Tunisia - Fourth Urban Development Project

Dmiat of The World Bank FOR OFFICIAL USE ONLY - 2> ?3 F-1OA Report No. 5444-TIJN STAFF APPRAISAL REPORT REPUBLIC OF TUNISIA FOURTH URBAN DEVELOPMENT PROJECT June 9, 1986 Urban and Regional Development Projects Division Europe, Middle East, and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIALENTS The exchange rate for the Tunisian Dinar is floating. The rates used in this report are: 1 Tunisian Dinar (TD) US$1.43 1 US Dollar = TD 0.7 ABBREVIATIONS AND ACRONYM AFH - Agence Fonciere d'Habitation (Land Development Agency) ARRU - Agence pour la R6habilitation et la R6novation Urbaine (Urban Upgrading and Renewal Agency) ASM - Association pour la Sauvegarde de la Medina (Association for the Safeguard of Medina) BCT - Banque Centrale de Tunisie (Central Bank of Tunisia) BDET - Banque de D4veloppment Economique de Tunisie (Economic Development Bank) CNEL - Caisse Nationale d'Epargne-Logement (National Housing and Savings Fund) CPSCL - Caisse de Prets et de Soutien des Collectivites Locales (Municipalities Support Fund) FOPROLOS - Fonds pour la Promotion du Logement des Salaries (Workers' Housing Fund) MOEH - Ministere de l'Equipement et l'Habitat (Ministry of Equipment and Housing) Moi - Ministere de l'Int6rieur (Ministry of Interior) MOP - Ministere du Plan (Ministry of Planning) MTC - Ministere de Transport et Communications (Ministry of Transport and Communications ONAS - Office National d'Assainissement (National Sewerage Company) SNIT - Societe Nationale Immobiliere de Tunisie (National Real Estate Company SONEDE - Soci&t6 Nationale d'Exploitation et de Distribution des Eaux (National Water Production and Distribution Company) SPROLS - Societe de Promotion des Logements Sociaux (Social Housing Company) STEG - Societ6 Tunisienne d'Electricite et de Gaz (Public Electricity and Gas Company) USAID - US Agency for International Development FISCAL YEAR January 1 - December 31  FOR OFFCAL USE ONLY REPUBUC OF TUNLAL FOURTH URBAN DEVELOPMENT PROJECT Table of Contents Page No. LOAN AND PROJECT SUMMA;Y .......... ........................ - i - I . INTRODUCTION . ............................................. 1 II. THE HOUSING SECTOR . ....................................... 2 A. Urbanization Patterns .................................. 2 B. Institutional Framework ............................... 3 C. Urban and Housing Conditions .......................... 3 D. Government Housing Policy ............................. 4 E. Bank's Role and Past Experience in the Sector .......... 6 F. Bank's Objectives and Strategy ........................ 8 III. THE PROJECT ............................................... 9 A. Project Origin and Objectives ......................... 9 B. Project Description ................................... 9 C. Institutional Aspects and Projet Execution .... ........ 11 D. Financial Features .................................... 15 E. Procurement and Disbursement .......................... 18 F. Accounts and Audits ................................... 20 G. Monitoring and Evaluation ............................. 20 H. Supervision ........................................... 20 IV. COST RECOVERY, BENEFICIARY SELECTION, AND AFFORDABILITY ... 21 A. Cost Recovery ......................................... 21 B. Beneficiaries Selection . . .............................. 22 C. Financial Terms and Conditions to Beneficiaries ....... 22 D. Income Profiles, Affordability Analysis and Urban Poverty Impact ............................. 22 V. PROJECT BENEFITS AND RISKS ................................. 23 A. Project Benefits ...................................... 23 B. Economic Impact and Rates of Return .................... 24 C. Project Risks ......................................... 25 VI. ASSURANCES, AGREEMENTS AND RECOMMENDATIONS ..... ............ 25 This Report is based on the findings of an appraisal mission (October 1984 and April 1985). The appraisal mission members included Messrs. A. El-Tobgy (mission leader), S. Kargetis (urban planner). C. Hovnanian and J. L. Berger (consultants); the April 1985 appraisal mission included Messrs. r. T. Christie and A. El-Tobgy. Mrs. L. Victorio typed the report. This document has a restrieted distribution nd may be used by rmcipients only in the peormace of their official duties Its contents may not otherwise be discloed without World Bank authofization.  Table of Contents (cont'd.) Page No. ANNEXES Annex 1: Agencies Involved in the Provision of Shelter .......... 27 Annex 2: Project Pipelire ..****....................... 28 Annex 3: Cost Estimate ty Main Com ponent ......................... 29 AnneM 4: Eligibility Cr_.teris ...... ............................. 30 Annex 5: Technical Assistance ......... ... ................................. . 32 Annex 6: Project Institutions ....... ........ ...* .......... 35 Annex 7: CPSCL Subsidiary Loan Agreement ......... 52 Annex 8: CNEL Management Agreement .... .. .... ..... ....... . . .... . 53 Annex 9: Cost Estimate by Site ..... .... . . a * ... **.....***............................. * * * 55 Annex 10: Cash Flow Charts ..*.****......O..O..O ...... 56 Annex 11: Cash Flow Tables .. *.....**e***********t**o**c****ee 58 Annex 12: Disbursement Schedule ............... 60 Annex 13: Income Distribution Curve ..* .......................... 61 Annex 14: Affordability Analysis .... ..... .. ......... ....... .... a . 62 Annex 15: Economic Analysis . ................ ..... oo ............ 64 Annex 16: Documents in Project file o ............................ 65 MAP IBRD 18756 - Map showing project sites Z03SU  REPUBLIC OF TUNISIA FOURTH URBAN DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Government of Tunisia Beneficiaries: Agence pour la Rehabilitation et la Renovation Urbaine (ARRU), Agence Fonci6re d'3abitation (AFH). The final beneficiaries of the project would be the municipalities and those families living in upgraded areas and purchasers of serviced lots. Loan Amount: US$30.2 million Loan Terms: Repayable in 20 years, including three years of grace, at the standard variable interest rate. Onlending Terms: Out of the loan the Government would channel US$22.05 million as follows: Ci) US$7.52 million would be onlent to the "Caisse de Prets et de Soutien des Collectivit6s Locales" (CPSCL), at cost of Bank funds at date of Loan Agreement, repayable in 20 years including three years of grace. CPSCL would relend these amounts to municipalities at cost for 20 years including two years of grace; and (5i) US$14.53 million would be managed by the Caisse Nationale d'Epargne-Logement (CNEL). CNEL would onlend out of these funds US$7.85 million to AFH for site servicing at 11.0 percent for three years and US$6.68 million to beneficiaries for housing construction, at 8.25 percent for beneficiaries with incomes higher than one and a half times the SHIG'" and 7 percent for beneficiaries with incomes equal to or lower than one and a half times the SHIQ, for 20 years with two years of grace. The Government would bear the foreign exchange risk as well as the interest rate risk. Project Obiectives: (i) To provide improved shelter and urban services in existing settlements and to develop serviced urban land affordable to low-income families. (ii) To support the Government's efforts in the rationalization of urban activities and to strengthen the capability of institutions involved in the sector. / SNIG is the legal guaranteed minimum wage (about TD 90/month in 1986).-  - ii - Proiect Description: The project ccnsists of three parts: (i) Upgrading of existing settlements through the provision cr extension of infrastructure networks ard community facilities, regularizardion of land tenure and provision of loans for Lousing construction and improvement of existing housing; (ii) Servicing Land through the development of subdivisiors, provision of infrastructure works, and loans for land acquisition and housing construction; and (iii) Technical assistance to organizations involved in the project. LOAN AND PROJECT SUMMARY Project Costs: Local Foreign Total Us- Million - Upgrading 21.6 18.5 40.1 Site Servicing 15.6 11.1 26.7 Technical Assistance 00.0 0.6 0.6 37.2 30.2 67.4 Finan:ing Plan: US$ Million 2 of Total IBRD 30.2 44.8 Government 24.2 36.0 CNEL 6.0 8.8 AFN 7.0 10.4 67.4 100.0 Estimated Disbursements: US$ Million FY 87 88 89 90 91 92 93 94 95 Annual 0.3 1.7 4.1 4.8 5.4 5.2 3.9 2.8 2.0 Cumulative 0.3 2.0 6.1 10.9 16.3 21.5 25.4 28.2 30.2  TUNISIA - FOURTH URBAN DEVELOPMEN PROJECT I. INTRODUCTION 1.01 Tunisia :- a rapidly urbanizing country. Its urban population in 1985 accounted fo= about 53 percent of its estimated total population of 7.5 million. The high rate of urban population growth of 3.7 percent a year since 1975 has strained the public sector's ability to provide basic urban services. Public housing, which has accounted for about 20 percent of the urban housing stock since 1975, has been provided at high cost in terms of investment and direct subsidy levels. More importantly, however, the public sector was unable to provide in a coordinated and timely manner sufficient urban infrastructure to meet the demand for serviced land for housing. This has directly contributed to the spread of spontaneous, unregulated, mostly low-income settlements on land lacking both services and legal title. The spread of these settlements has led to inefficient and largely uncontrolled urban growth patterns and ultimately imposes excessive investment requirements for ex post facto provision of infrastructure. 1.02 Previous Bank involvement under the First Urban Development Project was related to urban transport in Tunis. The Second Urban Development Project concentrated on upgrading infrastructure and housing in selected low-income areas and on providing new sites and services in adjacent areas. This project demonstrated the feasibility of upgrading and providing low-cost sites and services in Tunis and Sfax. The Third Urban Development Project continues the efforts in Tunis and extends them to priority areas in the North-West. A second transport project was approved in 1984, which is intended to improve the Greater Tunis highway system and the regional transport company in Sfax. 1.03 Sectoral policy improvements both under projects and through sector policy discussions have been significant. The Government now accepts the concept of upgrading squatter sites rather than demolishing and clearing them and is adopting policies whereby public sector emphasis is on the provision of infrastructure and serviced land and not construction of subsidized housing. The Government increasingly is leaving housing construction to private sector initiative and particularly to the considerable dynamism of the informal private sector. The Government is trying to reduce subsidies and to introduce cost recovery procedures and realistic interest rates in the sector in spite of the associated political risk. The Government acknowledges that much remains to be done to achieve consistent urban policies and has requested that tLe Bank provide assistance to further analyze and make recommendations regarding housing finance and land development as part of an ongoing dialogue about policy inprovement and for subsequent implementation under the VIIth Plan (1987-199L).  -2- 1.04 The proposed Fourth Urban Development Project builds on the second and third projects. It would address shelter needs in a two-fold manner: (i) a preventive component to increase the availability of serviced land for low-income families and (ii) a curative component to upgrade infrastructure in existing squatter settlements. Each component would be financed through a line of credit based on a pipeline of subprojects reviewed and approved by the Bank. The two components would further be supported by the strengthening of the staff capability of the project institutions and by a program of technical assistance. 1.05 The project also is designed to improve the linkages between the main institutions involved in land development, upgrading and housing finance and build up their capacity to appraise and execute low-income shelter projects in a well coordinated and systematic manner. The Agence Fonciere d'Habitation (AFH), which is the Land Development Agency, and the Agence pour la R6habilitation et la Renovation Urbaine (ARRU), which is the Urban Upgrading and Renewal Agency, would each identify and prepare feasibility studies for the subprojects. The Caisse Nationale d'Epargne-Logement (CNEL), which is the National Housing and Savings Fund, would manage, partially finance and appraise the site servicing component. The Caisse des Prets et de Soutien aux Collectivites Locales (CPSCL), the municipal development fund, would be used as a conduit to channel project funds under the upgrading components. II - THE HOUSING SECTOR A. Urbanization Patterns 2.01 The rapid increase in Tunisia's urban population has been due to a relatively high natural population growth (about 2.6 percent net p.a. between 1975 and 1984), the return of migrant workers from abroad, and rural-urban migration. Every region, except Sfax and Bizerte, has experienced in-migration in recent years. Tunis still receives the largest migratory flows but has a much lower urban populatio: growth rate than the rapidly urbanizing Center-West and North-West governorates (for Tunis 1.2 percent p.a. versus 3.1 percent p.a. for the North-West and 5.8 percent p.a. for the Center-West). The urban population is estimated to reach 6.0-6.2 million by the year 2000. The pressures of urban population growth have been such that authorities are unable to keep up the level of urban services, and as a result significant backlogs in the provisioni of services have developed. The problem is not limited to the major cities but is felt on a national scale in the 125 agglomerations of 5,000 or more inhabitants. 