The Sixth Plan (1982-86) proposed a number of policy reforms to face the consequences of rising unemployment and the progressive decline in net energy exports. Its main objectives were employment generation, export promotion, regional development and public sector efficiency. Investment priority was given to agriculture, engineering industries and tourism. The overall rate of investment was projected to decline during the Plan period. To minimize the effects on economic growth and employment, measures were proposed to increase the efficiency of existing investments and to encourage a shift to labor-intensive activities. These measures were to be accompanied by a substantially tightened incomes policy, in particular cautious wage and salary policies and a considerable slowdown in the growth of recurrent budget expenditures. 8. The Sixth Plan started poorly. In 1982, a prolonged drought depressed agricultural output and agro-industrial production, technical problems plagued the phosphate and cement industries, and tourism and exports of manufactured goods were adversely affected by the recession in Europe. The economy recovered in 1983 and 1984 due to buoyant growth in manufacturing  output, stimulated by rapidly growing local demand. This brought the average annual growth of GDP in the first three years of the Plan to 3.5 percent, compared to 5.3 percent targeted. This performance is nonetheless commendable in view of the world recession and compared with other countries. 9. More worrisome than the slowdown in economic growth are the macroeconomic imbalances, which have worsened over the last years. In contradiction to the Plan's macroeconomic scenario, the investment rate remained high rather than declined, mainly due to high public enterprise investments in energy and transportation, and consumption expanded rapidly, fuelled by sharp increases in wages and salaries. The corresponding strong demand pressure, facilitated by rather liberal credit policies, was reflected in rising inflation: 13.6 percent in 1982, compared to a 7.8 percent average over 1977-81; it was slowed to 8.4 percent in 1984 through increased price controls. Lower than planned overall economic growth, higher capital intensity of new investments, and the sharp increase in labor costs combined to keep employment creation below Plan goals, and unemployment further increased. 10. Despite a virtual stagnation of imports (in constant prices) due to tightened import control, the current account deficit of the balance of payments deteriorated to 8.9 percent of GDP by 1984. A fall in exports of petroleum and of agricultural products, and a slowdown in tourism, depressed export receipts. Direct foreign investment (mainly in the oil and gas sector) stagnated in 1983-84. Nevertheless, Tunisia's net foreign exchange reserves increased substantially to reach 1.7 months of imports at end-1984, as compared to 1.1 at end-1980. This reflects, inter alia, a revaluation of the Central Bank's foreign exchange assets, as well as the Government's drawing down part of a syndicated Eurodollar loan contracted in 1982. 11. The budgetary situation has also deteriorated since 1981; the Central Government's overall budget deficit jumped from 2.7 to over 7 percent of GDP between 1981-84. This reflected increases in public investments and in recurrent expenditures due to wage and salary increases, higher subsidy payments to households and public enterprises, and growing dollar-denominated debt service payments caused by a 36 percent dollar appreciation vis-a-vis the Tunisian dinar between 1981-84. On the other hand, this latter factor helped keep petroleum revenues from falling, and total revenues showed a continuous growth despite the recession. In 1984, recurrent expenditure growth slowed considerably, however, as a result of a freeze in Government salaries and wages and of lower consumer subsidies. 12. Medium-term prospects depend on two main factors: future developments in the hydrocarbon sector; and the speed with which the Government implements the far-reaching macroeconomic policy changes outlined in the Sixth Plan. Oil and gas exploration programs under way have not been encouraging. Based on known reserves, and with the possible exploitation of smaller fields that recently became profitable, it is generally expected that domestic oil and gas production could be stabilized at about its present annual level 3f 5-6 million tons of oil equivalent until the end of the decade. Barring large new oil or gas discoveries, and given the rise in domestic demand for energy, Tunisia would turn into a net importer of oil in the early 1990s.  -4- 13. Making the necessary adjustments to prepare the economy for the post- hydrocarbon era is made more difficult by increasing financial and balance of payments constraints. While there is little disagreement about the desirability or objectives of economic reform, the appropriate implementation measures and particularly the speed of reform are more controversial. While undeniable progress has been made since the early 1980s in several respects, other factors have worked in the opposite direction (para. 14). Over the last years, the Government has focussed with some success on administrative type measures. Legitimately concerned with immediate economic and social problems, it resorted to short-term measures and direct, quantitative controls such as mandatory price reductions and import restrictions. Among longer-term policies, only export promotion was addressed by a sufficiently broad approach (tax rebates, foreign exchange risk insurance, special credit, trade companies). The price liberalization process has moved slowly, with some reductions in price subsidies (particularly for agricultural inputs, transportation and energy) and some liberalization in the price regimes for manufactured goods. Economic incentives have been modified to promote regional development and stimulate smaller firms, but the existing bias in favor of capital-intensive investment rather than employment has little changed. Finally, fiscal reform has been initiated. 14. Policy reforms to address the root causes of the structural imbalances identified by the Sixth Plan have been less actively pursued. Specifically, major areas that need greater attention are: (a) wage and salary policies, which should become more restrictive, so as to slow down growth of public and private consumption and stimulate labor-intensive investments and exports and, thus, increase employment creation. As mentioned before, trends during the early 1980s were in the opposite direction. In 1984, however, no salary increases were granted and the Government has decided to continue to pursue cautious salary policies in 1985 and beyond; (b) subsidy policies, with consumer subsidies to be reduced so as to dampen private consumption and stimulate public savings. Some encouraging first steps have been taken in this respect, but more action is needed; (c) interest policies, to make interest rates positive in real terms, so as to stimulate savings and labor-intensive investments. A thorough reassessment of these policies is underway. As a first step, rates were increased in late April 1985 by 1-2 percentage points on average; (d) public enterprise reform, to stop the drain of public enterprise deficits on the Government budget. First steps have been taken in this direction, and a number of enterprises have been closed; (e) public investments, which should be reduced to decrease the budget deficit, but made more efficient and reoriented so as to increase their contribution to economic growth and employment creation. A particularly careful screening of projects will be necessary in the future; (f) domestic protection and pricing policies so as to create more incentives for exports, particularly for manufactured products; and (g) exchange rate policies, so as to ensure that exports (including tourism) become more competitive. 15. Even if the Government moves more rapidly in implementing all or most of the above measures, the delays incurred so far in meeting the Sixth Plan macroeconomic targets and in implementing its policy recommendations will probably not be recovered by 1986. It is unlikely therefore that medium-term GDP annual growth will match the 6 to 8 percent rate achieved in the past. A growth rate not exceeding 4 percent would be more coamensurate with the need to control current account deficits without a systematic recourse to  - 5- quantitative protection measures or excessive external borrowing. This 4 percent growth rate takes account of the projected stagnation or even decline of hydrocarbon production. It also assumes that while agriculture will remain sensitive to weather conditions, manufacturing will perform well as the full impact of the export promotion policies is felt. 16. Social Issues. Since independence, the country has gone a long way towards meeting the basic needs of its population. Over 16 percent of GDP is now devoted to social programs, and the number of absolute poor declined from 17 percent of total population in 1975 to 13 percent in 1980. This improvement was largely concentrated, however, in urban areas. Since 1981, social issues have faced a different context than in the 1970s, when an easy financial situation seemed to allow a relatively unconstrained expansion of social services. On one hand, the Tunisian population has become increasingly aware of and sensitive to the issues of income distribution and the Government's responsibility for redistribution. Furthermore, the beneficial effects of past rapid expansion in social services, reflected in the improvement of the country social data (see Annex I), have created a demand for improved standards in social services delivery. On the other hand, the provision of adequate social services - education, health, town infrastructure, housing - is being increasingly hampered by budgetary constraints. Attempts to respond to protect the workers by raising the levels of minimum legal wages and social insurance has discouraged private business from increasing employment. 