Tunisia - Investment and Industrial Investment Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6865 PROJECT PERFORMANCE AUDIT REPORT TUNISIA BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) (LOANS 1189, 1504, AND 1505) June 29, 1987 Operations Evaluation Department 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. ABBREVIATIONS AFI Agence Fonciere Industrielle (Industrial Estates Agency) API Agence de Promotion des Investissements (Investment Promotion Agency) BDET Banque de Developpement Economique de Tunisie CCCE Caisse Centrale de Cooperation Economique CNEI Centre National des Etudes Industrielles COFIT or COFITOUR Compagnie Firanciere et Touristique DFC Development Finance Company ERR Economic Rate of Return FOPRODI Fonds de Promotion et de Decentralisation Industrielle (Industrial Promotion and Decentralization Fund) KfW Kreditanstalt fur Wiederaufbau KIC Kuwait Investment Company ONT Office National du Tourisme PMM Peat, Marwick, Mitchell and Co. (auditors) SIDA Swedish International Development Authority SSE Small Scale Enterprises SSI Small Scale Industry UTICA Union Tunisieane de l'Industrie, du Commerce, et de l'Artisanat CURRENCY EQUIVALENTS SDR 1.00 = dinars (TD) .8486 (as of March 1985) Official Exchange Rate: Dinar (TD) Per U.S. Dollar Period End of Period Period Average 1973 0.4451 0.4200 1974 0.4065 0.4365 1975 0.4253 0.4023 1976 0.4309 0.4288 1977 0.4121 0.4290 1978 0.4034 0.4162 1979 0.3959 0.4065 1980 0.4187 0.4050 1981 0.5157 0.4938 1982 0.6158 0.5907 1983 0.7302 0.6785 1984 0.8666 0.7768 1985 0.8561 0.8345 FISCAL YEAR January 1 to December 31 FOR OFFICIAL M ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Ofic* at oDecti-Geeal Opwasom Evotion June 29, 1987 MHMRANDUM TO THE EXECUTIVE DIRECTORS AND TRE PRESIDENT SUBJECT: Project Performuanc Audit Report on Tunisia - Banque de Developpement Economique de Tunisie (BDET) (Loans 1189, 1504 and 1505) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Tunisia - Banque de Developpement Economique de Tunisie (BDET) (Loans 1189, 1504 and 1505)" prepared by the Operations Evaluation Department. Attachment This docuaent has restricted distribution and may be used by recipients only In the performance of their of1cial duties. Its contents may not otherwise be disclosed without World Bank authoriation. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT TUNISIA BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) (LOANS 1189, 1504, and 1505) TABLE OF CONTENTS Page No. Preface********************************** i Basic Data Sheets........o......o.................................. ii Evaluation Summary ................................................. vii PROJECT PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND................................................*#... 1 The Industrial Sector......................................... 1 The Financial Sector.............. 2 Banque de Developpement Economique de Tunisie................ 3 II. PROJECT OBJECTIVES ......................................... 4 III. UTILIZATION OF BANK FUNDS FROM THE SIXTH AND SEVENTH LOANS.... 4 IV. INSTITUTIONAL DEVELOPMENT..................................... 5 V. OPERATIONAL AND FINANCIAL PERFORMANCE.o.. ................... 6 Liquidity and Debt........oo................................ 7 Financial Position................. ......................... 8 VI. SMALL SCALE INDUSTRY (SSI) DEVELOPMENT PROJECTS............... 9 Project Design................................................ 9 Objectives.................................................... 10 Project Implementation........................................ 10 1. The Financial Components.................................. 10 (a) Institutional Arrangements..o........................ 10 (b) Utilization of Bank Funds.........0................. 11 (c) Characteristics and Problems of Subprojects.......... 12 2. Tec&nical Assistance...................................... 13 VII. SUSTAINABILITY................................................ 13 VIII. CONCLUSIONS AND LESSONS LEARNED.............................. 15 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 authorisation. TABLE OF CONTENTS (continued) Page No. ATTACHMENTS Attachment 1 - Approvals and Disbursements of Loans and Investments, 1975-1983............................ 17 Attachment 2 a-. Balance Sheets, 1975-1985........................ 18 Attachment 3 - Income Statements, 1975-1985...*....*........... 19 Attachment 4 - BDET Gains and Losses (-) Due to Foreign Exchange Fluctuations............................ 20 APPENDIX - Comments Received from the Borrower .................... 21 PROJECT COMPLETION REPORT ON THE SIXTH LOAN TO BDET I. INTRODUCTION................................................... 27 II. THE SIXTH LOAN TO BDET.................. 28 III. CONCLUSION............... ..................................... 32 PROJECT COMPLETION REPORT ON THE SSE AND SEVENTH LOAN TO BDET I, INTRODUCTION..................................... .............. 37 II. THE PILOT SSE ASSISTANCE PROGRAM........................... 40 III. THE SEVENTH LINE OF CREDIT TO BDET......................... 51 IV. CONCLUSION......... ............ .............................. 