2.02 About 10 percent of Tunisia's urban population lives below the Bank-defined absolute poverty threshold, estimated in 1984 at about TD 80 per household/month with an average household size of 5.3 persons. This represents a considerable improvement over the 1975 figure of 20 percent. Compared to other countries with similar characteristics, Tunisia's urban poverty problem appears containable. However, access of low-income groups to housing and basic infrastructure services is still a major concern.  B. Institutional Framework 2.03 Tunisia is divided into 23 governorates under the supervision of the Ministry of Interior (MOI). At the local level, authority is vested in Municipalities. With few exceptions, the municipalities have insufficient staff, limited management capacity, and little control over their financial resources. They rely therefore on direct Government budgetary allocations or subsidized loans for their operating and investment budgets. Since 1975, CPSCL. an agency of MOI, has served as the channel for Government long-term, low-interest loans to the municipalities for the financing of community facilities and infrastructure projects. 2.04 Issues related to shelter have been the responsibility of various ministries but are now consolidated in the Ministry of Equipment and Housing (MOEH), which was established as a result of the merger of the Ministry of Housing with the Ministry of Equipment in August, 1984. MOEH is also responsible for providing all major public works, including roads and highways. For shelter related matte:s, MOEH is presently organized into technical departments for housing construction, upgrading and urban renewal, housing assistance, and legal matters. MOEH has under its control three major public agencies: the Societe Nationale Immobiliere de Tunisie (SNIT) established in 1957 which is the national real estate company responsible for public housing construction; ARRU, an autonomous agency established in 1981 with broad powers to coordinate urban renewal and upgrading activities, including the provision of utility services; and AFH, the principal land developer established in 1973. In addition, MOEH has technical control over CNEL, the autonomous public savings and loan agency established in 1974 under the supervisory authority of the Ministry of Finance and Economy to mobilize domestic resources through contractual savings plans for housing loans. Annex 1 lists the institutions involved in the urban sector. 2.05 Design, construction, operation, and maintenance of utility networks and services in urban areas are the responsibility of national companies attached to different Ministries: the Societe Nationale d'Exploitation et de Distribution des Eaux (SONEDE) is the National Water Production and Distribution Company under the Ministry of Agriculture, responsible for water supply and distribution; the Office National d'Assainissement (ONAS) is the National Sewerage Company under the MOEH, responsible for urban sewerage and drainage systems; and the Societe Tunisienne d'Electricite et de Gaz (STEG) is the Public Electricity and Gas Company under the Ministry of Energy and Mines responsible for power production and distribution. 2.06 The MOI, through the Governorates and the Municipalities, carries out the collection and disposal of solid waste. C. Urban and Housing Conditions 2.07 Rapid urbanization has generated a large housing demand and led to intensive construction activity. As a result, the housing stock has increased at an annual average rate of 4 percent to reach 1.3 million dwellings in 1984, about 55 percent of which are in urban areas. Housing conditions improved  - 4 - during 1980-1984, rudimentary housing and one room dwellings decreased from 13 percent to 9 percent and from 31 percent to 21 percent of all housing units respectively. However, the demand for housing and urban services continues to outpace the public sector's ability to keep up with urban growth. Almost half of all dwellings built since 1975 have bypassed urban development regulations and were instead undertaken by the informal sector in areas lacking adequate utility services and community facilities, relying on self-help and low-cost construction methods. Moreover, according to most projections, housing construction by the public and formal private sectors will fall well short of demand under the Sixth Plan. It is essential therefore to incrc se the supply of suitably located serviced land at prices affordable to the poorest segments of the population. Availability of land would permit the informal private sector to develop its activities related to housing construction and fill the gap in housing demand. 2.08 Regulations related to rent control in Tunisin apply only to housing built prior to 1970 which represents a small percentage of the total housing stock. The Government is aware of the inconveniences caused by the control and intends to take the needed steps to reduce such controls. 2.09 Access to basic utility services has improved considerably in recent years in most urban areas. STEG's electricity network covers about 97 percent of urban areas while SONEDE is distributinig water to about 80 percent of the urban population through household connections and another 10 percent through standpipes. Despite an ambitious and sturcessful program, ONAS has been only able to service about 55 percenrt of urban areas, largely because it is a relatively new organization. The gap between water and sewerage availability aggravates environmental problems since waste water has increased as a result of improvements in water supply. Solid waste collection has also improved considerably lately in city centers. lhe improvement was partly triggered by the recognition of health hazards associated with uncollected wastes; however, the supply of infrastructure services at the urban periphery and at the rap-dly expanding areas is still poor and there is little coordination between the various responsible agencies. A feature of the proposed project is to im?rove coordination between agencies and thus to promote et2icient provision of services. D. Covcrtim i,t Housing_Poliry 2.10 Until thte mid-l17O's, the Government's response to urban housing nceds and to the growth of spontLancous settlemenits consisted mainly in construction ot public housing, siwum clearance and subsidized houbing schemes to rehouse displaced families. SNIT, the main operator for the construction of public housing, rapidly became an important agency. Its standards initially were high and bore little relationship to its clients' financial ability or willingness to pay. Recently, it has become more responsive to market demands and started building at lower cost and standards. Still. the magnitude of the housing problem continued to grow. The Govornment in response created CNEL in 1973 to mobilize savings for housing as well as AFH in 1974 to provide serviced land. However, the new agencies were subsidized and did not address the fundamental problem of providing infrastructure in the large settlements built informally by families in violation of urban regulations, that were proliferating on the urban fringes.  2.11 Thus, on the eve of the Fifth Plan (1977-81), the Tunisian housing sector consisted of subsidized public housing with rampant growth of squatter settlements which did not benefit from public services. Housing accounted for 15 percent of total investment; the public sector provided 42 perceIlt of financing for 25 percent of the units built; and the private sector provided 58 percent of financing and 75 percent of total units. However, under the Fifth Plan, the Bank's Second Urban Development Project (para. 2.23) as well as similar projects by USAID were financed. Theme ef forts laid the foundation for reintroduction of rational policies of upgrading instead of denolishing squatter settlements, developing low-cost sites and sgrvicem projects, And recovering costs of infrastructure and improvements from beneticiarieu. 2.12 At the beginning of the Sixth Plan (1982-8h). the Bank prepared a housing sector review that focumed attention on the necdt for all integrated rational housing policy.l Its main findings and recommenidations were that: (i) lack of serviced land is a severe constraeint to elfficienit tirban growth; (ii) Government should concentrate on provision ot intrastructure rathier than housing; (iii) provision of urban services in squatter settlements sand other spontaneous growth areas is badly needed; (iv) strengthenit.g nand improvement of the performance of housing sector institutions in setting policies, providing financing and implementing upgrading ;uind land development projects is of utmost importance; and (v) cost recovery and non-subsidized prices tor housing services should be assured. 2.13 In an etfort to limit investment in hiousing, the Sixth Plan: allocated TD 1.0 billion for lbO,OOO housing units, or 12.S percent of investment. However. by the end of 1983, these investments reached TD 1.5 billion or lb.b percent ot total investment. Accordin, to thle recent Mid-Term Plan Review.-: the increase in investment raised concerns that heusing was taking too great a share of total investment. Whereas there is substance to this concern, it is also true that housing investment is at near historical levels (the housing sector review projections had estimated housing investment at TD I.S-1.7 billion for the Plan period). Nevertheless, in light of the tight budgetary situation and the need to focus p-blais investments in housing on the lower-income groups, it is essential that public hotising investment be contained. As basic infrastructure and urbatn services can Kenerally he provided by the public sector more efticienitly thaln shelter, the hest way to reduce public investment in housing and to address housing necds .at thie same time, is upgrading existing settlements through provision of ba.sir infrastructure and guiding luture developmlnt thiroughi the provision ot small serviced plots. Housing investment can thenT be I,-5t more to private initiative, accompanied by .availability ot suit.able f inatiring. This would help mobilize domestic resources and uitilize theti potential oS thr intformal housing sector. Thc Government intends in the Seventh Plan to reduce public investment in housing trom the levels it attainrd duritng the Sixth Plavn. This would be achieved by graduallv reduring subsidies, building standards, instituting tull-cost pricing and recovery and more etticient coordination and provision of services. A number o' these measures hive alreadv been agreed with the Bank and the proposed project addresses these prioritv issues. L/ Housing Sector Review. Report No. 4013 (August 1. 1983). 2/ Country Economic Memorandum on Mid-Term Review of the Sixth Development Plan (1982-b6), Report No. 5128 (Februarv, 19S').  - 6 - 2.14 As a result of the rationalization efforts regarding sector institutions under the Sixth Plan, MOEH is now in a position to devise housing policies and supervise its execution. The Minister of Equipment and Housing has moved rapidly to reorganize MOEH by creating regional delegations in each governorate that are responsible for administration and accounts, urban planning, housing, roads and bridges, buildings, and research studies. The organizat:on of the MOEH at the central level into four main departments (as mentioned in para. 2.04) appears reasonable. The Department of Housing Assistance Research and Studies is responsible for all studies and analysis of planning options. This is a satisfactory arrangement at present, but as the ministry develops, it may be more efficient to consolidate MOEH into fewer dep,artnments. E. Bank's Role and Past _fxpcrienr c in the Sector Bank's Sectoral Role 2.15 Since 1966, the Bank has maintained a close sector dialogue with the Tunisian authorities. The Housing Sector Review represented a major contribution to the formulation of the housing policies and programs of tae Sixth Plan. The Housing Finance Sector Study ' provided a framework for much needed reform to housing policies and finance. The report of that Study was discussed with the Tunisian authorities in October 1984. Its main findings are that institutional finance represented only 37 percent of total investment in housing during the Fifth Plan (1977-1981) and that most housing iniestment comes from private hoarding and savings. CNEL is the largest provider of housing finance and has been able to mobilize savings under its contractual savings scheme largely through a promise of access to a house as part of its program. It has been less successful at utilizing resources because of bottlenecks in supply of developed land and low-cost housing eligible for institutional financing. 