17. To reduce internal differences, in particular between rural and urban areas and among workers in the modern sector and those precariously employed in informal activities, the Government is channelling more resources into regional development and youth employment. Integrated rural programs are being developed to stimulate productive job creation and grassroots participation. Subsidies and credit facilities are granted for young technicians to create their own enterprises and for entrepreneurs to create new projects in underdeveloped regions. More efforts are needed, however, to strengthen the coordination of vocational and on-the-job training with market demand. To reduce the financial burden of social services, the administration is reviewing the cost structure of the various types of social services, including free or below-cost delivery and the introduction of some user fees. Special efforts are needed to improve social infrastructure management, in particular as regards hospitals. Also, decentralization of social facilities in deprived zones will have to be assessed carefully because costs for servicing and maintaining them could become rapidly prohibitive. 18. External Assistance and Foreign Debt. During the second half of the 1970s, foreign borrowing was modest and a large share of foreign funds was provided by public sources at relatively soft terms. At the end of 1979, debt outstanding and disbursed was estimated at $3 billion, or 42 percent of GDP; debt service was 10 percent of export revenues. For reasons mentioned earlier (para. 10), the balance of payments deficit has increased substantially since then, as has foreign indebtedness. To.a; public foreign debt outstanding and disbursed at the end of 1983 reached nearly $3.7 billion, equivalent to about 45 percent of GDP; according to preliminary estimates, it reached nearly $4.2 billion (52 percent of GDP) at the end of 1984. The relative burden of debt servicing reached almost 22 percent in 1984. However, a relatively cautious debt management policy has been followed by the Tunisian authorities. While  -6- the share of short-term borrowings has increased slightly since 1980, Tunisia's overall foreign debt remains overwhelmingly long and medium-term, and debt service requirements are projected to increase only slowly. During 1978-82, 65 percent of foreign loan commitments were from official sources and about 30 percent on concessional terms. Just over half of official commitments came from bilateral sources (mainly France, Japan, the Federal Republic of Germany and some Arab oil-producing countries), and about 24 percent each from the Bank Group and from other multilateral sources. Overall borrowing terms were favorable, averaging 7.4 percent interest and 15.9 years maturity, including a grace period of 4.2 years. These terms hardened, however, in 1983 and 1984. 19. In the medium-term, external capital requirements will clearly remain manageable. In the longer-term, much will depend on the policy changes to be initiated during the next few years, and on developments in the hydrocarbon sector. The Government's medium-term objective is to maintain the present level of indebtedness; this prospect strongly depends on a timely implementation of policy measures to accelerate exports, reduce public investments, lower domestic demand growth, and liberalize regulation and controls. On this basis, the current account deficit is projected to fluctuate around $630 million until 1986, but decline thereafter. New loan co-mitments from abroad could be kept at little over $1 billion per year on average (in current prices at the 1984 exchange rate), while net foreign borrowing migh' average about $360 million between now and the early 1990s. 20. Tunisia, after a decade of outstanding performance, is facing the major challenge o0 adapting its economic structure at a time of external and internal financial constraints. A strategy of demand restraint combined with more liberal econoLnic policies is called for to preserve the country's financial stability and creditworthiness. Considering its long record of prudent and skillful balance of payments and external debt management, there are good grounds to assume that Tunisia will implement the necessary policy changes, and remain oreditworthy for a continued high volume of Bank lending. PART II - BANK GROUP OPERATIONS IN TUNISIA 21. Since 1962, the Bank has committed to Tunisia sixty-seven loans and ten IDA credits amounting respectively to $1,441.0 million and $75.2 million (net of cancellations) of which forty-one loans and credits have been fully disbursed. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1985. Project implementation is generally satisfactory. As of March 31, 1985, overall disbursements amounted to 51 percent of appraisal estimates, which is in line with experience in other countries in the region. Disbursement performance for irrigation, industrial finance and port projects has generally been above the country average, while longer than average disbursement delays have been experienced for agricultural credit, education, highway, urban and fisheries projects, due to project-specific problems that are being addressed through supervision missions and sector discussions. 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.  -7- 22. The Bank's lending strategy in Tunisia aims at supporting the country's transition from a situation of reliance on petroleum exports to a sectorally-balanced post-hydrocarbon era through appropriate changes in economic policies and programs. This adjustment process, as outlined in the Sixth Development Plan, will require further diversification of exports, greater savings efforts, reduction in consumer subsidies, gradual liberalization of all sectors of the economy, and stronger incentives to the private sector particularly in agriculture and industry, while taking measures to increase employment and target development to low-income groups. In support of the above, the overall objective of Bank lending is to emphasize projects which have a direct and rapid impact on production, employment and exports (or import savings) and which minimize Government net contributions. The focus of lending for agriculture and industry meets this objective. In addition to the above, proposed Bank lending would focus on improvement of public enterprise performance, development and conservamAon of energy resources, and continued support to the social sectors and operations targeted to low-income groups. For the latter, attention would be given to increased efficiency and cost-effectiveness of institutions and investments and to linkages with directly productive sectors (e.g., education reforms stressing vocational training). We envisage only marginal lending for basic economic infrastructure, focussed in areas where Bank guidance would still be useful, such as rural water supply and highways maintenance. 23. Past Bank lending emphasized support for long-term investments in infrastr-acture and social development, each of which accounted for about one-third of Bank/IDA commitments since 1971. The rest of the commitments were almost equally distributed between agriculture and industrial financing. In addition, the Bank has made two loans for technical assistance. Within the broad framework noted in para. 22, we expect a significant shift in our lending, with well over half going to agriculture and industry. In addition to the Irrigation Management Improvement Project (President's Report No. P-4082-TUN of May 13, 1985), and the proposed Gabes Irrigation Project, proposed lending in the next couple of years would include projects for grain st=..ge, a credit line for small-scale industry, urban development, energy, and sector loans for agriculture and industry. 24. The Bank's economic and sector work will continue to focus on strengthening the macroeconomic and sector base for our lending program. It will be centered on the analysis of economic issues and policies related to the necessary adaptation process from a petroleum-exporting to a petroieum- importing country. This analysis, which was included in the special economic report entitled "Tunisia - Review of the Sixth Development Plan (1982-86)" (No. 4137-TUN), dated March 16, 1983 and June 29, 1983, is being pursued through a number of studies. A mid-term performance review of the Sixth Plan is being discussed with the Government, as are studies on industrial employment creation and on the financial sector. A number of key studies resulted from provisions in Bank loans, for example on the institutional and incentive framework for electromechanical industries and for exports in general. In time, the recommendations of the above studies, and of those currently in progress (industrial policy study, agricultural sector discussion paper) will provide the basis for policy action programs. Further economic and sector work includes studies of educational finance and administration, housing finance, and a review of public enterprise performance.  - 8 - 25. The Bank and IDA accounted for about 17 percent of total commitments from official sources to Tunisia during 1982-1984. Their share in total debt outstanding and disbursed at the end of 1984 (including loans from private sources) was an estimated 11.5 percent, and their share in debt service during 1984 was 11.5 percent. The share of the Bank and IDA in Tunisia's disbursed external debt is expected to increase to about 16 percent and their share in the debt service to about 13.7 percent through 1986. 26. As of March 31, 1985, IFC's net commitment in Tunisia totalled about $14.0 million. IFC has invested in the Economic Development Bank of Tunisia (BDET), in 1966, 1970, and 1978; in the National Bank for Tourism Development (BNDT) to promote and invest in tourism projects; in the Societ6 Touristique et Hoteli&re (RYM), a large hotel development; in the Industries Chimiques du Fluor (ICF), a producer of aluminum fluoride from local fluorspar for export; and in the Societ6 d'Etudes et de D6veloppement de Sousse-Nord for an integrated tourism development project. In FY84, IFC approved two new equity investments in Tunisia: (i) Fluobar, a project to privatize, rehabilitate and expand an existing fluorspar mine; and (ii) Tunisia Leasing Company, the first leasing company in Tunisia to provide financing to the industrial sector. IFC is currently considering an investment in the privatization of an existing state-owned textile mill. Part III - THE AGRICULTURAL SECTOR 27. Background. Tunisia has a total land area of 16.4 million ha of which 8.4 million ha are suitable for agriculture and grazing. The country can be divided into three main ecological zones. The northern 25% of Tunisia's land area is the most fertile, receiving adequate rainfall (400-1,000 mm). The central zone (15% of total land area) receives between 200 and 400 mm of rainfall. The southern part (60% of total land area) is a predesert zone receiving less than 200 mm of rainfall with very extensive grazing and some irrigated agriculture. Of the 5.0 million ha of cultivable land, 34% is planted in cereals, 35% in fruit trees and the remainder in forage crops, vegetables, grain legumes and industrial crops; 20% is normally left fallow. Given the high variability in rainfall, important efforts have been made to develop irrigated agriculture. However, water resources are zcarce and the total irrigation potential is estimated at about 250,000 ha or some 5% of total arable land. About 205,000 ha are presently equipped for irrigation of which about 160,000 ha are irrigated effectively. This relati-vely small area currently accounts for some 25% of the Agricultural GDP. 28. Past Performaiice. Tunisia's agricultural sector performed well during the 1970s. The value of production grew at 4.4% p.a. in real terms between 1970 and 1979, compared to 3% p.a. for middle income countries as a group. However, the pace of growth slowed down considerably near the end of the period and early 1980s (0.5% p.a. for 1977-82), mostly because of drought which has repeatedly affected the country. While the more rapid growth in other sectors, particularly petroleum and tourism, induced a decline in the  -9- relative role of agriculture, it still represents 13Z of Tunisia's GDP and employs about one-third of the labor, force. The continued growth of agricultural production and rural migration has resulted in an increase in average per capita income in agriculture (from US$173 in 1960/62 to US$380 in 1979, measured in 1979 US dollars) and a reduction in the percentage of the rural population living below the absolute poverty level (from 172 in 1975 to 131 in 1980). 29. National Development Plans and Government StrategY. Under the Fifth Development Plan (1977-81), the Government's main objectives for the sector included a balanced agricultural trade and increased rural employment and incomes. Partly due to the drought, Plan targets were in most cases not fully met. Agricultural value added increased at an annual rate of 1.0 between 1976 and 1981, well below the plan target of 2.5X. Potential exports were diverted to local consumption, and imports, in particular of cereals, increased. As a result, the ratio of food imports to exports increased from 1.2 in 1976 to 1.8 in 1981. The basic objectives for agriculture under the Sixth Development Plan (1982-86) have not changed. The need to resolve key issues such as employment and regional income disparities as well as increased efficiency of investments has become even greater due to the necessity of adjusting the economy to a post-hydrocarbon situation. The Government is attempting to achieve this adjustment through inter alia: (a) a shift toward smaller, less capital-intensive investments, including rehabilitation of existing infrastructure, thereby generating employment opportunities; and (b) the creation of an economic environment more favorable to agriculture, including the introduction of a more realistic price structure for agricultural products. Investments in agriculture are planned to increase from 13X of total investments during the last Plan to 19X. Some 402 of investments would be for irrigation. 30. Previous Bank Involvement in Agricultural Projects. Bank Group lending for agriculture in Tunisia started in 1967, and to date 15 projects have been approved for a total of US$358.2 million of Bank/IDA funds. Of these, eight are ongoing including three irrigation projects and the recently approved Northwest Agricultural Production Project. Performance under these projects has been mixed reflecting the institutional constraints in the sector. The First Fisheries Project (Credit 270-TUN) was completed at the end of 1979 with considerable delays and low loan recoveries for boats. These problems were addressed under the Second Fisheries Project (Loan 1746-TUN) and this Project is now progressing well. The First and Second Agricultural Credit Projects (Loan/Credit 779/263-TUN and Loan 1340-TUN) financed BNT lending for onfarm development. While the projects achieved good rates of return, the continuing problem of higher interest rates on Bank funds than on Government-supplied credic and the lack of decentralization of BNT caused disbursements to be slower than anticipated. The Third Agricultural Credit Proiect (Loan 1885-TUN) is addressing priority credit problems. Action has been taken to decentralize BNT's operations and raise interest rates (para. 35), and the Government is preparing a plan of action to improve loan recovery ratios. The physical implementation of the poverty-oriented Northwest Rural Development Proiect (Loan 1997-TUN) is proceeding satisfactorily. The Grain Storage Project (Loan 2052-TUN) is also progressing well after initial delays and the recruitment of new consulting engineers. Under the Technical Assistance Project (Loan 2197-TUN). strategies have been or are being developed for several subsectors including farm input distribution, farm  - 10 - mechanization, produce marketing, research and extension and improved operation and maintenance of existing irrigation infrastructure. These strategies will contribute to increasing the efficiency of investments under the Sixth and Seventh (1987-91) Development Plans. 31. Experience with Past Irrigation Lending. Implementation of the irrigation projects - First rrrigation Rehabilitation Proiect (Loan 1068-TUN), Sidi Salem Project (Loan 1431-TUN), Southern Irrigation Project (Loan 1796-TUN), Medlerda/Nebhana Irrigation Prolect (Loan 2157-TUN) and Central Tunisia Irrigation Project (Loan 2234-TUN) -.has generally been satisfactory and on schedule. The Irrigation Development Offices (OMVs), the public enterprises which manage the projects, have demonstrated their ability to carry out construction works efficiently, but their management still needs improvement and their performance on operation and maintenance of irrigation infrastructure has been mixed. OED's audit of the First Irrigation Rehabilitation Project, dated November 5, 1984, determined that the economic rate of return of the Project was highly satisfactory (32X). A major finding was that the increased reliability of water supply brought about by rehabilitation works carried out under the Project had a major impact on farm production and incomes in the Project area, by increasing farmers' willingness to take higher risks by planting higher value crops. The recently-negotiated Irrigation Management Improvement Proiect (President's Report No. P-4082-TUN of May 13, 1985) is designed to support nationwide improvements of the operation and maintenance of existing irrigation systems as well as policy and institutional reforms to increase the efficiency and self-financing of the OMVs. The Project would inter alia (a) reduce the need for major costly investments for the rehabilitation of irrigation systems; (b) ensure the sustainability of agricultural development in public irrigation schemes; and Cc) aim at eliminating OMVs' operating deficits. 