63 PROJECT PERFORMANCE AUDIT REPORT TUNISIA BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) (LOANS 1189, 1504, AND 1505-TUN) PREFACE This is a performance audit under Loans 1189-TUN and 1504-TUN to the Banque de Developpement Economique de Tunisie (BDET) guaranteed by the Government of Tunisia, and Loan 1505-TUN, an SSI project, made directly to the Government of Tunisia. Loan 1189-TUN, in the amount of US$20 million, was approved in January 1976 and fully disbursed in April 1981, ten months behind schedule. Loans 1504-TUN and 1505-TUN, in the amount of US$30 million and US$5 million respectively, were appraised together and approved in December 1977; they were disbursed in November 1983 and February 1984 with a delay of five and eight months respectively. A small amount was cancelled in each of the three loans. Loans 1189 and 1504 were the Sixth and Seventh extended to BDET. Earlier loans to BDET have been audited (Loans 658-TUN, 798-TUN and 881-TUN, PPAR No. 3611 dated September 23, 1981). The Project Performance Audit Report consists of the Project Per- formance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department and Project Completion Reports (PCRs) prepared by the Europe, Middle East and North Africa (EMENA) Regional Office of the Bank. The PCRs were based on dnta provided by BDET and cover the period 1975-83, the closing date for the Loaa 1505-TUN. The PPAM is based on the PCRs, the Staff Appraisal and the President's Reports, the Loan documents, sector and economic reports, the summaries of the Board discussions, study of project file and discussions with Bank staff. An attempt has been made in the PPAM to update the analysis and comment on more recent developments. The PCRs describe the experience with the three projects, providing an analysis of BDET's institutional development, operational and financial performance and the use of the Bank's funds. The PPAM examines the design of the projects, elaborates on particular aspects of :he institution,,l develop- ment of BDET, discusses the experiences of Bank's first SSI project in Tunisia, and draws lessons from the project experience. Comments received from the Borrower have been taken into account as appropriate in finalizing the report and are reproduced as an Appendix. PROJECT PERFORMANCE AUDIT REPORT TUNISIA BANQUB DR DEVELOPPEMENT ECONOMIQUE DR TUNISIE (BDET) (LOAN 1189-TUN) BASIC DATA SHEET MEY PROJECT DATA (US$ aillions) Item Original Actual Loan amount 20.0 20.0 Disbursed 20.0 19.6 Cancelled - 0.4 outstanding to IBRD as of 04/30/87 - 3.26 CUMULATIVE LOAN DISBURSEMENTS (US$ millions) 1976 1977 1978 1979 1980 1981 (i) Planned 2.5 9.0 13.0 17.0 20.0 20.0 (ii) Actual 0.0 7.4 14.0 19.1 19.3 19.6 (iii) (ii) as 2 of (1) 0 82 107 112 96 98 OTHER PROJECT DATA Item Oriinal Loan Dates Actual Dates Negotiation I - 01/13/75 Negot ation II -- 06/12/75 Negotiation III - 09/03/75 Board Approval - 01/06/76 Loan Agreement Signed - 01/26/76 Effectiveness 04/26/76 06/07/76 Closing 06/30/80 05/01/81 Final Disbursement 06/30/80 04/30/81 - iii - MISSION DATA /a No. of No. of Date of Item Month/Year Weeks Persons Manweeks Report Appraisal 11/73 3 2 6 04/74 A number of subsequent visits (e.g., in June and August 1975) of varying duration were made in Tunisia by Bank staff through September 1975 as post- appraisal missions. Supervision I 07/76 1.5 3 4.5 07/13/76 Supervision II 03/77 2 3 6 n.a. Supervision III 06/77 2 3 6 07/06/77 Supervision IV 07/78 1 3 3 07/14/78 Supervision V 11/79 3 2 6 11/12/79 Subsequent supervision missions also dealt with Loan 1504-TUN (approved in 1977); for list of such missions, see PCR on Loan 1504-TUN. FOLLOW-ON PROJECT Seventh Loan to BDET (Loan 1504-TUN) approved in December 1977. - Iv - PROJECT PERFORMANCE AUDIT REPORT TUNISIA BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) (LOAN 1504-TUN) BASIC DATA SHEET KEY PROJECT DATA (US$ millions) Item Original Actual Loan amount 30.0 30.0 Disbursed 30.0 29.3 Cancelled - 0.7 Outstanding to IBRD as of 04/30/87 12.9 CUMULATIVE LOAN DISBURSEMENTS (US$ millions) 1978 1979 1980 1981 1982 1983 1984 (i) Planned 1.0 7.0 15.4 25.2 30.0 30.0 30.0 (ii) Actual - 11.6 22.4 26.4 27.3 28.6 29.3 (iii) (ii) as % of (i) - 166 145 105 91 95 98 OTHER PROJECT DATA Item Original Loan Dates Actual Dates Negotiations -- 11/11/77 Board Approval -- 12/20/77 Loan Agreement Signed -- 01/25/78 Effectiveness 03/31/78 10/13/78 Closing 12/31/81 06/30/83 Final Disbursement 12/31/81 11/15/83 MISSION DATA /a No. of No. of Date of Item Month/Year Weeks Persons Manweeks Report Appraisal 06/77 2 4 8 11/29/77 Supervision I 07/78 1 3 3 07/14/78 Supervision II 03/79 2 3 6 06/05/79 Supervision III 10/79 2 2 4 11/29/79 in 1980, 1981 and 1982, four supervision missions were conducted in the con- text of the appraisal and supervision missions of the SSI and EMI projects. Supervision IV 5/83 1 1 1 06/02/83 /a Supervision of Loans 1504-TUN and 1505-TUN was usually carried out simultaneously. - v - PROJECT PERFORMANCE AUDIT REPORT TUNISIA BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) (LOAN 1505-TUN) BASIC DATA SHEET KEY PROJECT DATA (US$ millions) Item Original Actual Loan amount 5.0 5.0 Disbursed 5.0 3.94 Cancelled - 1.06 Outstanding to IBRD as of 04/30/87 - 1.6 CUMULATIVE LOAN DISBURSEMENTS (US$ millions) 1978 1979 1980 1981 1982 1983 (i) Planned 0.1 27 5T. (ii) Actual - - 0.8 2.8 3.4 3.9 (iii) (ii) as Z of (1) - - 30 64 68 78 OTHER PROJECT DATA Item Original Loan Dates Actual Dates Negotiations -- 11/11/77 Board Approval -- 12/20/77 Loan Agreement Signed 02/31/78 01/25/78 Effectiveness 03/31/78 10/13/78 Closing 12/31/81 06/30/83 MISSION DATA /a No. of No. of Date of Item Month/Year Weeks Persons Manweeks Report Appraisal 06/77 2 4 8 11/29/77 Supervision I 07/78 1 3 3 07/14/78 Supervision II 03/79 2 3 6 05/05/79 Supervision III 10/79 2 2 4 11/29/79 In 1980, 1981 and 1982, four supervision missions were conducted in the con- text of the appraisal and supervision missions of the SSI and EMI projects. Supervision IV 5/83 1 1 1 06/02/83 /a Supervision of Loans 1504-TUN and 1505-TUN was usually carried out simultaneously. - vi - FOLLOW-ON PROJECT SSI I Project (Loan 1969-TUN) approved in April 1981. - vii - PROJECT PERFORMANCE AUDIT REPORT TUNISIA BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) (LOANS 1189, 1504, AND 1505-TUN) EVALUATION SUMMARY Introduction The three loans under review are all related to the Banque de Developpement Economique de Tunisie (BDET); Loan 1505-TUN, an SSI operation, is made to the Government of Tunisia with BDET as an administrator; Loans 1189 (the sixth) and 1504-TUN (the seventh) were traditional DFC credit lines made directly to BDET. This financial institution was established in 1959 under the name of Societ6 Internationale d'Investissement (SNI), then changed to BDET in 1973. In the first 10 years, BDET simply played the role of a supplier of equity fund for public sector investments. Since the 1970s, it has been increasingly involved in financing private sector investments in industry and tourism. In keeping with the Bank's policy orientation in the second half of the 1970s, BDET has also been active in financing Small Scale Industries (SSI) (paras. 