2.16 The report elaborates a strategy to strengthen CNEL and eventually enabic it to become a housing bank. The strategy is based on modifying CNEL's structure and diversifying its financial activities and products by involving it in financing plot acquisition, upgrading, acquisition and improvement of existing housing and rental investments. The approach implies reviewing deposit and lending interest raLes (within the framework of sector wide rates), extending maturiLies on new loans and studying the merits of contractual versus open saving schemes. The authorities are in broad agreemcnt with the recommendations and has already increased the lending and deposit interest rates. Additional work is needed before implementation of the remainder of the recommendations. 2.17 This additional work is underway. Bank missions visited Tunisia several times upon the request of the Minister of Housing and Equipment to give advice in developing a quantitative model of the housing finance system and in working with a commission composed of all the agencies involved in housing and urban development to enable the introduction of the 1/ Institutional Housing Finance Sector Review, Report No. 5199 (July 18, 1984).  - 7 - recommendations. The results are being taken into consideration in the deliberations regarding urban policies and programs of the National Superior Commission that was established on March 15, 1985 to prepare for the Seventh Plan (1987-1991). Bank's Urban Lending 2.18 The Bank's previous urban lending activities included two urban transport and two shelter projects. The proposed project would be consistent with the experience obtained out of these projects and with the Housing Finance Report recommendations. It would extend CNEL's activities into areas of financing land servicing and acquisition and wo.ld increas- cost recovery through more realistic pricing. It would also help move CNEL upstream in financing land acquisition and development and would be a first step towards the establishment of a plot acquisition savings scheme. Urban Transport 2.19 The Ministry of Transport and Communications and MOEN are the ministries resonsible for urban transport and highways. The Bank has been involved in two urban transport projects which are described below. 2.20 The first urban development operation in Tunisia, the Tunis District Urban Planning and Public Transport Project (Loan 937-TUN and Credit 432-TUN of 1973 totalling US$ll million) improved traffic conditions in Tunis, renewed and expanded the Tunisian National Transport Agency's bus fleet, and developed a suburban railway. It also supported the establishment of the District of Tunis, the first regional planning authority in the country. In its early years of operation, the District was influential in establishing spatial patterns of development for Greater Tunis and in guiding policies related to low-income housing; however, the District's performance lately fell short of expectations, mainly as a result of lack of Government support for its activities. 2.21 The Second Urban Transportation Project (US$33.0 million; Loan 2429-TUN of 1984) will improve the Greater Tunis highway system and provide for by-passes to the city center, will improve the Sfax regional transport company, and will address policy issues related to parking management and private transport services. The project became effective on June 26, 1985. All components are progressing except the Sfax regional transport component which is delayed because of financial and managerial issues. Shelter 2.22 MOEB is responsible for shelter related projects. The Bank is at present involved in two such projects. 2.23 The Second Urban Development Project (US$19 million; $4.0 million was cancelled in 1984, mainly because of the US dollar appreciation; Loan 1705-TUN of 1979) which was closed on December 31. 1985, included upgrading and sites and services in low-income settlements in Tunis and Sfax, as well as a solid waste collection and disposal component in Greater Tunis, and a line of credit for small-scale businesses. The project also provided technical assistance and support to the Project Unit and to the municipalities of Tunis and Sfax, which geared up for project execution. A cadastral study had been added to  - 8 - project by an amendment, She study is expected to lead to a program of cadastral reform. The Central Project Unit, initially within MOI, was transferred to MOEH. Funds earmarked for the small-scale business assistance component were reallocated to civil works after creation of a less expensive fund for the same purpose. The solid waste collection and disposal component initially suffered from delays in establishing an executing agency, but progressed well with ONAS in charge. Measures were also taken to improve coordination and introduce more effective cost recovery procedures. An amount estimated at US$1.0 million would remain undisbursed by the closing of project accounts on June 30, 1986. 2.24 The Third Urban Development Project (US$25.0 million; Loan 2223-TUN of 1983) includes upgrading in four settlements and sites cud services in three of these, a pilot program of upgrading and reconstruction in the medina of Tunis and technical assistance. Credit for plot acquisition and housing construction is also provided and represents the first such financing available in Tunisia. Three of the five project sites are in Greater Tunis with the two others in the North-West area. Most of the civil work and contracts for upgrading have been awarded. ARRU, the main executing agency, has developed rapidly in an efficient and businesslike manner. Signed contracts totaled US$13.5 million as of May 31, 1986, which represents about US$6.0 million of loan commitments. Disbursement, however, reached only US$3.4 million due to some initial delays in the start of works and as a result of the appreciation of the the U.' dollar in relation to the Tunisian Dinar. F. Bank Obiectives and StrategY 2.25 In the next five years, the Bank's urban lending strategy will be two-pronged: municipal development, and shelter. For municipal development, the municipal finance and management study should lead to a municipal project, possibly involving the strengthening of CPSCL as the municipal financial intermediary. In the shelter subsector, the lending objectives would address the following key priorities: (i) improving policies related to land ac, 1.5sition, deveLopment, and disposition; (ii) providing sufficient supply of suitably located serviced land at prices affordable to low-income groups; (iii) improving the level of services in existing spontaneous unregulated settlements; and (iv) strengthening and improving the performance of institutions involved in setting policies, providing financing, and implementing upgrading and land development programs.  2.25 The institutions to implement the objectives related to shelter are in place: HOEK is responsible for policy formulation, ARRU for improving services in existing settlements, AFH for land development and CNEL for housing finance. The proposed project addresses all the above mentioned objectives through these agencies. III. THE PROJECT A. Project Origin and Obiectives 3.01 The project was appraised in October 1984. It originated from discussions with the Government following the signature of the loan agreement for the Third Urban Development Project in January 1983. The dialogue continued through Bank missions to Tunisia notably in October 1983 and March and July 1984. The objectives of the project are to: (i) improve shelter and urban services for low-income households; (ii) provide serviced land in urban areas affordable to low-income households; and (iii) strengthen the capacity of institutions responsible for upgrading, land development and provision of shelter to carry out the above functions and improve the coordination between them. 3.02 To achieve these objectives, the project would build on the experience of prior projects and would address the major issues of land pricing, provision of services at appropriate standards for the targeted market groups, and cost recovery to ensure replicability. B. Project Description 3.03 The project consists of three major components (i) upgrading infrastructure and community facilities in underserviced settlements by ARRU; (ii) development of serviced sites aimed at low income groups by AEH; and (iii) technical assistance. Upgrading and Site Servicing Components 3.04 Two lines of credit would be established to finance identified subprojects (Annex 2). Eighteen sites were identified by ARRU for upgrading for a total estimated cost of US$40.0 million and twenty by AFH for site servicing for a total estimated cost of US$26.8 million. The Bank would finance the foreign exchange cost which represents about 44.8 percent of total cost (Annex 3). The proposed project would extend the intervention to most governorates in the country as part of a comprehensive national program. 3.05 The upgrading component would include land acquisition, compensation or rehousing of households affected by demolition, regularization of ownership and occupancy status, provision and extension of infrastructure networks  - 10 - (water, sewerage, storm water drainage, electricity and roads and footpaths) and construction of community facilities. The site servicing component would focus on improvement through developing and subdividing land into plots between 80 m2 and 160 m2 for housing, provision of needed infrastructure and development of serviced land for community facilities as well as the provision of loans for plot acquisition. Both components would include loans for housing construction for the infill plots in upgraded areas and for about 25 percent of the plots in the site servicing subprojects. Moreover, the upgrading component would include loans for improvement of housing existing on the site. 3.06 Identification of Subproject Sites. The subprojects sites were identified on the basis of selection criteria agreed with the Bank. These criteria include the availability of nearby and existing infrastructure, site accessibility, size of settlements, ownership patterns, growth potentialities, income of beneficiaries, cost, and expected demand for the serviced sites. Moreover to ensure a prompt start, all identified sites in the site servicing pipeline are already owned by AFH. However, since the implementation of subprojects would depend on local conditions at each site, AFH and ARRU could substitute subprojects in the event that any of those in the identified pipeline face delay or encounter unexpected problems. 3.07 Feasibility Studies and Eligibility Criteria. AFH and ARRU have prepared preliminary feasibility studies for all identified subprojects. The Bank has reviewed all of these studies, and ARRU and APH are refining and expanding the financial, economic and engineering aspects before submitting them to the Bank for approval. To satisfy the requirements of the eligibility criteria (Annex 4), submitted studies would include preliminary engineering, cost estimates, financial plan, implementation schedules, analysis of beneficiaries' income, affordability and cost recovery procedures. For the site servicing subprojects the study would also include a justification for the demand for the plots, an analysis of the beneficiaries creditworthiness, and an indication of the proposed selling price of the plots. ARRU and AFH would submit all documentation related to the subprojects for approval not later than December 31, 1989. Subprojects would be approved for Bank financing only if they meet the specific conditions of the eligibility criteria which were reviewed and agreed during negotiations. Technical Assistance 3.08 An amount of US$0.6 million would be allocated to technical assistance to strengthen AFH. The assistance would include 2.75 man-years of experts to train AFP staff in areas related to land management, administration and institutional aspects, accounting, and computerization. A management system would be set up to improve the acquisition and management of AFP's land stock and its accounting procedures. The necessary computer hardware associated with these activities would also be provided. AFH agreed to recruit the experts in accordance with Bank guidelines. Assurances to that effect were obtained during negotiations. The profile of the experts and the cost estimates for the technical assistance are indicated in Annex 5. Computers would also be acquired to assist the Direction des Collectivites Locales, which is the Directorate in the Ministry of Finance and Economy (DCL) responsible for monitoring municipal budgets, to improve the processing and review of data related to the municipalities' budgets.  - 11 - C. Institutional Aspects and Project Execution 3.09 The project would focus on strengthening linkages between existing institutions responsible for land development, upgrading, and housing finance in an effort to ensure effective control, coordination, and execution of the project. Overall execution, management and coordination would be through ARRU for the upgrading component and through AFH for the site servicing component. CNEL and CPSCL would serve as the financial intermediaries controlling the flow of funds. The institutions involved and their main responsibilities under the project are shown in Table 1 (their description is given in Annex 6). Table 1: MAIN INSTITUTIONS INVOLVED IN PROJECT Institution Responsibility 1. MOEH The Ministry responsible for establishing urban policies, coordinating their implementation and evaluating the results. 2. Municipalities Delegate responsibility for executing the upgrading component to ARRU. Assist in beneficiary selection and ensure cost recovery. 3. ARRU Executing agency for the upgrading component on behalf of the municipalities. Prepares feasibility studies, obtains approvals from municipalities, awards construction contracts, liaises with and reports to the Bank. 4. AFH Executing agency for the site servicing component. Acquires, subdivides, develops and sells serviced land, prepares all technical studies, financial and economic analyses, awards construction contracts, liaises with and reports to the Bank. 5. CNEL Financial intermediary for the site serviciig component. Appraises AFH subprojects, manages the funds for site servicing, and the loans for plot acquisition and housing construction, and partially finances AFH f^r servicing site. 6. CPSCL Channels funds to municipalities for upgrading of the on site infrastructure works. 7. Utility Companies Provide water, sewerage and electricity networks. Maintain the works and recover partially the cost through utility charges.  - 12 - Project Preparation 3.10 The project is in an advanced state of preparation. For the upgrading component, engineering studies for 16 out of the 18 sites are complete. ARRU also obtained the approval to implement the project from all the concerned municipalities and from both Ministries of Interior and Finance. As for the site servicing component, all land has been acquired by AFH and the subdivision plans for all sites have been completed. Most of the subdivisions have already been approved by the municipalities concerned; the remaining would be approved before the end of 1986. The Upgrading Component 3.11 ARRU would act on behalf of the municipalities as the implementing and coordinating agency for the upgrading component. It would enter into agreements with the municipalities and the utility companies, and define their roles and responsibilities under the proposed project. ARRU would establish the land boundaries needed for its intervention, expropriate and/or acquire the designated area, and compensate or rehouse those affected by demolition. It would have studies and bid documents prepared by consultants and review and appraise them, coordinate with the ministries and municipalities and obtain their approval on all project decisions. Moreover, it would supervise the execution of the works and provide the needed cost information to ensure that budgetary allocations are earmarked for the project. ARRU would also keep track of disbursements, prepare the project accounts, submit the subprojects to the Bank for approval and report to the Bank on all matters related to the upgrading component. 3.12 ARRU is an active and efficient organization, capable of executing the project. It has on its board representatives from all the ministries involved in the urban sector, as well as from the national utility companies. The president of ARRU is a dynamic individual who has mastered the task of managing upgrading projects. In the years since its establishment, ARRU has grown rapidly, attracted a highly qualified staff of professionals and is performing very competently under the Third Urban Project. It clearly has established itself as the lead agency for upgrading in Tunisia. 3.13 A draft of the prototype agreement (convention) between ARRU and the municipalities was agreed at negotiations. The agreement defines in detail the relationships and obligations of both ARRU and the municipalities for execution of the upgrading component. For each subproject the signature of the related agreement with the municipality concerned would be an eligibility criteria for the subproject. Draft agreements between ARRU and the utility companies were also dgreed upon during negotiations, defining the obligations and duties of the parties in executing the upgrading component. Their signature would be a condition of effectiveness of -he loan. 3.14 ARRU is receiving technical assistance through a cooperation agreement with the Italian Government. The assistance which includes two experts in urban planning, computerization, and the training of ARRU's staff through seminars and fellowships, is being provided as part of the  - 13 - requirements for the Third Urban Development Project. The Government assured the Bank that the ongoing technical assistance to ARRU would be maintained and that through that assistance an urban planner and an engineer would be employed up to June 30, 1987. 3.15 As under both the Second and Third Projects, CPSCL channels project funds to the municipalities for the upgrading component by means of a subsidiary loan agreement with the Government (Annex 7). The agreement defines the role of CPSCL and its borrowing terms from the Government for onlending to the municipalities. The agreement was reviewed and agreed during negotiations and its signature would be a condition of loan effectiveness. The management of CPSCL's resources is handled by the Economic Development Bank (BDET). Assurances were obtained during negotiations that the current management agreement between CPSCL and BDET would be maintained during the execution of the proposed fourth project. 3.16 For a municipality to obtain a loan from CPSCL for a subproject, a decree must be promulgated authorizing borrowing. Assurances were obtained from the Government that it would take all necessary measures to enable the municipalities to borrow. The municipalities would also enter into an agreement with CPSCL for each subproject to define the total estimated cost of the subproject and the terms and conditions of the related loan. A prototype of this agreement was reviewed and agreed during negotiations. The Site Servicing Component 3.17 AFH would be the implementing agency for this component; it would be responsible for the subdivision, servicing and sale of the land included in the pipeline. It would prepare the feasibility studies and the financial/economic technical and bid documents for appraisal by CNEL prior to submission to the Bank for approval. It would establish plot selling prices and would be responsible in conjunction with CNEL and the municipalities, for the selection of beneficiaries. AFH would moreover report to the Bank on all aspects of the site servicing component. 3.18 AFH is well staffed and is capable of carrying out its functions under the project. It has administrative, financial, technical, studies, and real estate divisions, with about 30 professionaL staff including 15 engineers. By the end of 1985, AFH had accumulated about 4,000 hectares at over 80 sites. Most of its acquisitions have been in the Tunis region; however, more recently AFH acquired sites in other cities throughout the country. Now, AFH owns about 400 hectares outside the Tunis regiun. 3.19 AFH's mode of operation and land selling policies nevertheless need improvement. At present, AFH establishes the selling price of its serviced land reserved for individual dwellings at cost of acquisition and servicing plus administrative and financial overheads. It requires full payment by beneficiaries before or on delivery of individual plots. AFH plots range in size between 250 mz and 650 m2, which tends to exclude their acquisition by the low-income segment of the population. AFH's current sales policies do not allow auction, selling for profit, or at differential prices/mz for  - 14 - plots of different sizes, uses, or locations, (except for land reserved for commercial activities) thus precluding the possibility of cross-subsidies to lower income groups. To permit AFH to better finance its land acquisition with no Government subsidies, and to establish land selling prices compatible with market conditions, AFH agreed to introduce the following measures: (i) establish a plot pricing system that would ensure a continuous flow of funds to AFH by selling land at its replacement cost. The cost would include the actualized price of the serviced land, the financial charges and all the expenses incurred by AFH for administration, studies and overhead; (ii) ensure effective cross-subsidies between servicc.d lots in favor of the smaller lots. The Minister of Equipment and Housing has approved the introduction of the two measures and directed AFH to introduce them. AFH has already started to apply the measure related to plot pricing. The introduction of the measures stated above would be a condition of disbursement for the site servicing component. AFH also would improve its accounting system, and separate in the entries the land held in reserve from the land actually sold. The technical assistance provided -.irough the loan would help AFH to improve its accounting system and to manage efficiently its land stock. 3.20 At the time of its inception in 1973, AFH was granted TD 2 million from the government and has since borrowed TD 5 million from the government. During negotiations, it was agreed that the Government would submit to the Bank before June 30, 1987, a plan to convert AFH debt to the Government into equity and that it will take into consideration the Bank's comments on the plan and implement it accordingly. 3.21 CNEL. CNEL is the major lender for housing in Tunisia. Subscribers to CNEL savings contracts may borrow up to twice the amount saved plus accumulated interest, with a ceiling of TD 13,000. The contractual savings period is either four or five years at the subscriber's choice, which entitles the saver to a 10- or 15-year loan, respectively. Interest on savings was recently raised to 6.75 percent p.a. from 4 percent and the Government subsidy was abolished. CNEL's initial target was to attract 8,000 savings contracts annually; actually the results were much greater than expected. At the end of 1984, savings contracts numbered 141,648 for a savings amount of TD 275.1 million. Recent trends (1980-1984) show an average increase of about 20,875 savings contracts and TD 23.1 million in net savings mobilized. CNEL also prefinances housing construction by SNIT and the private developers. Since 1978, it also has managed the Fonds pour la Promotion du Logement des Salaries (FOPROLOS) which is a worker's housing fund and grants housing loans to people whose wages are lower than one and a half times thie SMIG. At present, the Government and the Bank, through the ongoing discussion on housing finance, are devising measures to improve CNEL's operational and lending policies (para. 2.16). 3.22 Under the project, CNEL would be responsible for the the financial aspects of the site servicing component. It would manage Government and Bank funds for the provision of loans to beneficiaries for acquiring serviced plots and for the construction of a housing unit and would partially finance the site servicing component through a Management Agreement with the Government  - 15 - (Annex 8) and a Financing Agreement with AFH. The draft Financing Agreement and the draft Management Agreement were reviewed at appraisal and agreed at negotiations. The signature of both agreements would be conditions of loan effectiveness. 3.23 The credit department within CNEL has satisfactory experience and is responsible for appraising of all short and long-term financing. The short-term financing section within the department would appraise the site servicing subprojects prepared by AFH. D. Financial Features 3.24 The total cost of the project would be US$67.4 million. The detailed cost estimates were based on preliminary studies and analysis of current tender prices for projects of similar nature. Bank financing is based on the foreign cost of each component estimated at 45 percent for upgrading, 42 percent for sites and services and 100 percent for technical assistance (Annexes 3,9). 3.25 Allocation of Funds. On the basis of the identified subprojects the proposed loan of US$30.20 million covering the foreign exchange costs of the project would be channeled as follows: *i) US$7.52 million would be onlent to CPSCL by means of a Subsidiary Loan Agreement; (ii) US$14.53 million managed by CNEL through a Management Agreement between the Government and CNEL out of which CNEL would relend (a) US$7.85 million through a Financing Agreement between CNEL and AFH for financing the servicing of sites, and (b) US$6.68 million for the provision of construction loans; and (iii) US$8.15 million by means of budgetary allocations to the ministries and agencies for the provision of primary infrastructure for the upgrading component (roads, water, sewerage, drainage, electricity and public lighting), community facilities, and technical assistance. 