32. The Southern Irrigation Project covering the implementation of the first phase of the Southern Tunisian Water Master Plan is expected to be completed on schedule, in December 1985. The Project provides for the rehabilitation and new construction of desert oases in the south of the country as well as some oases in the Gabes area similar to those proposed under the present Project. Initial results are already encouraging and indicate that benefits will be in line with expectations. On the cost side, however, some overruns have been experienced for the desert oases due mainly to the unexpected need to strengthen sand barriers and wind breaks. However, costs in the Gabes area have been in line with estimates and useful experience has been obtained for the design of the proposed Project. Sector Issues Relevant to the Project 33. Land Tenure and Agrarian Reform. In Tunisia, the size of holdings is generally a constraint to the intensification of irrigation. Studies carried out by the Ministry of Agriculture have indicated a strong inverse correlation between the size of holdings and irrigation intensities. To rationalize the use of available water resources and ensure fuller exploitation of its investments in irrigation infrastructure, the Govenzent has enacted Agrarian Reform Laws providing for (a) land ownership limitation; (b) land consolidation; (c) inducement to irrigate; and (d) farmers' contribution to investment cost. While some progress has been made, particularly in the area of consolidation in some public irrigation perimeters, farmer resistance and  - 11 - inadequate penalties have limited implementation of the Agrarian Reform Laws. A study on land issues is being carried out under the Technical Assistance Project, and an internal Government Commission has been established to review this matter. The lack of a proper national cadaster has affected the Government's ability to address land issues, and the Government therefore envisages a National Cadaster and Cartography Project. The land situation in the Project area is discussed in para. 39. 34. Extension and Applied Research. Since 1973/74, OilVs have made considerable efforts to set up effective extension services, supported by Applied Research Stations, to cater to the specific needs of the farmers in their sphere of influence. Although their impact on production is difficult to assess, OMVs' extension and research services seem to have performed reasonably well. They have been instrumental in selecting and introducing new high-yielding varieties, in particular for vegetables, and promoting fodder crops with pure-bred milk cows. However, the present system still has drawbacks: (a) applied research by OMVs lacks linkages and coordination with other existing research services and programs, and concentrates mostly on providing advice on specific crops, without taking into consideration the whole farm system or farmers' different needs, motivations and capabilities; (b) little attention has so far been given to improved water management at farm level; and (c) OMVs' extension agents are burdened by additional tasks (input supply, credit, marketing, collection of statistics, etc.) that have diverted them from their principal role. The Government is preparing a National Extension and Research Master Plan under the Technical Assistance Project, which will propose the measures necessary to improve Tunisia's extension and research systems, including irri.gated agriculture, and is planned to be implemented in 1986 and beyond. In the mrantime, measures are underway to facilitate the introduction of an improved system nationally. Under the Northwest Agricultural Production Project, the Training and Visit (T&V) system is being introduced in a large rainfed area on a pilot basis. The proposed Project would introduce the T&V system on 5,000 ha of irrigated areas. In addition, under the Irrigation Management Improvement Project, measures would be taken to divest OMVs of scme of their commercially-oriented activities, which will facilitate the future reform of the extension system by allowing OMUs' extension agents to devote more time to their primary function. Under the proposed Project, the Gabes and Medenine Irrigation Development Office (OMVGM) would particularly transfer to the private sector activities related to production of seedlings and marketing services. OMVGM would also conclude agreements with regional research agencies to carry out selected research programs essential for the Project, thereby contributing to better coordinated and more meaningful research efforts. 35. Agricultural Credit. The institutional structure of formal agricultural credit in Tunisia is complex. The principal vehicle for medium- and long-term investment credit is the National Bank of Tunisia (BNT). The main sources of short-term credit are BNT (in the case of larger farmers, generally clients of long standing) and the Mutual Guarantee Societies (SCMs). SCMs grant seasonal credit, using BNT funds but with Government guarantee, to small- and medium-size farmers. Supervised credit is also offered by a number of agricultural development projects financed by external donors. Some Government-owned enterprises operating outside the financial sector (e.g., the OMVs) provide credit in kind. A new agricultural bank  - 12 - (BNDA) was recently created to finance investments by large farmers or agricultural enterprises. While access to credit is not a problem in the Project area, use of credit is constrained by the farmers' lack of appreciation of investment opportunities because of, inter alis, the ineffective extension system. The improvement of extension services provided by OMVGM in the framework of the Project would motivate farmers to better understand and participate in credit activities. The ongoing Third Agricultural Credit Project (Loan 1885-T-UN) is addressing priority credit problems, especially interest rates and loan recovery levels. As part of the April 1985 general interest rate reforms, the interest rates of commercial banks for short-term credit to agriculture were raised from 5.5-8.75 to 6.75-9.5%, for medium-term credit from 6.25 to 7%, and for long-term credit from 7.5 to 9% (the latter rates after deduction of a 3-point Government subsidy). Interest rates of development banks increased by 0.5 percentage points more. In addition to these base rates, borrowers must pay a tax to the Government which adds about another point to the cost of borrowing. With an inflation rate of about 8.4% in 1984, many of these rates have now become positive in real terms. Some, however, remain somewhat negative, and the Government has indicated its intention to follow more flexible interest rate policies in the future, with more frequent interest rate adjustments based on, inter alia, inflation. The Government is also preparing a plan of measures to improve loan recovery levels. 36. Prices and Subsidies. In an effort to provide food at low cost, most consumer prices are fixed by Government. Traditionally, farmgate prices in Tunisia have also been fixed artificially low compared to world prices, discouraging the use of more productive but higher-cost techniques and investment. Farm input subsidies, which the Government has seen as a means of compensating farmers for low producer prices, benefit only a minority of farmers and tend to be provided for the most modern inputs (purebred cows, feed concentrate, irrigation water, fertilizer, pesticide, etc.). While this encourages use of these inputs, it also causes their excessive use. The Government recognizes the negative resource allocation and income distribution effects of its present pricing and subsidy policies and one of its objectives is to move towards a pricing system that more closely reflects the real costs and benefits of inputs and outputs to the economy. Some agricultural producer prices (milk and cereals) have thus been increased more rapidly than average price inflation in the recent past, thus improving agricultural incentives. As a result, current producer prices are now for the most part reasonably in line with world prices (94%, 89% and 92% for durum wheat and 100%, 103% and 107% for bread wheat in 1981/82, 1982/83 and 1983/84, respectively). Consumer prices for milk, beef and cereal products have also been increased recently. The Project's main outputs, fruits and vegetables, are not subject to price regulations and therefore would not require any special price policy re-ommendations. In the sector, the input which so far has received considerable subsidies is irrigation water. 37. Irrigation Cost Recovery. Government policy for recovering irrigation investments is embodied in land reform legislation, which calls for betterment levies aimed at recovering part of the increase in land value due to new irrigation. Actual recovery of farmers' contributions to inve:-tment costs has, to date, been very limited. Investments to rehabilitate existing systems are considered deferred maintenance which creates no new :ncome  - 13 - sources for farmers, or investments which compensate for the lowering of the artesian head of wells due to the use of water resources for other development purposes, and are therefore the financial responsibility of the State. As regards irrigation O&M costs, Government policy is to achieve lOOZ cost recovery. Water charges have been substantially increased since 1980, with average annual increases in various OMVs ranging from 15-36% in current terms, or from 3-24% in constant terms. Despite this major effort, water charges currently cover on average only about 40% of O&M costs. In the Gabes area, however, farmers do pay the full O&M costs for their irrigation systems through their water user associations (para. 43). Bank-financed irrigation projects have followed a consistent approach to cost recovery based on (a) the recovery of investment costs according to land reform legislation, (b) the recovery of 100% of O&M costs within a reasonable time frame, and (c) recovery levels consistent with farmers' ability to pay. The Irrigation Management Improvement Project will introduce comprehensive measures, consistent with those already taken under ongoing projects, to achieve full repayment of irrigation O&M costs nationally within 5 to 10 years, thus increasing the financial autonomy of the OMVs and encouraging a more rational use of available water. The proposed Project, in addition to maintaining the current arrangements for full O&M cost recovery by farmers, would aim at achieving sustainability of the irrigation investments by creating a reserve fund for replacements and renewals and by recovering part of the investment cost for new perimeters within the framework of land reform legislation (para. 54). 