5-6). Objectives The sixth and seventh loans had the same basic objectives: re- source transfer and institution building. The seventh loan also sought to strengthen BDET's borrowing capability in international financial markets. The third loan had as the sole objective the financing of new SSE projects, complementing the seventh loan which had a $2 million component to finance expansion of existing Small Scale Enterprises (SSEs) (para. 7). Implementation Experience Both lines of credit ran into implementation problems, namely delays and cost overruns. In both loans, arrears were a persistent problem, emanating from BDET's in-dequate supervision, bad investment decisions by project sponsors, and the economic downturn. Remedial action was not taken until 1984 (paras. 8 and 11). The two SSI operations were marred by shortfalls in commitments and disbursement delays and time and cost overruns. Several reasons for the shortfalls are now familiar SSI problems including high cost of SSI lending administration, excessive appraisal procedure required by BDET which in part resulted to low participation by commercial banks in the pilot program (paras. 26-27). - viii - With two reorganizations undertaken under the sixth and seventh loans, BDET has made some progress in institutional development particularly in improving the effectiveness of its staff for appraisal work. One major objective not achieved was to help BDET, a maturing DFC, become a viable borrower in the international financial markets (para. 13). BDET was also unsuccessful in its role as an apex institution for financing small scale enterprises, a role found to be better played by the API, a government agency for investment promotion (paras. 29, 34-35). Results All 99 subprojects financed under the sixth and seventh loans have started operation. The subprojects under the seventh loan were well diversi- fied both sectorwise and geographically while only sectoral diversification was achieved with subprojects under the sixth loans. The subprojects under the seventh loan were however more capital intensive. As of 1984, about half of subprojects under the seventh loan were operating profitably (paras. 8-9) A total of 37 subprojects were financed under the SSI loan with in- vestment cost per job averaging about TD 3,582 (US$2,064 equivalent) well within the covenanted limit (TD 4,000) (para. 28). BDET's financial position has been characterized by a decrease in profitability during the period under review; insufficient spreads and foreign exchange losses were the major causes. Both issues of spreads and foreign exchanges risks have been addressed in subsequent Bank's operations involving BDET and interim measures have been adopted while more definite solutions are in active policy dialogue with the government (paras. 19-21). Sustainability BDET's profitability has been guaranteed by the Government through direct transfer from the budget and the magnitude of the annual transfer payments raises questions about BDET's financial viability without government support. If the transfer payments is phased out at the end of 1986 as planned, BDET will be forced to face competition from new development banks and improve its financial position. If BDET can be financially viable, it seems likely that it can be overall self-sustained as an institution as a result of continuing improvements in other important areas including management and staff strength. BDET's supervision remains its main weakness, but significant efforts are being made to improve the system. In recent years, BDET has also placed increasing importance on identification and promotion of projects which should help build-up a healthier portfolio (para. 30-31). Overall Assessment and Lessons The loans have achieved their traditional dual objective of helping BDET fill a resource gap and continving the Bank's effort to assist BDET to improve its organization, particularly appraisal and promotion work. But much more remains to be done to strengthen BDET's supervision capability, and - ix - the Bank has acted belatedly and tentatively when the arrears situation worsened. The. objective of assisting BDET to establish itself as a viable borrower in the international financial markets has not met with total success (para. 33). The implementation of the SSI pilot program made it possible to assess more accurately the specific problems associated with SSE development, including the often underestimated administrative costs involved, the appropriate spreads required for greater participation by commercial banks, and the problead of working capital which are particularly difficult for SSEs. Subsequent SSI projects have benefitted from the experiences of the pilot program, and were in a better position to address many of the issues mentioned above (paras. 