3.26 Local cost requirements of US$37.2 million would be financed by the Government (US$24.2 million) and two of the agencies involved in the project - CNEL (US$6.0 million) and AFE (US$7.0 million). The charts in Annex 10 show the amounts and flow of project funds and the related tables (Annex 11) show the cash flows for upgrading, and site servicing. The financing plan is summarized in Table 2. 3.27 On-Lending Terms. The proceeds of the proposed loan would be made to the Government of Tunisia at the standard variable interest rate with a repayment period of 20 years including three years of grace. The loan and the counterpart funds would be onlent through CPSCL and CNEL on the following terms and conditions: (i) US$12.9 million to the municipalities through CPSCL  - 16 - for 20 years including three years of grace at cost of borrowing at date of loan agreement for Bank funds and at 2-4 percent for Government funds ' (which is expected to produce an average weighted interest rate of about 6 percent); (ii) US$13.5 million through CNEL to AFH for servicing the sites at 11.0 percent for three years and US$12.7 million through CNEL to beneficiaries for construction loans at 8.25 percent for beneficiaries with incomes higher than one and a half times the SMIG and at 7 percent for those with incomes equal to or lower than one and a half times the SMIG, in both cases for 20 years with two years of grace. The foreign exchange and the interest rate risks associated with the Bank's onlent funds would be borne by the Government. The remainder of the funds represents US$21.3 million which would be channeled through budgetary allocations to the Ministry and agencies involved in the project and US$7.0 million of AFH contribution through its land and services. Table 2: FINANCING PLAN (UPGRADING, SITE SERVICING AND TECHNICAL ASSISTANCE) (In Millions) Government IBRD AFH CNEL Total TD US$ TD US$ TD US$ TD US$ TD 8pSrading Land and rehousing 2.24 3.20 0.25 0.36 - - - - 2.49 3 Offsite Infrastructure 1.96 2.80 2.70 3.86 - - - - 4.66 6 Onsite Infrastructure 3.81 5.44 5.26 7.51 - - - - 9.07 12 Utility Connections 1.33 1.90 1.49 2.13 - - - - 2.82 4 Community Facilities 0.73 1.04 0.82 1.17 - - - - 1.55 2 Construction Loans - 0.00 2.37 3.39 - - 2.11 3.01 4.48 6_ Admin. and O.H. 2.92 4.17 - - - - - - 2.92 4 Subtotal 12.99 18.56 12.89 18.41 - - 2.11 3.01 27.99 39 Site Servicing Land - - - - 3.18 4.54 - - 3.18 4 Offsite Infrastructure 0.11 0.16 0.16 0.23 - - - - 0.27 0 Onsite Infrastructure 3.87 5.53 5.33 7.61 - - - - 9.20 3 Construction Loans - - 2.31 3.30 - - 2.09 2.99 4.40 6 Admin. Studies and O.H. - - - - 1.71 2.45 - - 1.71 2 Subtotal 3.98 5.69 7.80 11.14 4.89 6.99 2.09 2.99 18.76 26 Technical assistance - - 0.44 0.63 - -- - - 0.43 0 TOTAL 16.97 24.24 21.13 30.19 4.89 6.99 4.20 6.00 47.18 67_ 1/ 2 percent for non-income generating components and 4 percent for income generating components.  - 17 - 3.28 Consolidation of Loans. After completion of the site servicing works, CNEL would consolidate the short-term financing for AFH land servicing into loans to beneficiaries for acquisition of serviced plots at the same interest rates as for the construction loans (para. 3.27). 3.29 Interest Rates. The expected long-term inflation rate projected by the Bank for Tunisia is about 7 percent for 1986 and beyond. The interest rates in the project are as follows: (i) rates charged to the municipalities average about 6 percent. The Government believes that these rates are reasonable because: (a) the loans are given for the fulfillment of basic needs which in many countries are financed by grants from the Central Government, (b) the statutory limitations the Central Government is imposing on Local Government's taxation ability, (c) the low-income level of beneficiaries, and (d) the loans to local communities are virtually risk free and the interest rate is net of the risk premium normally included in commercial rates; (ii) the interest rates charged to AFH by CNEL at ll.0 percent is comparable to the commercial rates in the country; and (iii) the interest rates charged to the beneficiaries for construction and plot acquisition loans to 7.0 and 8.25 percent (para. 3.27) are compatible with the long-term inflation rates. 3.30 The Government has recognized the need to eliminate all interest rate subsidies. It announced increases in interest rates in the industrial and commercial sectors and more recently in the housing sector where it raised the interest charged by CNEL to its savings accounts holders for construction loans to 8.25 percent. The interest rate issue is addressed in the Bank's Housing Finance Sector Review and in the discussions currently underway (paras. 2.15-2.16). A Municipal Finance Study currently underway is addressing the methods to increase the interest rates charged by CPSCL to the municipalities. During negotiations, it was agreed that the borrower would review annually with the Bank not later than December 1 of each year and until project completion the interest rates in the housing sector, taking into consideration the cost of capital to the financial intermediaries concerned and the general trend of interest rates in Tunisia, and promptly after each review take the necessary action to ensure that the financial intermediaries apply in their loans an interest rate permitting them to cover their cost of capital and enable them to earn a sufficient spread to cover their operations cost. 3.31 Retroactive Financing. To speed up implementation, the Government will commit the needed funds in its 1986 budget to rehouse the families displaced by the need to demolish about 200 houses to make way for infrastructure works in the upgrading areas. Since these works are an integral part of the project and essential to ensure an early start, the Bank loan would provide about US$0.4 million in retroactive financing for rehousing expenditures incurred after July 1, 1986.  - 18 - E. Procurement and Disbursement Procurement 3.32 Procurement of civil works for upgrading and site servicing would be carried out in accordance with the Bank's procurement guidelines. Since the pipeline of subprojects would be (i) dispersed over about 40 sites across the country, (ii) committed separately for each category of works over a period of three years, and (iii) executed and administered by different agencies and parastatal utility companies over a four to five-year period, it would not be feasible to aggregate the contracts into packages large enough to attract international contractors through ICB. Thus, all contracting would be procured through local procedures. The local competitive b!dding procedures in Tunisia are generally consistent with the need for economy and efficiency in the execution of the project. There are. however, a few procedures which are inconsistent with Bank procurement guidelines. During negotiations. agreement was reached regarding the changes needed to make these procedures acceptable to the Bank. 3.33 SONEDE and STEC, the two utility companies would execute the water and electrical works according to their procedures. They would call for tenders to select contractors for local bidding or enter into contracts with ARRU and AFl and execute the works by force account. The works to be executed by force account are unsuitable for competitive bidding as their quantities cannot be defined accurately in advance, the material used must be compatible with the existing material used by the utility companies for ease of maintenance and moreover, no contractor would be interested in executing such usually small and dispersed works. The two utility companies normally execute such works and have the experience to ensure its rapid and efficient completion. 3.34 The large number of small contracts (about 300) in the project, their similarity and the capability of the borrower agencies to procure efficiently would make the prior review of most of these contracts unnecessary. Only contracts exceeding US$1.0 million would be forwarded to the Bank for review before award. All other contracts would be sent to the Bank after their award prior to the first application for withdrawal. 3.35 Computer equipment costing about US$70,000 in aggregate would be bought off the shelf by AFH and DCL after obtaining quotations from three suppliers. Procurement arrangements are summarized in Table 3. Disbursement 3.36 The proposed loan of USM3O.2 million would be committed over a period of three years (December 31, 1986 to December 31, 1989). The loan is expected to be fully disbursed in nine years (Annex 12). This is consistent with the disbursement profile of Bank loans in the EMENA region. Accordingly, the closing date would be set at December 31, 1994.  - 19 - Table 3: PROCUREMENT ARRANGEMENTS (USS Thousands) Procurement Method LCR Other S!toppjng Total Cost Force Account Offsite infrastructure 8,035.86 - 8,035.86 Roads 9,261.43 - 9,b1.43 Sewerage and drainage 13,399.84 - 13,399.84 Water 3,089.87 1,203.77 4,293.64 Electricity and public lighting 1,983.46 837.55 2,821.01 Utility connections 3,904.94 7O.00 4,604.94 Community facilities 9,533.fl _ - 2,533.61 Subtotal civil works 42,209.C1 2,741.32 44,950.33 Computer equipment - - 70.00 70.00 Total 42,209.01 2741.32 70.00 45,020.33 Note: Total cost in table does not include cost of land US$9,145.02, construction loans US$12,694.54, technical assistance, and the related administrative expenses and overhead. 3.37 Disbursement for each item would be as follows: (i) civil works: 58 percent of total expenditures; (ii) rehousing 50 percent of total expenditures; (iii) construction loans for infill plots and site servicing plots: 54 percent of total amount of these loans; and (iv) technical assistance and computers: 100 percent of total expenditures. The Bank would not finance the cost of land acquisition, administrative expenses, overhead, and engineering studies. 3.38 Disbursement would be made on the basis of standard Bank disbursement procedures with the exception of construction loans, and expenditures for civil works below $20,000. For these items, statements of expenditures would be required. The Borrower would retain all documentation to support the disbursements and will keep records of all expenditures for examination by Bank missions. 3.39 Special Account. A special account, for all categories for a total amount of US$1.0 million, would be established at the Central Bank to finance eligible expenditures under the loan, and would be replenished against standard withdrawal applications. The Central Bank would keep separate  - 20 - accounts and documentation to support all withdrawals and replenishment to the special accounts and audit such accounts by independant auditors and submit to the Bank within six months of each fiscal year. Assurances to this effect were obtained at negotiations. F. AccounLt and Audits 3.40 Separate accounts for each subproject would be set up to record all project related expenditures. ARRU would prepare and consolidate the accounts for the upgrading component. AFH would submit to CNEL the details of the site servicing expenditures, after which the accounts would be prepared and consolidated by CNEL. CNEL also would keep accounts for all construction and site acquisition loans for both upgrading and sites and services. All accounts would follow the procedures of the Tunisian Plan Comptable Commercial wlhicl. adequately provides for recording all the expenditures. 3.41 CPSCL, CNEL, AFH, and ARRU have accounting systems based on the Tunisian Plnn Comptable Commercial. Each institution has agreed to keep separate accounts for project-related financial transactions and have these accounts audited by independent auditors acceptable to the Bank. In addition, assurances were obtained at negotiations that CNEL. AFH and ARRU would have their annual financial statements audited by independent auditors acceptable to the Bank and submit these accounts to the Bank within six months of the end of each fiscal year. G. Monitoring and Evaluation 3.42 ARRU would be responsible for monitoring, coordinating, and evaluating the upgrading components and AFH for the site servicing components. Both agencies would prepare and send to the Bank (i) semi-annual progress reports not later than six weeks from the end of each semester, (ii) a socioeconomic study at completion of each subproject, and (iii) a project completion report at the end of project implementation. The semi-annual reports would include a performance evaluation of the implementing agencies, the financial status for the project, and key indicators to measure the progress in executing and fulfilling project objectives. The socioeconomic report would analyze the impact of each of the subprojects and the benefits accruing to the beneficiaries as a resuAlt of the project. The completion report would summarize the administrative, institutional and executing experience gained during implementation. At negotiations, assurances were obtained that both ARRU and AFH would prepare the reporta mentioned above. H. Supervision 3.43 Bank supervision of the project would require about 100 man-weeks over the period of project implementation. The basic staff required would include an architect/engineer and a financial analystfeconomist. ARRU and AFH would be responsible for collecting the relevant data that will form the basis for project supervision.  - 21 - IV. COST RECOVERY. BENEFICIARIES SELECTION AND AFFORDABILITY A. Cost Recoverv 4.01 About TD 38 million or about 80 percent of total project costs would be xecovered in rea_ terms directly from the project benefic,aries as follows: for the upgrading c=mponent, the cost of on-site infrastructure works would be recovered through improvement charges under the frontage tax (para. 4.05) and the cost of utility connection and part of the off-site infrastructure through utility tariffs. Tre cost of land acquisition associated with the regularization of ownership and the cost of land for the infill plots would be recovered through d_rect sales. For the site servicing component, the cost of land and servicing would be rocovered directly through sales and loan repayments to CNELT tpara. 4.04). Construction loans under both the upgrading and site servicing components would be recovered through loan repayments to CNEL. The remaining 20 percent of the total project cost would be funded through budgetary allocations and would be recoverable under the central taxation system. This represents the cost of construction and land for comun.ity facilities, the part of off-site infrastructure not covered by the utility tariffs, upgrading studies, and the implementing agencies' admiuistration and overhead. The cost recovery would ensure the replicability of similar projects. Table 4 shows the recovery mode for all project components. Table 4: COST RECOVERY (TD Million) Recovery Mode Total Total Not Total Direct Loan Improv. Utility Directly Directly Main Component Cost Sales Repayment Charges Tariffs Recovered Recovered Land Acquisition 5.7 2.5 2.1 0.0 0.0 4.6 1.1 Off-site Infrastructure 4.9 0.1 0.2 0.0 1.6 1.8 3.1 On-site Infrastructure 18.7 2.8 6.5 9.4 0.0 18.7 0.0 Utility Connections 2.8 0.0 0.0 0.0 2.8 2.8 0.0 Community Facilities 1.6 0.0 0.0 0.0 0.0 0.0 1.6 Construction Loans 8.1 0.0 8.1 0.0 0.0 8.1 0.0 Technical Assistance 0.4 0.0 0.0 0.0 0.0 0.0 0.4 Admin., Overhead & Studies 5.0 0.6 1.3 0.0 0.0 1.9 3.1 Cost Recovered in Real Terms 47.2 5.9 18.2 9.4 4.4 37.9 9.3 Z of Total 100.0 12.5 38.6 20.0 9.3 80.4 19.6 4.02 The pricing policy for land sales would ensure both affordability and effective cost recovery. AFH plots would be differentially priced according to size and location to ensure the affordability of the smaller plots to the low-income segments while in upgrading, cross-subsidies through direct sales of infill plots would reduce improvement charges paid by the occupants of existing plots. The prototype AFH sales contract for each subproject was reviewed by the Bank and the submission of an acceptable sales contract for each subproject would be a condition of elibigility for that subproject.  - 22 - B. Beneficiary Selection 4.03 For the upgrading component, beneficiaries would be selected by a committee comprising the relevant municipality and ARRU. Selec:tion would be made on the following basis: (i) first priority would be to families whose houses would be demolished in order to execute the infrastructure works; (ii) second priority would be to families whose houses would be demolished for reasons of safety, health or precariousness; (iii) third priority would be to other families living on the site who own no house and would have to leave their lodgings in order to reduce overcrowding; and (iv) then on the basis of priorit: of application for those owning no house and with mon"h', household income equal to or less than two times the SMIG. The family situation (age, number of dependents) would also be taken into consideration. For the serviced sites, a selection committee including AFH, CNEL and the municipality concerned would select the beneficiary. Beneficiaries would be selected according to (iv) above provided they can document sufficient income to afford the purchase of the plots. An upper limit of 30 percent of the plots would be reserved for subscribers of CNEL and FOPROLOS savings plans. The selection criteria were discussed at appraisal and were agreed at negotiations. C. Financial Terms and Conditions to Beneficiaries 4.04 For acquiring a serviced plot, the beneficiaries would make a total down payment of 30 percent of the plot price of which one-third would be paid at the time of reservation of the plot and two-thirds in installments during site servicing works. The balance of the price would be financed through a plot acquisition loan from CNEL upon plot delivery at 8.25 percent or 7 percent per annum depending on the beneficiaries income (para. 3.27), over 20 years with a two year grace period during which the beneficiary would pay only interest. An optional construction loan would also be made available on the same terms as the plot acquisition loans. 4.05 The frontage tax used to recover the cost of on-site infrastructure for the upgrading component would be collected by the municipalities over a period of 20 years at an interest which shall include the cost of borrowing by the municipalities from CPSCL. ARRU would provide the municipalities with all the documentation needed for the establishment of the frontage tax for that subproject as soon as all the civil works contracts for a subproject have been concluded. Assurances to this effect were obtained during negotiations. D. Income Profiles, Affordability Analysis and Urban Poverty Impact 4.06 The 1984 income distribution of the urban population of Tunisia was estimated by the mission on the basis of the 1980 household consumption survey  - 23 - and the increase of private consumption per capita during 1980-84 assuming no changes in the urban income distribution pattern. As shown in Annex 13, the median urban household income was TD 183/month in 1984. Incomes of the population in most of the sites proposed under the upgrading pipeline were identified in the socio-economic. surveys carried out by ARRU in 1984. The median income in these sites averages TD 93/household/month and ranges between 55 and 140 TD/household/month. 4.07 UPgrading. As shown in Annex 14, Table 1, the average improvement charge is TD 2.7/household/month or 3.1 percent of the average median income in the sites under the proposed pipeline for which adequate incofie and cost information is currently available. When the percentage of income spent on upgrading is increased to 8 percent, improvement charges would be affordable by an average of 96 percent of the beneEiciaries of the reviewed sites. The table also shows that the smallest infill plot option and a construction loan would be affordable by all the families to be rehoused, since they would not spend more than 25 percent of their monthly income. 4.08 Serviced Sites. As shown in the same Annex, Table 2, loan repayments for acquisition of the smallest AFH plot category (80m.) average TD 6.5/household/month aud would be affordable by 95 percent of all urban households (i.e. all households with incomes of more than TD 65/month). The first (and largest) portion of the down payment required at the start of land development works (10 percent of the plot price) would not exceed 2 months' income. The least cost option of an AFH plot/construction loan would be affordable by 92 percent of all urban households (i.e. all households with incomes of more than TD 79/month). Urban Poverty Impact 4.09 On the basis of the subproject pipelines reviewed, 38 percent of the beneficiaries would be urban poor benefitting from 36 percent of project costs. In the upgrading pipeline, 38 percent of the beneficiaries would be urban poor benefitting from 39 percent of this component's costs and in the site servicing pipeline, 37 percent of the serviced plots would be affordable by the urban poor who would benefit from 30 percent of this component's costs. V. PROJECT BENEFITS AND RISKS A. Proiect Benefits 5.01 The project would assist the Tunisian Government in alleviating the problems associated with poorly serviced communities and would extend the benefits of upgrading such communities to practically every region of the country. It also would provide plots at prices affordable to the low-income groups, thus solving one of the main constraints affecting the housing market. The proposed project would benefit directly about 150,000 persons. Some 90,000 of these persons would benefit from improvement of urban services in their current residence and about 60,000 from acquisition of serviced plots at low prices. The project is geared towards the low income segments of the  - 24 - population, since all the beneficiaries would be below the 50th percentile of the urban income distribution and their median income corresponds to about the 15th percentile of the urban income distribution (see Annex 13 and data available on file on the income distribution of beneficiaries for each site). The project would also indirectly benefit the population of settlements and owners of vacant land adjacent to the project areas through their proximity to improved services and environment. 5.02 Through its institutional approach, the project would develop the capabilities of the two main executing agencies, ARRU and AFH, to identify, study, and execute a pipeline of subprojects on the basis of the agreed criteria. This is a major contribution to the institution building of these two agencies and would help to improve their respective approaches to upgrading and land development. The project would also enhance CNEL's appraisal capabilities and extend its its activities to finance land servicing and acquisition. B. Economic Impact and Rates of Return 5.03 The direct project benefits from the proposed investments can be quantified on the basis of the beneficiaries' willingness to pay for the services provided. The latter is reflected in (i) the difference between existing rents in areas to be upgraded and rents in sites with similar level of service and community facilities as proposed under the project, and (ii) the estimated market value of serviced land to be developed under the AFH pipeline. The indirect project benefits to neighboring areas also would be reflected by increased rental and land values; however, since their measurement is difficult, they have not been included in the benefit stream. 5.04 The economic rate of return of the combined subprojects of the reviewed pipelines is estimated at 20 percent. The rates of return of the two pipelines and tlie results of sensitivity analysis are shown in Table 5, while details are presented in Annex 15. It is expected that the rates of return of all individual subprojects financed under the loan would be within the same range. Table 5: INTERNAL ECONOMIC RATE OF RETURN OF THE PROJECT ARRU AFE Total IERR with: Pipeline Pipeline Project (Z) (2) (X) - Base case 20.7 18.2 20.6 - Cost increase by 20Z 16.8 11.8 15.9 - Benefits decrease by 20% 16.1 10.5 15.1 - Cost increase by 10% and benefits decrease by 10% 16.5 11.2 15.6 - Benefits delayed one year 17.3 13.7 16.6  - 25 - C. Project Risks 5.05 In the past, AFH catered only to middle- and upper-income groups and developed plots ranging from 250-650 mz. It also relied on prefinancing its site servicing through its future beneficiaries. Under the project, AFH will develop much smaller plots (between 80 m2 and 160 mz) and will have to adjust to the land servicing financing system proposed by the project. Although these changes may seem difficult to introduce, the risk associated with them is reduced through AFH's willingness to adjust its policies and the steps it has already taken to change its methods of operation. 5.06 For the first time, the sites are dispersed in many small localities throughout Tunisia, and as a result there will be a large number of small construction contracts, which implies a heavy administrative load. The risk would nevertheless be reduced by the reinforcement of ARRU's staff and by the experience it gained through its involvement in the Third Urban Project. The technical assistance provided to AFH under the proposed project would improve its ability to cope with this issue. VI. ASSURANCES, AGREEMENTS, AND RECOMENTNDATIONS 6.01 Assurances were obtained during negotiations on the following: - Submission of all documents related to subprojects prior to December 31, 1989 (para. 3.07). - Recruitment by AFI of the experts in accordance with Bank guidelines (para. 3.08). - Maintaining the employment of an urban planner and an engineer through the ongoing technical assistance to ARRU up to June 30, 1987 (para. 3.14). - Maintaining the management agreement between CPSCL and BDET (para. 3.15). Making all the arrangements to enable municipalities to borrow from CPSCL (para. 3.16). Introduction of reforms to AFH (para. 3.19). Submission of a plan before June 30, 1987 to convert AFH debts into equity (para. 3.20). Annually review the interest rates in the housing sector not later than December 1 of each year and ensure that the financial intermediaries apply in their loans an interest rate permitting them to cover their cost of capital and enable them to earn a sufficient spread to cover their operations cost (para. 3.30); LCB procurement procedures to be acceptable to the Bank (para. 3.32);  - 26 - Keeping separate accounts and documentation to support all withdrawals and replenishments to the special account (para. 3.39). Auditing by independent auditors of CNEL, AFE and ARRU annual financial statements and project accounts (para. 3.41). Preparation of semi-annual reports, a socioeconomic study, and completion reports by ARRU and AFH (para. 3.42). The selection criteria for project beneficiaries would be adhered to (para. 4.03). - Provision by ARRU to the municipalities of all documents needed for the promulgation of the decrees for the frontage tax as soon as civil works contracts have been concluded (para. 4.05). 