38. Input Supply and Output Marketing. Public marketing and input supply enterprises exist for cereals, grain legumes, olives, wine, meat, fertilizer, seed and farm machinery. Several Government development authorities participate in the collection of milk, fruit and vegetables. All these institutions require improvements in their efficiency. They are slow to respond to market signals and to introduce cost-cutting efficiencies. Farm inputs are frequently not available in the quantities and at the time required. However, in the context of the Irrigation Management Improvement Project, the Government has indicated its intention to start divesting the OMVs of many commercial activities, and as noted in para. 44, the private sector is already active in the Gabes area in supplying basic fertilizers and small-scale mechanized equipment. An input supply study financed under the Technical Assistance Project has already led to urgently needed increases in fertilizer distribution margins, and an agricultural marketing study, also funded from the Technical Assistance Project, is expected to lead to a series of output marketing measures for implementation during the Seventh Plan period. PART IV - THE PROJECT 39. Rationale for the Project. The standard of living in the Gabes area is among the lowest in the country. Land distribution in Project oases shows a predominance of smallholders. The small size of holdings is generally conducive to intensive development of irrigation, and while some oases are characterized by land fragmentation, cropping systems in the oases (largely for vegetables and fruits) are such that this is not a major constraint to agricultural development. However, in recent years, agricultural production in the formerly prosperous oases in t;; area has declined sharply, causing  - 14 - increased unemployment, due mainly to (a) shortage of water (the lowering of the artesian head of wells (para. 42), deteriorating irrigation networks as the systems have been abandoned or poorly maintained, increasing water losses, and aging of deep wells); (b) increasing salinity (poor drainage and insufficient leaching); and (c) aging of trees and subsequent decreased production. Unless corrective and rehabilitative measures are taken quickly, there will be further rapid deterioration and the area will become almost totally unproductive from an agricultural viewpoint sometime in the 1990s, with a seriously negative social impact on the Gabes area. The Project aims to resolve two main issues - water availability and improved crop production - and would provide the physical infrastructure, the institutional support and the assistance to farmers required to achieve this. 40. Rationale for Bank Involvement. The Project represents a follow-up to the successful pilot operations in the Gabes region financed under the Southern Irrigation Project. Bank involvement during preparation of this second-phase Project has been instrumental in causing a careful review and optimization of proposed investments and significant reductions in investment costs. The proposed Project will also support the Bank's dialogue, already underway in the context of the Irrigation Management Improvement Project, on key irrigation subsector issues such as (a) improving the efficiency of the public and private organizations connected with the provision of irrigation services and with the production and marketing of agricultural goods, and (b) establishment of proper systems for the operation and maintenance (O&M) of hydraulic structures. 41. Background. The Project was identified in October 1983, and prepared by the National Center of Agricultural Studies (CNEA), a Government consulting agency. The Project was appraised in November 1984. Negotiations were held in Washington from April 29 to May 3, 1985. The Tunisian delegation was led by the Director General of International Cooperation, Ministry of Planning, and included the General Manager of the Gabes and Nedenine Irrigation Development Office (OMVGM), and the Directors of Planning, Statistics and Economic Analyses and of Rural Engineering in the Ministry of Agriculture (MOA). The Staff Appraisal Report entitled "Gabes Irrigation Project", No. 5111-TUN of May 30, 1985, is being distributed separately to the Executive Directors. The main features of the Project are summarized in the Loan and Project Summary and in Annex III of this President's Report. Maps showing the areas covered by the Project are attached. 42. Project Area. The Project area consists of about 5,000 ha of oases located on the coastal strip of the Gabes Governorate. Agriculture is the most important sector of the Governorate's economy, although industry and tourism have grown recently. The traditional date palm plantations started at the beginning of the century have been replaced by other fruit trees and vegetables to meet changing demand patterns, largely influenced by the growing tourist flow. Traditionally, water in the area was obtained either from natural springs or artesian wells. However, with increased development, the springs declined or dried out and the artesian pressure decreased. In recognition of the need for a more carefully planned approach, a Master Plan for Water and Soil Resources Development in Southern Tunisia was prepared in 1976 and has been systematically updated. In addition, the Government promulgated a Water Code in 1978, regulating water exploitation, use and  - 15 - conservation. This Code is satisfactory and has been strictly enforced. Future planned uses of water for agriculture, including the proposed Project, industry and domestic use are within acceptable limits. Agreement was obtained at negotiations that water use would be adequately monitored, that agreed limits on water use would not be exceeded, and that the Government would inform the Bank of the water balance situation annually (Loan Agreement, Section 5.02). 43. The Gabes area is one of the few areas in the country where water user associations - the Associations of Common Interest (AICs) - have effectively developed. AICs are responsible for operating and maintaining the irrigation systems included in the Project oases. As noted in paras. 39 and 42, these systems have deteriorated due to many factors including, to a large extent, increasing shortages of water beyond the AICs' control. Project investments would overcome this problem. The Group of Hydraulic Interest (GIH) is an apex consultative body which oversees the AICs' management and performance, as well as overall use of water resources under the Water Code. The AICs also receive support from OMVGM which provides extension services, storage and marketing facilities and technical assistance, as well as execution of large repairs for the AICs, the latter at cost. 44. Agricultural support services are available in the area, but in some cases need strengthening. OMVGM's extension services suffer from lack of staff, facilities and equipment. Research, largely carried out by the Arid Zones Institute (IRA) and the Water and Soils Departments (DRE and DRS) of the MOA, needs to be expanded to better cover the specific needs of the area. As regards input supply, in contrast to most other parts of the country, basic fertilizers are sold by private retailers in the Project area. The proximity of fertilizer production plants and the consequent savings in transport costs make this a more viable operation in the Gabes area than elsewhere. Similarly, small-scale mechanized equipment is available on the private market because the many development activities in the Gabes area, including non-agricultural, have attracted the private sector. OMVGM also provides some inputs as credit in kind. BNT is the main agency responsible for providing agricultural credit in the Project area. For marketing, two trade associations of vegetable and fruit growers (GIL and GIAF), as well as a private company financed by local development banks, operate in the Project area to promote marketing, especially for export. In addition, since the European Economic Community is providing technical assistance for the organization and management of service and marketing cooperatives in the area, only limited assistance to strengthen OMVGM's marketing infrastructure is proposed under the Project. These facilities would eventually be passed on to the private sector. Finally, although the road network in the Project is generally adequate, some rehabilitation of farm access roads is needed. 