34-35). The main lessons that can be drawn from the loans reviewed pertain thus to the special aspects of SSI operations. They suggest the need for flexibility in the design to allow modifications in light of on-going experi- ence. The two traditional DFC lines of credit offer no particular lessons to learn apart from a need to closely monitor both supervision and the changing economic environment when the first sign of -arrears emerge. Close supervi- sion normally encourage sub-borrowers to comply with payments due but may not increase their ability to pay back when the economy or the sector is in de- cline. Policy changes of the type of the on-going Industrial and Trade Policy Ajustment Loan (ITPAL) are often required in this case. Other significant lessons drawn are presented in para. 36. - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM TUNISIA BANQUE DE DEVELOPPEMENT ECONOMIqUE JE TUNISIE (BDET) (LOANS 1189, 1504, AND 1505-TUN) . BACKGROUND The Industrial Sector 1 1. Tunisia's industrial sector performed well in the 1970s. It was the fastest growing sector in the economy with an average annual rate of 6.9%2/ between 1971-81, contributing 40% to GDP growth. Apart from petrleum, industrial growth was led by construction materials, textiles and chemicals. The sector provides 22% of total employment. In 1976, at the end of the Fourth Plan, the largest sub-sectors of manufacturing were food processing and textiles (each contributing 30% of manufacturing value added), followed by electrical and mechanical industries (11.6%) and construction materials (9.1%). This profile changed under the Fifth Plan (1977-81) with construction materials being the fastest growing sector (23% p.a.), followed by chemicals (17% p.a.) and electro-mechanical engineering (15% p.a.). In the first three years of the Sixth ilan (1982-86) industrial growth slowed to 3.9% a year due largely to the decline in crude oil and phosphate production. 2. Since the 1970s, Tunisia's industrial strategy has evolved gradual- ly from import substitution to export orientation. Efforts to promote ex- port-oriented industries started in the early 1970s, under the Fourth Plan, but the incentives system was biased against exports.3/ The Fifth Plan essentially continued the policies of the Fourth Plan, i.e., further promotion of export-oriented industries, improving the efficiency of public enterprises, and development of Small Scale Industries (SSI). Only under the current Sixth Plan (1982-86), a more systematic effort was made to review policy objectives, and concrete proposals were made to liberalize import policy and export incentives, investment licensing and price controls of I/ For further details, see Tunisia, Industrial Sector Report, IBRD Report No. 5665-TUN, July 1985. The three projects under review were prepared and implemtnted during the time of two Plans, the Fourth Plan (1973-76) and the Fifth Plan (1977-1981). 2/ API in its comments (see Appendix) provides higher figures: 9.8% as growth rate of manufacturing and the sector provides 39% of the total employment. 3/ API (Appendix) considers the incentive system is not unfavorable to exports. - 2 - manufactured goods.4/ All of the policy ref orms are aimed at opening up the industrial sector whiclh, like other parts of the economy, remained highly regulated until 1985/86. Concrete macro-economic reform actions agreed during negotiations in December 1986 of the Industrial and Trade Policy Adjustment Loan (ITPAL) include a phasing out of quantitative restrictions (QR) before the end of 1990, and a program of tariff reform aiming at achieving a uniform effective protection rate of about 25% by the end of the VII plan, The Financial Sector 5/ 3. Over the past decade, the financial sector has expandAd and has be- come more competitive as seven more development banks and a leasing company were added to the existing fourteen financial intermediaries. The capital market is still underdeveloped, traded securities are limited to shares and to government bonds, and investors comprise mainly the government and insti- tutions with little participation by the general public. A secondary market exists but trading is light. Until 1985-86 the financial sector was heavily regulated. Interest rates were controlled, borrowing rates (deposit rates) were fixed by the monetary authorities and lending rates were allowed to fluctuate within an extremely narrow range (generally a quarter of a point to half of a point). In April 1985, the authorities introduced interest rate increases that were partially in line with the Bank's financial sector mission's recommendations, but many deposit rates were still negative in real terms. Prior approval by the Central Bank was required for almost all credits, which was granted on the basis of recommendations by other government agencies, such as the Agence de Promotion Industrielle (API) for investments and the Ministry of National Economy for imports. 4. The Government has been aware of the deficiencies of the financial system and has adopted a gradual approach to changes. The Bank's Financial Sector Study (FSS) recommended a series of actions with a view toward finan- cial liberalization. Apart from increases in lending and deposit rates, other important measures suggested by the FSS are the abolishment of the re- quirement of prior approval of credits by the Central Bank and greater flexi- bility in the interest rate structure. The Government has decided to deregu- late as of January 1, 1987 all lending and borrowing rates with a number of 4/ For recent developments, see Tunisia CEM: Mid-Term Review of the Sixth Development Plan 1982-1985, IBED Report No. 5328-TUN, October 1985. 