6.02 The following documents had been reviewed and agreed during negotiations: - The eligibility criteria for subprojects (para. 3.07 and Annex 4). - The draft contracts between ARRU and the municipalities and between ARRU and the utility companies (para. 3.13). - Draft Subsidiary Loan Agreement between the Government and CPSCL (para. 3.15). - Prototype agreement between municipalities and CPSCL (para. 3.16). - Draft Management Agreement between the Government and CNEL and draft Financing Agreement between AFP and CNEL (para. 3.22). 6.03 Conditions of Effectiveness - Signature of the agreements between ARRU and the utility companies (para. 3.13). - Signature of the Subsidiary Loan Agreement (para. 3.15), the Management Agreement and the AFE/CNEL Financing Agreement (para. 3.22) on terms and conditions satisfactory to the Bank. 6.04 Conditions of Disbursement of Funds Against the Related Expenditure. - Subprojects meet conditions of eligibility and are approved by the Bank (para. 3.07). - For the site servicing component, the implementation of the measures allowing AEH to sell land at its replacement cost and to ensure effective cross subsidies between serviced lots (para. 3.19). 6.05 Subject to agreement on the above, the project is suitable for a loan of US$30.2 million on standard Bank terms.  - 27 - ANNEX I TUNISIA - FOURTh URBAN DEVELOPMENT PROJECT ACENCIES INVOLVED IN PROVtION OF SWELTER AND RELATED ASPECTS Catgeary of Aoene1es Eunet1in cinu 1.flUS" - Ministry of Enuianmnt and Housina (MpE0H) Soc1itt Nattonale nuobili*re Urban and rural housing Institution Public sector housing developer Tun1sienne (SUIT) Agence pour la Rehabilitation et Upgrading of infrastructure in poorly Involved in Third and proposed la Rinovation Urbaine (APRiR) serviced settlements Fourth Bank projects Fonds National d'Amiliration de Upgrading of existing houses Managed by HOEK l'Nabitat (FUAM) Agence Fonci1re d'Habitation (AFH) Land assembly and development Involved in Third and proposed Fourth Bank projects - Hinistry of Social Affairs IMOSA) socidUt de Promotion des Rental housing agency Limited to social security Logements Sociaux (SPROLS) subscribers 2. FIIUME Ministry of Finance and Economy (MOF) Caisse Nationale d'Epargne-Logement Provides contractual savings and Involved in Third and proposed (CdELI (also under MOEH) finances housing construction loans Fourth Bank projects oFnds pour la Promotion du Logement Finances housing for low-income Managed by CNEL des Salaries (FOPROLOS) salaried persons -tinistrv of Planning (MOP) Programe de Diveloppement Rural (PDR) Finances rural housing Managed by the Government 3. INFRASTRUCTSIRE - Hinistrt of Eau1ment and Housina (M4OH) Direction de l'Amenagement du Regional and urban physical planning Ter;itoire COAT) Office National d'Assainissement (ONAS) Sewage collection, disposal and National monopoly. Involved in treatment Second. Third and proposed Fourth Bank projects - Ministrv of Agriculture (MOAt Sociite Nationale d'Exploitatian et Water production and distribution National monopoly. Involved in de Distribution des Eaux (SONEDE) Second, Third and proposed Fourth Bank projects -Ministry of Finance and Economv Soci1te Nationale d'Electriciti et Power production and distribution National monopoly. Involved in de Gaz (STEGt Second. Third and proposed Fourth Bank projects 4. MUNICIPAL SERVICES (via municipalities) - Ministry of Interior (MOT) Direction des Collectivitis Locales Relation with local government: solid waste collection. street maintenance Caisse des Prets et de Soutien des Finances municipal projects and Involved in Second. Third and Collectivites Locales (CPSCL) infrastructure upgrading proposed FourLh Bank projects (also controlled by MOF) This table is an update of a table in the Housing Sector Review Report  - 28 - TUNISIA: FOURTH URBAN DEVELOPMENT PROJECT Annex 2 PROJECT PIPELINE Site / Location AREA (IN HA) NUMBER OF PLOTS TOTAL COST IN (MOO)TD Total Built Exist.Infill Total /Ha Total /Ha /Plot A Upgrading KEBILI Nozla 29.16 24.00 800 0 800 33.33 1,152 48.01 1.44 MEDNIN Jlidet 24.00 19.14 430 90 520 27.17 959 50.11 1.84 MAKTAR El Ksiba 5.60 5.30 315 75 390 73.58 573 108.04 1.47 TOZEUR Mintakt 36.00 29.00 473 160 633 21.83 960 33.10 1.52 BEN AROUS S'Mosbah 40.00 35.40 865 252 1,117 31.55 1,783 50.38 1.60 KASSERINE Ennour 6E.00 39.90 1,080 120 1,200 30.15 2,299 57.77 1.92 5IDI BOUZID 25.00 25.00 700 0 700 28.00 1,380 55.21 1.97 6AFSA Moalla 47.00 43.00 1,180 20 1,200 2Z7.91 1,150 26.75 0.96 BEJA M'Zara 40.00 28.00 1,250 0 1,250 44.64 1,523 54.39 1.22 KAIROUAN Menchia 75.00 65.00 1,700 304 2,004 30.83 2,185 33.62 1.09 MENZEL BOURGUIBA 12.00 12.00 229 162 391 32.58 1,314 189.S0 3.36 SOUSSE El Ghardane 23.00 21.50 600 460 1,060 49.30 3,141 146.10 2.96 EL FAHS El Mechta ll.S 11.50 300 55 355 30.87 1,228 106.80 3.46 KELIBIA Lahouache 4.80 4.80 121 24 145 30.21 529 110.26 3.65 TATAOUINE Brourmet 20.00 20.00 636 0 636 31.80 890 44.51 1.40 MOKNINE Khereddine 11.08 10.30 230 67 297 28.83 948 92.08 3.19 GABES Mintakt 38.00 36.75 1,267 0 1,267 34.48 1,709 46.51 1.35 MAHDIA 17.18 17.18 508 14 514 29.92 983 57.22 1.91 OTHERS SITES 75.00 70.00 2,100 350 2,458 35.00 3,291 47.02 1.34 ------------------------------------------------------------------__---------__ Subtotal A 594.24 517.57 14,776 2.153 16,929 32.70 28,800 54.09 1.65 B Site Servicing AREA (IN HA) ------------------ Total Social Kasserine 8 14.69 6.00 320 53.33 675 112.43 2.11 Fouchana 19.00 10.00 556 55.60 1,356 135.55 2.44 Le Kef I 16.19 5.00 278 55.60 671 134.22 2.41 Tebourba 20.00 10.00 556 55.60 1,201 120.11 2.16 Khelidia 27.00 12.00 667 55.58 1,498 124.85 2.25 Belli 8.00 4.00 222 55.50 481 12e.19 2.17 Sejnane 20.82 8.32 458 54.09 945 113.59 2.10 Siliana II 7.23 5.08 278 55.60 594 118.72 2.14 Bargou 6.00 3.00 167 55.67 340 113.23 2.03 Dahtani 14.33 8.00 444 SS.50 871 108.82 1.96 Tabarka 20.00 18.80 556 55.60 1,152 115.21 2.07 Zaghouan 20.00 12.00 667 55.5B 1,617 134.75 7.42 Zriba 12.00 6.00 333 55.SO 671 111.80 2.01 Gabes I 30.00 10.00 556 55.60 1,471 147.06 2.64 Tataouine 20.00 10.00 556 55.60 1,168 116.82 2.10 Kairouan 30.00 10.00 556 55.60 1,290 128.95 2.32 Sbiba 7.08 4.00 222 55.50 439 109.78 1.98 Skhira ll.SS 6.00 333 S5.50 652 108.71 1.96 Nafta 16.00 8.00 444 55.50 1,012 126.45 2.28 Mareth 11.56 6.00 333 55.50 652 108.61 1.96 Subtotal B 331.45 153.32 8494 55.40 18,756 122.33 2.21 Total A+B 925.69 670.99 14,776 2,153 25,423 37.89 46,756 69.68 1.84  - 29 - Annex 3 Summary Cost Estimate By Main Component ----------------------------------------- TO Million USS Million Foreign Exchange Component Local Foreign Total Local Foreign Total X A Upgrading Pipe Line _______________________ Land Acquisition 1.99 0.00 1.99 2.85 0.00 2.85 0.0% Rehousing 0.13 0.13 0.25 0.18 0.18 0.36 50.0% Off Site Infrastructure 1.38 1.96 3.34 2.80 2.77 4.77 58.0% On Site Infrastructure 2.94 4.06 6.99 4.20 5.79 9.99 58.0% Utility Connections 0.91 1.26 2.18 1.31 1.80 3.11 58.0% Community Facilities 8.58 0.70 1.20 0.72 0.99 1.71 58.0% Construct. Loans 1.70 2.04 3.74 2.43 2.91 5.34 SS.8% Admlnist. OH & Studies 2.39 0.00 2.39 3.42 0.00 3.42 0.0% -------------------------------------------------- Base Cost A 11.94 10.14 22.08 17.06 14.48 31.55 45.9% Contingencies 3.20 2.72 S.91 4.57 3.88 B.45 45.9% Total Cost A 15.14 12.85 28.0B 21.64 18.36 40.00 45.9% -----------------------------------------------------------------__------ B Site Servicing Pipe Line _______________________ Land Acquisition 2.4B 0.00 2.48 3.55 0.00 3.55 O.8% Off Site Infrastructure 0.09 0.12 0821 0.12 0.17 0.30 58.0% On Site Infrastructure 2.98 4.11 7.09 4.25 5.87 10.13 58.0% Construction Loans 1. 9 1.98 3.67 2.36 2.88 S.24 55.8% Admnist. OH & Studies 1.47 0.00 1.47 2.10 0.00 2.10 0.O% -------------------------------------------------- Base Cost B 8.71 6.21 14.92 12.38 8.93 21.31 41.9% Contingencies 2.24 1.60 3.84 3.20 2.2B 5.48 41.7% Total Cost 8 10.95 7.81 18.76 15.58 11.21 26.79 41.9% C Technical Assistance 0.00 0.36 0.36 0.00 8.S1 0.51 10W.0% Contingencies 0.00 0.07 0.07 0.00 0.10 8.10 100.0% Total Cost C 0.00 0.43 0.43 0.00 0.62 0.62 1Z.0% -----------------------------------------------------------------________ D Total Base Cost 20.65 16.71 37.36 29.45 23.93 53..;8 44.8% E Contingencies 5.44 4.39 9.82 7.77 6.27 14.03 44.8% F Total Cost 26.09 21.10 47.18 37.22 30.19 67.41 44.8%  - 30 - ANNEX 4 Page 1 of 2 TUNISIA - FOURTH URBAN DEVELOPMENT PROJECT ELIGIBILITY CRITERIA A. Upgrading 1. ARRU would present to the Bank a file containing the preliminary studies, the cost estimates and the implementation schedule for the sites selected out of the identified pipeline for approval. Prior to Bank's approval, the agreement between ARRU and the concerned municipality must be signed. The Bank's final approval to finance the site would require: (a) preliminary designs be acceptable economically and technically; (b) the financial plan be satisfactory. This implies that a decree allowing the municipality to borrow from CPSCL for at least 58 percent of needed funds be promulgated. A municipality is allowed to borrow from CPSCL if its debt ceiling does not exceed 15 percent of its operating cost. The balance of the needed funds could be from the municipality's own resources, other government programs; (c) a minimum acceptable density of 200 persons per hectare for sites in all governorates except those in the south where a minimum density of 150 persons/hectares is permitted. The density is calculated net of areas needed for primary infrastructure, right of way and main comunuity facilities; (d) Off-site infrastructure works be approved by the concerned ministries and authorities and its cost not exceed 20 percent of the total civil works cost for the site (except for some' exceptional cases where it is warranted due to specific site conditions). B. Site Servicing 2. AFH would present for the Bank's approval the pr-.liminary studies, cost estimates and implementation schedule for the sites selected out of the identified pipeline for the site servicing component. Prior to Bank's approval, a favorable appraisal report must be received from CNIEL. The Bank's final approval to finance each of the subprojects would require: (a) proposed standards be acceptable economically and technically; (b) demand for the plots be justified and documented by plot type and income category with priority given to low-income families; (c) sites be within the communal perimeter and are easily serviced; (d) cost of off-site infrastructure does not exceed 10 percent of total cost of site servicing;  -31- ANNEX 4 Page 2 of 2 (e) all individual plots be affordable to those families whose income La less than 2 times the minimum monthly wage; (f) each subproject have a minimum of 150 plots and at least 75 percent of plots have an area less than 130 ma for all regions except in the south where the area is increased to less than 150 m'; (g) the density be between 50-60 dwellings/hectares in all regions except the south where it is between 40 and 50 dwellings/hectare net of areas needed for primary infrastructure right of way and main community facilities; (h) the saleable land be at least 70 percent of the subproject area with a maximum of 30 percent for roads, open spaces and community facilities; (i) financial plan and cash flow demonstrate the capacity of AFE to execute each subproject as scheduled; Ci) submission of an acceptable model sale contract between AFB and the beneficiary. Sales price would cover: - land at replacement cost; - infrastructure coat at the time of sale; - overhead, studies, and financial charges; (k) indication of the nmount of cross subsidies between the price of plots destined to low-income buyers and other plots; and (1) the monthly payments for acquisition of a serviced plot not to exceed 15 percent of the beneficiary monthly income or a total of 33 percent if added to the construction loan.  - 32 - ANNEX 5 Page 1 of 3 TUNISIA - 'OURTH URBAN DEVELOPMENT PROJECT TECHNICAL ASSISTANCE Pr'ofile of Experts 1. Land ManaRement Expert Qualifications: University degree in law, economics or engineering Experience: Extensive experience in land management and use related issues at either universities or public agencies Languages: Fluent in French Duration of Contract: One to two years Starting Date: Mid 1986 Responsibilities: The land management expert would review and study with AFH the following: (a) AFI policies towards land acquisition and assembly; (b) identify AFN future land needs; (c) define a program and schedule for future land acquisition; (d) conduct feasibility and financial analysis on land issues; (e) assess present value of AFE land stock; and (f) train APR staff in land issues. In addition to the above, the land management expert would assist in the preparation of reports on land issues and help AFE to develop a sound policy toward land acquisition and disposal. Before completion of his assignment, the expert would prepare a comprehensive report on land issues with detailed recommendations for proposed action. 