45. Project Objectives and Description. The Project would aim to: (a) provide more water under an improved distribution system; (b) increase and diversify agricultural production; (c) strengthen public and private organizations involved with the production and marketing of agricultural goods; (d) set up proper systems for the O&M of irrigation structures; and (e) reduce the exodus of farmers from the area, get farmers back to their land and improve the socio-economic standards of the farmers' coummnity. The project would be implemented over a six-year period (1986-1991), and would consist of  - 16 - a) rehabilitation of 42 selected oases covering 4,800 ha, comprising digging deep wells (including 5 reserve wells), installing and providing power connections for pumps, establishing a conduit distribution system, improving drainage, applying leaching techniques, uprooting unproductive trees and replacing them with higher-yielding, more valuable varieties, and rehabilitating farm access roads; b) expansion of the irrigated area by about 200 ha (1 new oasis and expansion of 3 existing oases) by using available extra yield -f newly equipped wells and by digging 1 more well, and undertaking distribution, drainage and access road works; c) introduction of an efficient extension service in the Project area to be managed along the lines of the T&V system, including construction and provision of equipment, vehicles and agents for local extension centers (CTVs), provision of services of specialists and administrative staff, and provision of support facilities to OMVGM - a nursery, a soil and water laboratory and staff - to allow research experimentation in topics relevant to the Project area; d) strengthening of OMVGM, including creation of a Project Management Unit (PMU), provision of technical and administrative staff, workshop and cold storage, grading and packing equipment and vehicles, and construction of houses; e) training of OMVGM staff to assist AICs in dealing with water management and maintenance of pumping and water distribution structures and to monitor the execution of works; provision uf consultant services to review and give recommendations in thc fields of marketing, organization and management, extension, hydromechanics and communications; and f) investment credit for new trees, plastic tunnels, small farm machinery, greenhouses and reservoirs. 46. Proiect Cost and Financing. The total estimated cost of the Project is $58.3 million, of which $29.6 million is in foreign exchange. Base costs are estimated in June 1985 prices and were derived from recent bids and appraisal estimates. Taxes and duties estimated at $14.3 million are included, as well as physical contingencies representing about llZ of base costs (15X for civil works and 1OZ for equipment), and price contingencies totalling about 29% of base costs plus physical contingencies (7.5Z for 1986, 8% for 1987-90 and 5% for 1991 for foreign costs; lOZ for 1986-1988, 9Z for 1989, 8Z for 1990 and 7Z for 1991 for local costs). The Project includes about 25 staff-months of consultant services for technical assistance. 47. The pioposed Bank loan of $27.7 million would finance the foreign exchange cost of the Project, with the exception of agricultural credit which would be financed by BNT through available lines of credit. The Bank loan would represent 48% of total project cost, or 63% of the total cost net of taxes, and 94% Lf the foreign exchange cost. The Bank loan would be made to  - 17 - the Government and passed on to the Department of Rural Engineering (DGR) of the MOA ($20.2 million) and OMVGM (US$7.5 million) through their annual budgets to finance Project activities (para. 51). The Government would cause BNT to provide investment credit to farmers (see para. 35 for current interest rate structure). Beneficiaries would share the Project cost through credit downpayments, qcjotas to the AICs to pay full O&M costs during the Project implementation period, and payment of their share of the tree uprooting operation. The Government would finance the remaining Project costs. On a net of tax basis, Project financing would be shared as follows: World Bank, 63%; BNT, 6%; beneficiaries, 11%; Government, 20%. Agreement was obtained at negotiations that the Project's annual budgets and financial plans, as presented to the Ministries of Planning and Finance, would be sent to the Bank for information by September 30 .f each year (Loan Agreement, Section 3.06). Details of Project costs and1 rinancing are contained in the Loan and Project Summnary. 48. Status of Engineering. Standard architectural plans and specifications are available for most Project buildings, as are terms of reference for Project-related consultants. Detailed specifications and bidding documents for the first year's works and supplies are being completed, and bid results for deep well execution confirm Project cost estimates. Procurement documents for the rest of the Project period would be ready by December 1985. 49. Procurement. Procurement arrangements are summarized in the table on page 18. ICB in accordance with BanAk guidelines would be used to procure major works and equipment. For the purposes of bid evaluation of contracts bid under ICB, qualifying domestic manufacturers would be granted a margin of preference equal to 15% of the c.i.f. bid price of the imported goods or the actual custom duties and import taxes, whichever is lower. When bulking is not feasible, equipment contracts which do not exceed the equivalent of US$150,000 each, and totalling no more than US$1.0 million in aggregate, may be awarded on the basis of local competitive bidding (LCB) procedures. Due to the scattered nature of tree uprooting and civil works for laying of pipes, construction of buildings, drainage and roads, they would be of no interest to foreign contractors based overseas and would be procured under LCB procedures. LCB procedures are generally consistent with the need for economy and efficiency in the execution of the Project. Laws and regulations regarding these procedures in Tunisia are being reviewed in the Bank in order to reach a judgment as to whether they are acceptable for Bank-financed contracts. The findings of the review will be discussed with the Tunisian authorities and agreements will be sought regarding required changes- Small dispersed civil works, not suitable for contracting, would be carried out by OMVGM by force account, up to a total amount of $800,000. Contracts for electrification and related equipment would be negotiated with the Tunisian Electricity and Gas Company (STEG), a public company solely authorized to execute rural electrification works. Office and extension equipment and furniture which are easily obtained off-the-shelf, and whose contract cost does not exceed $20,000 individually or $500,000 in aggregate, would be procured through local shopping based on at least three price quotations. Because it is advantageous to standardize servicing, small vehicles (about 14, costing $60,000 in total) would be procured through direct contracting with local assembly plants following procedures currently used by the Government.  - i8 - Procurement Method Total Project Element ICB LCB Other NA Cost -(US$ million equivalent) ~ A. Deep wells 5.1 (3.4) - - - 5.1 (3.4) B. Supply of conduits 13.4 (8.2) - - - 13.4 (8.2) C. Execution of irrig. and drainage works, roads - 11.2 (7.0) - - 11.2 (7.0) D. Supply of pumps, pipe accessories and hydromechanic equip. 5.0 (3.2) - - - 5.0 (3.2) E. Electrification - - 0.4 (0.3) - 0.4 (0.3) F. Buildings and minor civil works - 1.1 (0.6) 0.3 (0.1) - 1.4 (0.7) G. Tree uprooting - 6.2 (3.8) - - 6.2 (3.8) E. Vehicles and other equipment - 0.7 (0.5) 0.6 (0.4) - 1.3 (0.9) I. Studies, T.Asst., Training - 0.3 (0.2) - 0.3 (0.2) J. Onfarm investments - - - 4.7 () 4.7 () L. Incremental staff and other op.costs - - - 9.3 (-) 9.3 (-) Total 23.5 (14.8) 19.2 (11.9) 1.6 (1.0) 14.0 (-) 58.3 (27.7) Koce; Figures in parentheses are the respective auouats financed by the Bank.  _ 19 - All bidding packages for works estimated to cost the equivalent of US$500,000 or more and for goods estimated to cost the equivalent of US$150,000 or more would be subject to the Bank's prior review of procurement documentation, resulting in a coverage of about 80% of total contract values. Contracts for consultant services would be awarded in accordance with Bank guidelines. Works and goods under the credit component would be procured through regular commercial or other channels. 50. Disbursements. The proposed BanE loan would be disbursed over a period of seven years as follows: 601 of local and 100X of foreign expenditures for civil works; 65% of local and 100X of foreign expenditures for equipment and vehicles; and 70Z of local and 1001 of foreign expenditures for consultants and training. To ensure the efficient and timely implementation of the Project, a revolving fund of $1.0 million would be established in a special account at the Central Bank of Tunisia. This fund, corresponding to an average three months' Project needs, would be used to pay eligible expenditures for civil works, goods and technical assistance. The Bank would replenish the fund upon receipt of satisfactory evidence that expenditures paid were eligible for financing out of the fund. Project completion is expected by December 31, 1991 and the Loan Closing Date would be December 31, 1992. 