5/ For further detail, see Tunisia, Financial Sector Report, IBRD, Report No. 5263-TUN, December 1985. - 3 - exceptions.6/ Apart from these exceptions, banks are now free to determine spreads and fees. Monetary authority will however intervene in situations where there is a need to guarantee positive real rate for term deposit and set a ceiling for lending rates to prevent usury. Prior approval of credits by the Central Bank is still in force but beginning January 1, 1987 the mini- mum amount for loans requiring advance authorization will be raised to TD 5 million. The practice of advance authorization will be totally abolished beginning January 1, 1988. Banque de Developpement Economique de Tunisie (BDET) 5. BDET was established on 1959 under the-name of Societf Internation- ale d'Investissement (SNI). Its name was changed in 1973 to BDET. In 1984, the Government controlled 43% of the capital, foreign investors including IFC 40.5% and the private sector the remaining 16.5%. Its main function is to provide term financing to industry and tourism. In the fitst years of exis- tence, BDET simply played the role of a supplier of equity funds for public sector investments. The last PPAR (Report No. 3611, September 1981, para. 52) concluded that the Bank's Loans "contributed effectively to the financing of the private investment boom which begAn in the early 1970s in Tunisia, and to the re-definition of SNI's role, from that of a supplier of equity funds for public sector investments, to that of financier and advisor of private investors in industry and tourism." 6. In 1976, at the time of preparation for the Seventh Loan (1504- TUN), BDET carried out a further reorganization which, according to the appraisal team, resulted in considerable improvement of the effectiveness of its management: "BDET's house has been put in order in the areas of finan- cial management and quality of portfolio. Procedures are satisfactory, though improvements are needed as regards appraihal and, especially, supervi- sion."7/ But supervision, which first emerged as an issue during the appraisal of the Sixth Loan,8/ has been a continuing problem which, among other things, has contributed to a serious arrears situation in 1983. The 1981 audit (paras. 4.06-4.07, 4.09) also states that considerable progress in terms of institution building had been achieved: a major reorganization was carried out in early 1972; the credit department was expanded; a project 6/ The exceptions are: lending rates on loans to priority activities (i.e. exports, agriculture, small and medium-sized enterprises, energy saving), which will continue to be set by the Central Bank; borrowing rates on special savings accounts and the convertible dinar deposits of Tunisian nationals resident abroad; these will be determined by refer- ence to money market rates. For further details on the Government's Economic Adjustment Program as well as further adjustment measures pro- posed. See President's Report (January 28, 1987, Report No. P-4449-TUN) Industrial and Trade Policy Adjustment Loan (ITPAL). 7/ SAR No. 1734b-TUN, November 29, 1977, Summary. 8/ SAR No. 1187-TUN December 19, 1975 Summary. promotion department and a follow-up division were created; under the Bank's guidance, project appraisal was significantly improved but supervision work was an area of concern. Since 1981, BDET has however lost key managerial personnel to new development banks and to public enterprises. II. PROJECT OBJECTIVES 7. The Sixth and Seventh Loans had the same basic objectives: resource transfer and institution building, At the time the sixth loan was approved, BDET was already considered a maturing DFC but there was scope for improvement and further assistance in appraisal, supervision and financial practices. The seventh loan also sought to strengthen BDET borrowing capability in international financial markets, thus reducing its dependence on concessionary financial resources (PCR, para. 3.07). The third loan under review (Loan 1505-TUN, hereafter the SSI Loan) had the sole objective of financing new SSE projects (see Chapter VI) to complement the seventh loan which had a US$2 million component to finance expansion of existing SSEs.9/ The SSI Loan and the seventh loan were appraised together as they were complementary. III. UTILIZATION OF BANK FUNDS FROM THE SIXTH AND SEVENTH LOANS 10, 8. Disbursements of the Sixth Loan (1189-TUN) fell behind schedule by 10 months mainly because of problems experienced by project sponsors during implementation. All 62 subprojects financed under the loan are in opera- tion. The subprojects are well diversified sector-wise but geographically they are concentrated in the Tunis area (PCR, para. 2.08). Abo t half of them experienced substantial cost overruns and 7 experienced ma or delays (over five years). Delays and cost overruns were attributed to red tUpe, shortcomings in project appraisal and supervision, and the sponsors' diffi- culty to secure additional financing to meet cost overruns. 9. The Seventh Loan to BDET (1504-TUN) helped finance 37 projects apart from 11 projects financed under the SEE pilot line of US$2 million (see Chapter VI). The sectoral and geographic distribution of the 37 subprojects was satisfactory. Also, two-thirds were new enterprises and 22% export-ori- ented. In terms of implementation, the Seventh Loan ran into similar prob- lems as the Sixth and for the same reasons: delays were experienced in 18 subprojects and cost overruns in 20 of 37 subprojects. As of 1984, only 9/ This component is referred to in the PCR as the SSE Credit Line, whereas the SSI Loan refers to the free-standing SSI operations, such as Loan 1505-TUN and subsequent operations SSI-I and SSI-II. 10/ For details see PCR (Loan 1189), paras. 2.08-2.11; PCR (Loans 1504 and 1505), paras. 3.13-3.17. - 5 - about half of the subprojects were operating profitably. Ex ante economic rates of return appear to have been optimistic, while ex post were not calcu- lated. 10. The table below shows comparative data on capital intensity and em- ployment creation by the subprojects supported by the two loans. The loans financed subprojects ranging from relatively high to very low capital inten- sity. Although the mean and median values indicate rising costs per job over time, on the whole, the bulk of the projects were labor-intensive, albeit less than expected. As a result, employment generation under both loans was somewhat lower than appraisal estimates. J Table 1: INVESTMENT COST PER JOB No. of No. of Cost-Per-Job Created Subprojects Jobs (US$)* Loan Financed Created Maximum Minimum Average Median 1189 - Sixth 62 3,471 22,622 344 4,533 3,447 1504 - Seventh 37 2,552 22,388 726 6,467 5,445 * Converted from dinars at 1976 exchange rate for Loan 1189 and 1978 exchange rate for Loans 1504 and 1505. Source: PCR (Loan 1189-TUN), Annex 1. PCR (Loan 1504-TUN and 1505-TUN), Annexes 2, 6 and 7. 