2. Administration and Institution expert Qualifications: University degree in public administration, management or organisational aspects of institutions Experience: Past experience in organisational aspects of institutions, preferably dealing with land development. Experienced in accounting and finance Languages: Fluent in French Duration of Contract: One to two years Starting Date: Mid 1986  - 33 - ANNEX 5 Page 2 of 3 Responsibilities: The administration and institution expert would: (a) propose more efficient ways for reporting, controlling and evaluating AFH activities; (b) study the needs for training AFH's staff; (c) study means to improve AFH's financial reporting and accounting practices; and (d) prepare and organize studies and seminars on issues related to AFH activities. 3. Computer expert Qualifications: Knowledge and experience in programming and devising computerized systems for accounting, spread sheets, and billing and collection Languages: Fluent in French Duration of Contract: 9 months to one year Starting Date: Mid to end 1986 Responsibilities: The expert would establish: (a) a computerized system to keep track of AFH land stock and accounting system. He would also computerize and organize the billing and collection to and from AFH beneficiaries; and (b) train AFH staff on the use of micro-computers.  - 34 - ANNEX 5 Page 3 of 3 TUNISIA - FOURTH URMAN DEVELOPMDNT PROJECT TECHNICAL ASSISTANCE COSTS ESTIMATES Tot..l Cost Man-year in US$ (000) 1. Foreign Expert - Land inangement expert 1 - Administration and inatitutional expert 1 - Accounting and computer expert 0.75 Total 2.75 450 2. Computer EpuLmnts - micro-computers, printers and related software 60 Total base Cost 510 Price contingencies 100 Total T.A. and computer equipment 610 Note: Recruitment of experts would be completed no later than December 31, 1986.  - 35 - ANNEX 6A Page 1 of 5 TUNISIA - FOURTH URBAN DEVELOPMENT PROJECT PROJECT INSTITUTIONS CAISSE NATIONALE D'EPARGNE-LOGEMENT (CNEL) 1. CNEL was established in 1974 under Law No. 74-224, which introduced the contractual savings concept to Tunisia. It is an autonomous, public savings and loan agency under the joint tutelage of the Ministries of Finance and HOES. CNEL's role is to mobilize domestic savings for housing construction by offering attractive terms to households subscribing to a savings contract. In less than 10 years, it has become the main housing finance institution, accounting for 33 percent of institutionally-financed housing investment during the Fifth Plan. CNEL also has managed FOPROLOS since 1978. FOPROLOS is a Government fund, financed by a tax on wages, that grants loans to finance moderate cost dwellings to earners with wages up to one and a half times the minimum wage. 2. CNEL employs about 540 persons, it has directorates for personnel and social development, administrative services, credits, inspection and control, computerization, financing, exploitation and promotion, legal and claims, and a separate division to manage FOPROLOS. CNEL has moreover, divisions for legal studies, computerization and technical matters. Its organization chart is attached. 3. Subscribers to CNEL savings contracts may borrow up to twice the amount saved plus accumulated interest, with a ceiling of TD 13,000. The contractual savings period is either 4 or 5 years, which entitles the subscriber to a 10 - or 15-year loan, respectively. Savings used to earn 4-percent interest p.a. compounded once a year, plus a Government bonus of 2 percent p.a. (increased to 3 percent p.a. for savings made in foreign exchange), recently the interest paid to holders of CNEL savings contract was increased to 6.75 percent and the Government subsidies were removed. 4. The initial target was to attract 8,000 savings contracts annually, but this proved to be a great underestimate of the potential. By the end of June 1984, savings contracts numbered 141,648 for a total amount of savings of TD 275.1 million (US$343.9 million). Recent trends (1980-1984) show an annual average increase of about 20,875 net savings contracts and of TD 23.1 million, but declining, in net savings mobilized. By the end of 1985, the balance sheet showed TD 168.9 million of savings balances by savers. 5. When the savings contracts mature, beneficiaries are entitled to a "normal" loan, subject to the lowest of four ceilings: (i) an amount up to twice the accumulated savings and interest; (ii) TD 8,666; (iii) a total loan plus accumulated savings plus interest not to exceed TD 13,000, or (iv) a debt service not higher than one-third of subscriber's income. A sample analysis, however, shows that 48 percent of the loans exceed twice the savings, thus  - 36 - ANNEX 6A Page 2 of 5 indicating that CNEL's loan committee is flexible in fixing the loan amount. The sum of the loan and accumulated savings and interest must be used to finance either the construction, acquisition, or extension of a principal residence. In the case of acquisition, it must be a new house built by an MOEH-approved developer according to an MOEH-approved building permit; extensions must be at least one-third of the size of the existing structure. 6. The interest rate charged by CNEL for its loans was 5.5 percent p.a., of which 1 point is paid by the Government directly to CNEL, leaving borrowers a 4.5 percent net interest rate. In March 1986 however, the rates were increased to 8.25 percent and the Government subsidies were removed. Loans are guaranteed by a first mortgage security held by CNEL. Borrowers are required to have life insurance equal to the loan amount and fire insurance for the house. A creditworthy co-borrower or loan insurance is also required for borrowers aged 40 (with 5-year savings/15-year loan maturity contracts) or 46 (with 4-year savings/10-year loan maturity contracts). This is a conservative requirement given that the life expectancy at birth is currently 61 years in Tunisia. 7. By the end of June 1984, CNEL had granted 27,576 housing loans for a total of TD 168.8 million, or an average loan amount of TD 6,122. About 57 percent of these loans were the advance type, 30 percent were normal and 12 percent were immediate loans. In terms of outstanding loan amounts, at the end of 1985, the balance sheet showed TD 121.7 of outstanding mortgage loans to savers. "he distribution is different mainly because advance loans are consolidated into normal loans after two years. 8. CNEL also prefinances housing construction through SNIT and private developers and land development through AFH. The interest rate was inmreased in 1986 to 10.5 percent nominal (11.259 APR) and the maturity up to 3 years. By the end of June 1984, CNEL had prefinanced 42,351 SNIT dwellings amounting to TD 179 million as well as 3,081 dwellings built by private developers amounting to TD 13.7 million; at the end of 1985, outstanding construction loans amounted to TD 106.2 million. 9. CNEL currently is responsible, through an agreement with the Municipality of Tunis, for cost recovery under the Second Urban Development Project in Tunis and manages through a Management Agreement with the Government, Bank and Government funds for the sites and services component in the Third Urban Development Project. Under the proposed Fourth Project, it would manage Government's and Bank's funds and would also appraise and finance the site servicing component of the project through a financial agreement with AFK; this financing is expected to be less than 12 of CNEL's lending activity in any one year and the risk exposure is minimal. 10. Within the scope of the project, CNEL would reinforce its credit department to appraise AFH subprojects. The credit department, after appraisal of the subprojects, would submit the files to CNEL's loan committee for examination and then to CNEL's president for approval. !Te subproject file would then be sent to the Bank for inclusion in the line of credit.  - 37 - ANNEX 6A Page 3 of 5 11. At the end of 1985, CNEL's assets amounted to TD 319.07 million. Not all the funds so mobilized are invested in mortgage loans: at the end of 1984, only 66 percent of savings plans and 68 percent of FOPROLOS rcsources had been converted into loans; the balance was used to provide construction loans to developers, mainly SNIT. Because of the latter, the yield on the loan portfolio is high (7.5 percent in 1982) given that the nominal rate on savings loans was 5.5 percent. Since CNEL relied on savings that were remunerated at 4 percent, it still has a comfortable spread, which at 3.3 points in 1982 was equivalent to 44 percent of its average yield on its portfolio. Since CNEL has no capital, but only a token initial Government contribution of US$0.5 million, the debt-equity ratio is not a meaningful measure. However, the ratio of savings deposits and long-term debts over net worth is high even for a financial institution (24.7:1 at the end of 1984). Recapitalization under some form should be considered in the near future as cash flow generation is not sufficient to ensure the needed increase in net worth. However, as long as savings remain stable, that is new deposits largely exceed withdrawals and account cancellations, CNEL's financiel equilibrium is not jeopardized. CNEL's balance sheets up to 1984 are attached. 12. CNEL's Performance. CNEL's success in attracting a substantial portion of household savings is indisputable although the net savings collected peaked in 1982 (TD 27.2 million) and declined since (TD 21.8 million in 1984). It has been, nevertheless, less successful in channeling funds into housing loans and as a result had built up considerable liquidity. The main reasons leading to this situation are the bottlenecks in the housing production system as well as an inflexible approach to accommodatC changing demand/supply conditions. Both issues are being addressed under the proposed project. 13. CNEL is at present studying with Bank's help and in conjunction with the MOEH and MOF methods to improve its operation by raising the ceilings of its loans to meet the rise in construction costs and is contemplating extending the terms of its 5-year savings contract. It is also investigating possibilities of diversification by starting savings and loan schemes for (i) plot acquisition, (ii) housing improvement, and (iii) acquisition of existing houses as well as opening of checking accounts for its beneficiaries. These measures are in conformity with the recommendations of the green cover report on the institutional housing finance sector in Tunisia (July 18, 1984). 14. On the whole, CNEL is well managed, has consistently shown profit, is capable of performing the tasks assigned to it by the proposed project of managing Bank and Government funds for prefinancing AFH's land development operations and of providing loans for land acquisition and housing construction.  - 38 - Page 4 of S TUISTA - rain urnA. orwopnT mo.leT CASE MATIOALK b'PCILCST(UL UNAUDTTED BALANCE SHEETs 'gag-long (TO 000 1980 1981 1982 1983 1984 1985 ASSETS Current Assets Cash 7.521 14.493 27.87Z 26.030 13.875 5.562 Prefinancing of developers 34.776 30.160 37.071 67.718 99.43 106.167 Loans maturing within the year 1.315 967 2.816 3.734 4.000 4.98S Others (short-term receivables) 4.075 3.587 5.698 16,845 S.100 2,494 Loans on special sources - 5.845 4.867 5.4a9 5.516 - Nedium-term loans /a 15.165 - - - - Long-term loans 48.059 62.034 72.215 83.047 98,704 121.730 of which: saving loans lh (23.6091 (35.630) (46.712) (63.021) (82.089) (100.864) immediate loans /l (8.299) (7.422) (6.374) (5.1881 (4.153) (16.354) bridge loans /d (14.351) (15.415) (16,425) (12.994) (12.462) (2.934) SUIT /a (1.800) (3.567) (2.704) (1.844) _ (1.578) less provision for risk 5M70 5 70 9S 1la4 I S1s Net loans portfolio 47.489 61.464 71.345 82.051 97.520 120.094 Others - 3.588 5.967 S.750 6.286 7.953 FOPROLOS loans 12,034 23.989 34.197 65.975 87.238 66.367 Fixed assets (net) aaz 101 1011 1J3.J 1 500 2z4E -545 Total Assets 121I AZ 14 4.830 l 5J1 lILA219 2 456 319.076 Current Liabili ties Short-term debts 8.766 6.836 6.755 6.528 5.389 4,331 Mousing savings 61.422 78.075 105.295 131.927 150.S63 168.933 Other (short-tern payables) 5.078 7.803 9.371 16.049 IS.841 20.598 tong-tern debts 29.047 14.811 13.11S 11.353 10.124 6.414 of whtch: CNEL ratio /I (8.154) (6.486) (4.818) (3.150) (2.082) (2.900) AL USAIO loans ia (8.326) (2.076) (2.067) (2.046) (2.016) (1.975) lt United Arab Emirates (10.899) (8.325) (6.230) - maturing within the year (1.668) - - (6.157) (6.067) (1.539) FOPROLOS scheme 15.436 31.626 48.503 95.066 127,817 103.930 met worth 4.083 5.679 7.599 8.267 11.722 14.870 of which: Government grants (420) (420) (420) (420) (420) (420) Reserves A2-.S3i .J52591 (7. 17.l OJ47L Zl 1302 -114-413