51. Pro;ect Implementation. The MWA would have overall responsibility for the execution of the Project, with OMVGM ma-naging the Project at the local level. A Project Management Unit (PMU) would-be created to coordinate Project activities for OMVGM's General Manager, and establishment of the PMU and appointment of its head would be conditions of effectiveness of the Bank loan (Loan Agreement, Section 7.01). The-PMU'E role would be coordinative; specific Project activities would be carried out by existing services of OMUGH, which would be reinforced under this Project and the Irrigation Management Improvement Project. The MOA's Planning Department (DPSAE) would monitor Project activities at the central level and supervise the allocation of counterpart funds. Major Project construction would be handled by DGR, which would be responsible for preparation of bidding documents, procurement and supervision of the execution of the important infrastructure works and procurement of hydraulic and electric equipmmt and supervision vehicles. OMVGM would be responsible for procurement and supervision of the works related to tree uprooting and removal, extension buildings and miscellaneous construction, equipment and vehicles connected with support activities. Proposed activities are well within the scope of DGR and OMVGM's capabilities. 52. The Government, through the Project, would provide the necessary infrastructure investments to help stop the gradual degradation of the Project oases. It would also, through OMVGM and research agencies, provide support services such as extension, research, marketing, and special repairs and maintenance. However, with a view to encouraging private sector/cooperative involvement, and consistent with agzeements reached under the Irrigation Management Improvement Project, all commercially-oriented services provided by OMVGM would be provided at full cost by the end of 1988, with interim costing arrangements to take effect from the start of 1986. In addition, the private sector, through the AICs, would be responsible for the use and maintenance of irrigation infrastructure. The Government is currently taking measures to  - 20 - improve the AICs throughout the country by decentralizing their operational responsibilities and simplifying their management procedures. It has been agreed under the Irrigation Management Improvement Project that legislation in this regard will be passed by December 31, 1985. Under the proposed Project, a management agreement satisfactory to the Bank would be signed by OMVGH and each AIC, prior to the completion of irrigation works for that AIC's oasis, deff-ing the responsibilities of OMVGM and the AIC in respect of water management and agricultural developmeut in the oasis (Loan Agreement, Section 3.05). In these agreements, OMVGM would commit itself to provide, inter alia, free extension services, marketing advice, help with annual programs and budgets and technical assistance on maintenance and water distribution, as well as other services related to agricultural development at cost. The AICs would commit themselves, inter alia, to maintain and operate their pumping, irrigation and drainage systems and to promote the payment by farmers of the respective costs thereof; to promote land consolidation; to assist in the tree conversion program; and to pay OMVGM for its services -such as major repairs. Under these agreements, OMVGK would have the right to inspect the irrigation works to ensure that they are being properly maintained and, if they are not, to carry out the necessary remedial measures at the AICs' expense. A model agreement between OMVGM and the AICs was reviewed at negotiations, and the first five agreements would be sent to the Bank for approval. I 53. Agricultural Support Services. The Project would reorganize and strengthen the extension services of OMVGM to achieve and maintain regular contacts with farmers using the principles of the T&V system, which is already accepted by Project authorities. Extension agents would help farmers with crop planning, marketing and water use, disseminate the results of applied research, promote land consolidation,- and help AICs with the organization of water distribution, preparation of budgets and financial control, and O&M of equipment and works. The Project would finance the construction of 10 new CTVs, provide training to OMVGM agents and establish 750 demonstration plots. About 22 additional extension agents would be recruited to achieve coverage of about one agent per oasis or per small group of adjacent oases. The principles to be followed by the Project's extension program were discussed and agreed at negotiations. Also, since some agricultural practices may have become routinized by the end of the Project period to the extent that the extension service could be modified, it was agreed at negotiations that OMVGM would submit to the Bank by December 31, 1990 a plan for the organization and operation of the extension service for three years after Project completion (Loan Agreement, Section 3.04(b)). Other support activities to be provided by the Project include adequate arrangements for the supply of good quality seedlings; promoting adequate water use, monitoring soil and water salinity, and doing research on themes of particular importance for the area. Although OMVGN would initially handle certain research activities to ensure their availability for the Project, agreement was obtained at negotiations that these activities would be transferred to appropriate organizations (e.g., production of fruit and vegetable seedlings to GIAF, GIL, or other specialized producers) by December 31, 1991. In addition, agreement was obtained that CMVGM would enter into agreements, by December 31, 1986, with IRA, DRS and DRE to ensure that applied research required by the Project and soil and water salinity monitoring would be integrated into their programs (Loan Agreement, Section 3.07). In recognition of the need for OMVGN to concentrate on water distribution issues and in view of other agricultural marketing initiatives  - 21 - in the area (para. 44), agreement was obtained at negotiations that an action plan to define marketing strategy and OMVGM's support role for marketing cooperatives would be agreed with the Bank by June 30, 1986 and implemented thereafter (Loan Agreement, Section 3.08). This action plan would include (a) a timetable for signing a letter of understanding between OMVGM, GIL and GIAF, or other marketing organizations, defining the respective roles of each in marketing; (b) a program, including a timetable, for transferring the management of OMV0M's cold storage, grading and packing facilities to the private/cooperative sector, this transfer to take place no later than June 30, 1989; and (c) OMVGMfs commitment, in the interim, to charge fees for these facilities which would cover the full costs of O&M. 54. Cost Recovery. The proposed Project goes beyond existing cost recovery achievements elsewhere in Tunisia, and would aim at immediate recovery of 100X of O&M costs of the irrigation systems, and recovery of 50S of tree uprooting investments. As noted earlier (para. 43), AICs in the Project area already have responsibility for operating and maintaining their irrigation systems with the assistance of GIH and OMVGM. Continuation of this practice would be recorded in the agreements to be signed between OMVGM and the AICs (para. 52). Included in O&M charges would be a charge approximating 5' of total O&M costs, which would finance a reserve fund for future replacements. Future major investments not covered by this fund would be financed by special assessments on farmers or by BNT credit to the AICs. These cost recovery provisions wquld ensure long-term sustainability of Project investments and relieve the Government of future fi-nancial responsibilities for irrigation rehabilitation investments in the Project area. It was confirmed at negotiations that for new perimeters, betterment levies would be established within the framework of land reform legislation to recover part of the investment costs from farmers. Based on an analysis of farmers' ability to pay, it is estimated that up to 40Z of these new investment costs could be recovered. In addition, present tax legislation provides for an agricultural sales tax which, when applied to incremental Project production, would recover an average of 22 of the investment costs for all perimeters. Assuming 100% O&M cost recovery with provision for a reserve fund, 40% investment cost recovery for new perimeters, and the sales tax as an indirect method of investment cost recovery for all perimeters, farmer rent recovery would range between 17-39Z for the six farm models at full development, which is considered acceptable in terms of farmer affordability. 55. Agreement was also obtained at negotiations on cost recovery for tree uprooting and for STIL. Present legislation provides for a subsidy for tree uprooting in order to encourage the upgrading of production. Agreement was obtained that farmers would repay 50Z of the total uprooting cost for palm, olive and other fruit trees under a repayment schedule to be agreed with OMVGM and satisfactory to the Bank (Loan Agreement, Section 4.02). STIL, a public enterprise which produces, inter alia, dates, has a long-term rental agreement with the Government for the use-of one of the Project oases. It would be a condition of disbursement for the works in that oasis that should STIL continue to rent the oasis, STIL would present an investment plan to the Bank for review, including a proposed repayment schedule designed to recover from STIL the full capital cost of these works; make a downpayment of 20Z of the investment costs; and obtain medium-term credit for the remaining investment  - 22 - cost (Loan Agreement, Schedule 1, para. 3). If the rental agreement should terminate, the Government would rehabilitate the land for other farmers under the normal Proiect provisions. 