11. In both loans, arrears were a persistent problem-23 out of 62 in the sixth and 14 out of 37 in the seventh. They were attributed to the eco- nomic downturn, managerial problems, poor investment decisions, and lack of proper supervision. The issue of arrears was addressed much later by intro- ducing Action Programs for monitoring supervision activities (see paras. 16 and 19 below). IV. INSTITUTIONAL DEVELOPMENT 12. A central objective of both projects was to help improve the effec- tiveness of BDET's staff in appraisal and supervision. The other major ob- jective in institutional development was to help BDET, a maturing DFC, become a viable borrower in the international financial markets. This objective has yet to be achieved (see para. 20 below). Under the SSI Loan, the third proj- ect under review (see Chapter VI), BDET was also made to play t! t role of an apex institution for, SSEs, a role later found to be better played by the Agence de Promotion de Investissements (API) once it had acquired the neces- sary experience (PCR, Loans 1504-TUN and 1505-TUN, Summary and Conclusions). - 6 - 13. As part of the institution building effort, the projects also sought to increase BDET's capital base. Between 1977 and 1985, BDET made three capital increases for a total of TD 30 million in 1985. BDET's re- source mobilization includes a line of credit from a French commercial bank, a loan from Qatar, and a loan from the Arab Fund for a total of DT 21 million. BDET floated a small domestic bond issue for DT $2 million (SAR, No. 1734b-TUN, paras. 6.04-6.06). For domestic resources, BDET depends most- ly on the Government and the Central Bank (PCR for Loans 1504/1505, para. 3.02). The Seventh Loan sought to help BDET consolidate its standing in the international finance community and to be less dependent cn IBRD loans in particular. This objective was not met as the Bani's share in BDET's borrow- ings has increased to 23% in 1979 and to 26% in 1981 instead of decreasing to 18% and 15% as expected at appraisal time (June, 1977). The main reason for this was competition from and precedence of the Government over BDET in in- ternational borrowings (PCR, for Loans 1504/1505, paras. 3.18). 14. BDET's management structure has unde:gone considerable changes as part of agreements under both loans. A degree of decentralization was intro- duced by reorganizing the institution's three operational departments into six smaller, more manageable depa.tments. Four of these departments were staffed by capable young professionals (SAR, No. 1734-TUN, para. 3.03). BDET's appraisal and promotion activities improved measurably over the years although economic analysis needs to be further strengthened. However, super- vision remains a vexing problem. Supervision was described as the "weakest point in BDET's performance" during the implementation of the Sixth Loan. For example, out of 100-120 projects that needed close supervision in 1976, only 40 were visited that year (PCR, Loan 1189-TUN, para. 2.15). During the implementation of the Seventh Loan, supervision continued to be a serious problem. 15. To reverse BDET's worsening arrears situation, Bank staff, working together with the borrower, developed specific action programs to improve supervision. In February 1985, during the negotiation of the Export Indus- tries Loan, a reporting system and a work program for 1985 concerning BDET's supervision activities was agreed upon, which should enable BDET's management and the Bank to monitor progress more effectively. Under the system, super- vision work in terms of staff involved, types of projects worked, the prob- lems encountered and solutions suggested are detailed and followed up. Dur- ing negotiations of the Second Electro-Mechanical Industries (EMI-20) Loan in the same year, the Bank reviewed an Action Plan on 22 companies in serious arrears. It is expected that 19 of the 22 companies will have fully repaid their arrears by the end of 1986, which may be optimistic. Although belated- ly, the Bank staff has made a vigorous effort to address the problem, which is commendable. V. OPERATIONAL AND FINANCIAL PERFORMANCE 16. BDET's approvals, commitments and disbursements of subloans for the years 1975-83 are presented in Attachment 1. Approvals in constant prices - 7 - showed an extremely erratic trend over 1977-83 such that the average rate of growth of 16% would make little sense. In 1983, they fell by 44% as a result of resource shortage,11/ the competition from new developed banks, and the sluggish growth of SSE investments. Approvals to the industrial sector as a percent of total approvals generally declined from about 79% in 1977 to 69% in 1983, while approvals for tourism and SSI showed an erratic trend over the same period. Equity participations have been around 10% of total approvals. During 1978-83, BDET approved mainly new projects (74%). Table 3.3 of PCR for Loans 1504/1505-TUN gives data on BDET's share in subsector financing. BDET financed about 10% of total public and private investment in industry and tourism in the country during 1978-83.12/ The share of private sector industry to total lending declined from 35.ft In 1978 to 27.4% in 1983, in part due to competitive pressure from new development banks. Liquidity and Debt 17. BDET has been facing liquidity problems particularly since 1983, and had to resort to short-term borrowings to meet part of its cash require- ments. BDET, at the Bank's urge, raised US$126.6 million equivalent in medi- um term funds to improve its liquidity position and current ratio which stood at 1.45 at the end of 1985. To rectify this recurring problem, the Bank has reached an agreement during negotiations of the Export Industries Loan to review with BDET and the Government BDET's resource mobilization plan every year starting in 1986 (PCR, para. 3.19). On the other hand, BDET's debt- equity ratio has remained below the maximum allowed of 8:1 in part because of two capital increases which more than doubled the original capital base. 18. Portfolio. Although BDET's portfolio is well diversified, (PCR, para. 3.29), its quality has been affected by arrears. The situation has worsened since 1983 both in terms of percentage of portfolio affected by arrears and amount of arrears as a percentage of total portfolio. By December 1984, 30% of BDET's portfolio was in arrears largely as a result of inadequate supervision (PCR, para. 3.35). Recent supervision reports indi- cate that arrears will continue to be a problem. Despite the implementation of action programs (PCR, para. 3.37) aiming at closer monitoring of supervi- sion activity, especially in 1985-86, arrears have increased further by 32% from TD 15.9 million at the end of 1984 to TD 20.9 million at the end of 1985. Bad investment decisions, deterioration of economic conditions, and 11/ BDET in its comments on this report (Appendix) saya that the decline in approvals were not due to resource shortage but gave no indications for other possible reasons. 12/ BDET in its comments of this report, gave the following updated figures on BDET's share of industrial financing (see Appendix). 1978 1983 Private sector 25.9% 15.4% Public sector 1.8% 3.5% - 8 - inappropriate policy environment without corrective adjustments may have been the root cause for the rise of arrears. In an effort to address these see- toral and policy issues, the Region is preparing a Trade Adjustment Loan to support adjustments in key subsectors. Financial Position 19. BDET's financial performance has deteriorated during the 1980s due to the insufficient spread and foreign exchange losses (Attachment 3). BDET's net income (before tax and Government compensations) which amounted to TD 0.94 million in 1978 fell to TD 0.23 million in 1985; as a result, the re- turn on net worth declined from 8.12% in 1978 to less than 1% in 1985. It is noteworthy that BDET suffered substantially an operating loss of TD 2.9 million in 1984. BDET's spread fell from 1.20% in 1978 to 0.42% in 1983, and the interest coverage ratio dropped from 1.2 in 1978 to 1.0 in 1983, reflect- ing BDET's poor financial performance towards the end of the period. This led BDET to increase in 1981 its interest rates to 10.5% for small-and-medium size industries, 12% for tourism projects, and 13% for large projects. Re- cently, in April 1985, BDET raised again its interest rates by 2%, and a fur- ther across-the-board increase of 1% is planned for 1987. Nevertheless, BDET's spread would have to be further increased by at least 2%, or admini- strative expenses be reduced by the same percentage according to PCR, for the institution to remain viable (PCR, paras. 3.30-3.32). BDET however does not think that administrative expenses can be further reduced (see Appendix) as they are comparatively the lowest in terms of percentage. The recent Financial Sector Study (FSS) has proposed the introduction of adjustable interest rates (para. 4) with a view to linking lending rates with the cost of borrowings, particularly in the international markets. 20. In line with government policy before 1984, BDET was assured both of a "reasonable" profit margin by way of budgbt transfers and compensation for losses due to foreign exchange risks a-d the fact that BDET had to op- erate over the years on insufficient spreads resulting from a controlled in- terest rate structure which the Government was unwilling to change until re- cently (April 1985). Payments by the Government to BDET to assure a reasona- ble profit for BDET are based on an old compensation ("somme compensatoire") arrangement between BDET and the Government. With respect to foreign ex- change risk, the losses have become so heavy due to the depreciation of the dinar against the dollar13/ that the Government was unable to make transfer payments commensurate withthe magnitude of losses. By 1984, total exchange losses (on principal and interest) amounted to about TD 30 million (US$38.6 equivalent), and the Government was able to compensate BDET for only TD 10 million (see Attachment 4). Because of the seriousness of the issue and its 13/ See Tunisia, Financial Sector Report, op. cit., Chapter III. The Gov- ernment was not prepared to permit BDET to pass the exchange risk on to sub-borrowers because the inconvertibility of the dinar prevented the borrowers from protecting their foreign exchange position, while in- creases in interest rates made it inappropriate time for increasing the foreign exchange risk to subproject borrowers. (See SAR, No. 1734b-TUN, Nov. 29, 1977, paras. 6.05-6.06.) - 9 - impact on BDET's sustainability, it became clear that the issue of foreign exchange riak had to be separated from the mere "assurance" of BDET's profit- ability and to be addressed in a broader context. C ompensation for losses due to exchange risk was made part of the 1985 Loan Agreements for EMI II. A dialogue based on the FSS's proposed priaciples and a government study is still ongoing. As an intermediate step, and under the mechanism of an Ex- change Equalization Fund, the Government will bear the exchange risk for new loans, at a fee charged to all banking institutions. The fee is one-half of one percent on all lending by commercial banks and one percent on term lend- ing by development banks. But these measures are short term solutions; dur- ing the recent negotiations of the Industrial and Trade Policy Loan the Government agreed that in the long run the exchange risk needs to be borne by the final borrower. Toward this goal, and in the framework of Medium Term Industrial and Trade Adjustment Program, a number of improvements have been introduced in the system which will reserve the benefit of state-guaranteed foreign exchange borrowings for SSIs which do not have the means to protect themselves effectively. 