56. Monitorinw and Audits. The PMU would be responsible for monitoring Project activities, and DPSAE for Project evaluation. The PMU would establish and maintain separate Project-related accounts, in accordance with accounting principles and procedures to be agreed under the Irrigation Management Improvement Project. Agreement was obtained at negotiations that Project accounts would be audited annually by independent auditors acceptable to the Bank, and that the audited financial statements and reports would be submitted to the Bank within six months after the end of each fiscal year (Loan Agreement, Section 4.01). Agreement was also obtained that OMVGM would help design and install an appropriate accounting system for the AICs, and that at least three randomly selected AICs would have their accounts audited each year by an independent auditor (Loan Agreement, Section 4.03). 57. Justification and Risks. Incremental production under the Project of dates, pomegranates. apricots, apples, pears, peaches, summer and winter vegetables, forage and new crops such as table olives, pistachios and late season potatoes-would amount to about 70,000 tons at full development. These production increases would stem from increased water availability, decreased salinity, thinning of dense orchards and intercropping. Although some of the Project production may be exported, most is expected to find a ready market to meet strong inter-nal demand, from both Tunisians and the growing-local tourism industry. Gabes' production has a marketing advantage by being earlier than other main producing areas. The Project would benefit about 7,700 farm families in the oases, while support services, such as applied research, nurseries and marketing facilities, are expected to benefit an additional 3,000 farm families. The Project would also create about 1,900 full-time jobs in agriculture. Based on farm models representing the different faning systems found in the area, increases in farm income range from about 100 to about 900%, the financial rate of return to the farmers for all farm models is over 50%. The Project economic rate of return (ERR), with benefits based on incremental production, is estimated at 21%. A separate economic rate of return was calculated for each of six farm models; the ERR's ranged from 17 to 43%. 58. Risks facing the project include: (a) a fall in the price of some Project production. This risk is minimized by using conservative price estimates, well below current wholesale prices; (b) inadequate response of marketing channels to increased supply. Demand and production projections indicate that Project output would help fill a substantial deficit in supply, and with the modest Project investments in refrigeration, grading and packing facilities, adequate market infrastructure exists to respond to increased Project output; and (c) slow adoption by farmers of new cropping patterns. This risk is minimized by the Project focus on extension services, by the high profitability of cropping patterns, and by the fact that proposed Project investments do not require undue farmer financial risk. Sensitivity analyses show that even if prices are reduced by 50% or farmer participation lagged by 3 years, the ERR would still be 13% and 16%, respectively. Overall, benefits could decrease by 53% or costs increase by 114% before the Project would reach a level of ma-ginal justification (1Z). Separate sensitivity analyses were  - 23 - also done on three Project oases where land fragmentation is a problem (benefits were halved) and to measure the effect of poor maintenance 'Project life was reduced from 20 to 10 years); under both scenarios, the Project is still viable. The Project thus has a strong economic justification which is resistant to adverse movements in key variables. PART V - LEGAL INSTRUMENTS AND AUTHORITY 59. The draft Loan Agreement between the Republic of Tunisia and the Bank and the Report of the Committee provided in Article III, Section 4(iii) of the Articles of Agreement are being distributed separately to the Executive Directors. Special conditions of the Project are listed in Section III of Annex III. Establishment of the PMU and appointment of its head would be a special condition of effectiveness. It would be a condition of disbursement for works in the oasis rented by STIL that should STIL continue to rent the oasis, STIL would present an investment plan to the Bank for review, including a repayment schedule for full capital cost recovery; make a downpayment; and obtain medium-term credit for tLe remaining investment cost. 60. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 61. I recommend that the Executive Directors approve the proposed loan. A.W. Clausen President Attachments May 31, 1985 Washington D.C.  - 24 - TAB*L E SA PAU TUNISIA -8 I SOIL NDICATORS DAT FNzr TUNII RIPIRZU OMA (WENTER APSAI) p HOST (HOrST Re TIT) lb * RECN 11301 lIlltX WIDOWS r13 Io1Lb 19701k x zxanb V. UtICA HItD ZSAT L T. ETCA & CA AUL Cuomm uq. IN) TOL 163.6 163.6 163.6 AGRICULTUAIAL 68.B 70.3 72.2 P PaR cAT CUs$) 210.0 340.0 1390.0 1149.6 2108.6 m30 ceenasmP caum CKRLGWW OF 01L zUqVAzvwr) 119.0 230.0 497.0 622.1 995.5 POPMIATION.MID-YEAR (TTWSAN) 4221.0 5127.0 b683.0 URBA POPULATION tX OF TOTAL) 36.0 43.5 53.6 48.2 66.5 POPULATION0 PRORCIZONS IPOPITION IN liaR 2000 C(IL) 10.0 STATION POPULATION CHrLL) 11.1 POPUIATIWO HONNTU 1.8. POPULATON uDSmTY PE1t SQ. KI. 25.8 31.3 39.9 36.3 35.7 PER FP. IN. AI. LAND 61.4 72.9 90.3 461.7 92.4 POPULATIOW AGE STRUCTUHE (I) 0-14 YRS 43.4 46.2 39.9 43.6 39.9 IS-64 r1s 52.5 50.0 56.2 53.1 56.0 bS AND ABOVE 4.2 3.8 3.8 3.3 4.1 POPULATION GRDOJ? RATE (C) TOrAL 1.8 IC 1.9 e 2.2 / 2.8 .4 URaS 3.2 3.8 3.9 4.5 3.6 CRUDE BTR1 RATW (PE TNOUS) 46.6 39.4 33.9 a0,4 31.3 CRUe DEATH RATE (Pat nDO) 19.1 14.3 9.2 11.3 8.1 GROSS REPRODUC7TON RATE 3.5 3.2 2.1 2.L 2.0 FAMILY PLANNINC ACCEPTORS. ANNUAL (THOuS) . 29.2 1HO.9 /d USERS (Z OF MARRIED WON) .. .. 61.0 7 22.2 40.3 INDEX OF FOOD PROD. PER CAPITA (1969-71-100) 97.0 96.0 12B.0 97.3 114.3 PEM CAPITA SUPPLY OF CALERIS (I OF REQUIREfE#S) 83.0 88.0 116.0 110.8 110.6 PROTINS (GRAMS Pre DAY) 52.0 57.0 74.0 70.1 67.3 OF WHICH ANMAL AND PULSE 13.0 14.0 23.0 If 17.8 34.1 CHILD (AGES 1-4) DEATH RAIE 36.1 20.0 6.0 14.6 5.7 LIFE EXPECT. AT BIRTH (YEARS) 48.3 53.0 61.1 57.5 66.7 INFANT MORT. .ATE (PER T2OUS) 158.9 121.0 65.0 101.5 60.6 ACCESS TO SAE WATER (fPOP) TOTAL . 49.0 70.0 X 59.7 65.4 HIRAM : .91.0 84.5 78.1 RURAL . - 66.0 LK 38.4 46.2 ACCESS TO EXCRETA DISPOSAL (: OF POPULATION) OTAL .. 62.0 .. .. 52.9 lEAN D. 10.0 42.0 .. 67.0 RURAL * 34.0 .. .. 24.5 POPULATION PER PHYSICIAN IW30.0 5930.0 3690.0 4345.1 1917.7 POP. PER NURSING PERSON .. 730.0 890.0 1831. 1 815.8 POP. PER HOSPITAL BED TOrAL 610.0 410.0 460.0 fd 632.9 367.2 URAn 230.0 /h 310.0 350.0 717 545.5 411.5 RDRAL 1040.0 / 1270.0 1230.0 71T 2513.5 2636.3 ADNISSIONS PER HOSPITAL RED .. 24.1 25.0 /t 26.2 27.3 AVERAGE SIZE OF HOUSEHOID TOTAL 5.1 5 5 .. URBAN, RURAL 5i AVERMA NO. OF PFRSONS/ROOG TOTAL .. 3.2 I URBAN .. L2/. RURAL . 3.6f 3.8 7W ACCESS TO ELECr. (2 OF LE.fl) TOTAL .. 2&.0Ol 34.2 ht 46.2 URBAN .. .. 68.2 V 77.7 RURAL . .. 6.07W 16.1  - 25 - T A I L 1 3A PACE 2 TtINIA -SOCrAL MIDCATR UTA SHCET TUNISCADUPS [REERIC IN (ViOWZED AUZRAI) HOST CMOlT RECENT INTIATE) 1b RIGENT MIDDLE imEI MID INCOGM 1960i Wa19lk USTiHTU N. AnUCA H MID EASS LAT. AmIcA CAR -DCAXM ADWUSTED ENROLLNENT RATIOS PRINARY: TOTAL 66.0 101.0 106.0 08.3 105.4 HALz 88.0 121.0 119.0 102.5 106.3 FZKALE 43.0 80.0 92.0 73.6 104.5 SECONDMYA TOTAL 12.0 23.0 30.0 43.0 43.2 MALE 19.0 33.0 37.0 52.3 42.3 FEKALE 3.0 13.0 23.0 33.0 44.5 VOCATIO1AL CZ OF SECONDARY) 23.5 11.1 25.2 10.3 33.6 PUPIL-TEACI RATIO PRIKARY 61.0 47.0 3S.0 30.3 30.1 SECONDARY 16.0 28.0 21.0 23.1 16.8 ADULT LITERACY RATE CZ) 15.5 24.0 Li 62.0 / 43.5 79.5 PASSENCER CARS/'OUSAND POP 10.5 13.0 18.3 A 17.8 46.0 RADIO RECEIVERS/TNOUSAND POP 4D.3 75.7 157.0 136.8 225.6 TV RECEZVERS/THOUSAND POP 0.1 14.0 47.1 46. 1 107.2 NEUSPAPER "DAILY CGNERAL INTEREST") CIRCUATION PER THOUSAND POPULATION 18.6 15.9 43.6 /d 31.2 53.5 CINrN ANNUAL ATTENDANCE/CAPITA 1.6 *- 1.5 ; 1.7 2.8 LANDOL FORM TOTAL LABOR FORCE (THOUS) 1138.0 1215.0 1751.0 FEUZ CPLcERZNrS) 6.0 7.7 8.5 10.8 23.2 AGRICULTRE (PERCENT) 56.0 50.0 35.0 42.4 31.5 INDUSTRY (PERCENT) 18.0 21.0 32.0 27.9 23.9 PARTICIPATION RATE (PERCENT) TOTAL 27.0 23.7 26.2 26.2 3L2 ALEz 50.2 44.2 47.3 46.4 49.3 FIIALE 3.3 3.6 4.5 5.8 15.2 ECONOMIC DEPENDENCY RSTIO :.a 2.1 1.7 1.8 1.4 xucom DlSmRMDll PERCE3T OF PRI1VATE INCOME RECEIVED By IIICHEST 5Z OF HOUSEHOLDS .. .. 17.0 / RICHEST 20D OF DOUSKEOLDS .. .. 42.0 LOWEST 20Z OF UOUSZROLDS .. .. 6.0 . LZWEST 40Z OF HOUSEHOLDS .. .. 15.0 . uOIX TARGET ESTIKATED ABSOLUE POVEREY INCOME LEVEL CUSS PER CAPITA) URBAN .. .. 204.0 If 274.8 288.2 RURA .. .. 97.0 Lf 177.2 184.0 ESTIMTED RELATIVE POVERTY ICOME IZVL CUSS PER CAPITA) ORIN .. .. 193.0 /f 402.6 522.8 RUMRL .. .. 193.0 W 284.9 372.4 ESTItATED POP. BELOW ABS1G5 E POVERIT INC0ME LEVEL (Z) RBRAN .. .. 20.0 /f RUML .. .. 15.0 if: NOT AVAIABLE NOT APPLICABLE N O T e s la The group averages for each Sndicator are popuLation-weighted aritbeetic means. Coverage of countrIAs amon the indicators depends on availability of data and 1s not unform. /b Unles otherime noted. "Data for 1960" refer to any year between 1959 and 1961; "Date for 1970" between 1969 and 1971; and date for "togt Recent Etiate" betwen 1980 and 1982. /e Due to eamgretian poplation growth rate Is loier than rate of natural increase; /d 1979; Io 1983; /f 1977; LA Accens to piped water only; b 1962; /i 1976; /1 1966; Ak 1975. 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