21. Because of the special agreement of support between the Government and BDET, the institution's financial situation and performance must be viewed in the context of a DFC that receives government subsidy. As such it does not compare favorably with independent DFCs. It also raises questions about its sustainability (see Chapter VII) in the absence of government support, despite .e fact that BDET is viewed by the PCR as a maturing DFC. The term subsidy used to describe government transfer payments to BDET is controversiall4/ and BDET in its comments made to the draft of this report (see Appendix) argued that BDET is not a subsidized DFC as government payments made to BDET represent only a compensation not a subsidy. Bank staff agreed with this view and argued further that it was the sub-borrower not BDET who was subsidized. VI. SMALL-SCALE INDUSTRY (SSI) DEVELOPMENT PROJECTS Project Desigg 22. The third loan under review (1505-TUN) in the amount of US$5 mil- lion was an SSI operation. This chapter assesses the project experience under this loan together with the Small Scale Enterprise (SSE) component 14/ The terms "subsidy" and "subsidization" have been used in various Staff Appraisal Reports [e.g. SAR for Sixth and Seventh Loan (Report No, 1734b-TUN, paras. 6.07-6.09) and recent appraisal reports, e.g. SAR, No. 5251-TUN, Export Industries Project, March 20, 1985, paras. 5.08 and 5.18] to describe government transfer payments to BDET to guarantee its profitability and compensate for foreign exchange losses. Other Bank staff think the term "subsidy" inappropriate since BDET's low profita- bility results from the government's policies and incapacity to repay its obligations (to pay compensations to BDET). - 10 - (US$2 million) under the Seventh Loan (7.504-TUN) reviewed earlier. The two operations were part of an SSI pilot program. The SSE component under the Seventh Loan was to finance expansion of existing Small Scale Enterprises (SSEs) through BDET while the Loan 1505-TUN was to finance only new SSEs through the Fonds pour la Promotion et la Decentralisation Industrielle (FOPRODI) which was created in 1975 to provide financial assistance to new SSEs. The two projects were designed in line with Tunisia's Fifth P17 (1977-81) which emphasized the promotion of SSI, as well as the Bank's policy orientation at that time. Objectives 23. The objectives were typical of SSI operations, i.e. (a) to promote a faster growth of employment by creating more jobs at an average cost sig- nificantly lower than in the rest of the industrial sector; (b) to help de- velop an industrial base in less developed regions; and (c) to establish an efficient technical assistance delivery system. The projects also sought to assist new and existing SSEs to increase their productivity, but there were no specifies as to how this particular objective would be achieved. More- over, as the projects were prepared at the beginning of the Fifth Plan, it was hoped that the loans will also help the Government in formulating an SSI policy, including the introduction of new legislation (PCR, paras. 2.07- 2.08). The SSI project included a financial assistance program and a small technical assistance component of US$650,000. The SSE program under the Seventh Loan had no technical assistance component. Project Implementation 1. The Financial Components (a) Institutional Arrangements 24. The US$5 million Bank loan borrowed by the Government was chan- nelled to new SSEs through a special account at the Central Bank of Tunisia and drawn upon by BDET and four commercial banks (Societe Tunisienne de Banque, Banque Nationale de Tunisie, Union Internationale de Banques, and Banque du Sud, which together cover the whole country through a wide network of branches). Bank funds were originally to be used to finance a new FOPRODI credit facility that would complement the financing plan of newly created SSEs which qualify for concessionary FOPRODI assistance in the form of - 11 - subordinated medium- and long-term loans (SAR, No. 1734b-TUN, para. 7.06).15/ The eligibility criteria for the Bank funds were, however, slightly more restrictive than those currently established for FOPRODI, in terms of lower benchmark for project cost, investment cost-per-job and compulsory use of technical assistance as deemed necessary by the Agence de Promotion Industrielle (API). 25. The US$2 million SSE component of the Seventh Loan was earmarked to finance the expansion of existing SSEs with net fixed assets valued (before expansion and excluding lan at less than D 100,000 (US$235,000 equivalent) at 1976 prices. The conditions of subloans and the eligibility criteria for such expansion projects were similar to those applying to subloans for new SSE projects, but repayment under this credit line would be to BDET. There was no risk-sharing mechanism between BDET and the Government under this scheme. In order to ensure that SSE expansion projects will receive appro- priate attention, BDET was to set up a special unit staffed by two SSE spe- cialists as a condition of effectiveness. The unit was to be responsible for the processing of these subprojects as well as for administering the Bank funds. The two projects (the SSI Loan and the SSE component of the Seventh Loan) sought to take advantage of the extensive branch network of the parti- cipating commercial banks and BDET's lending experience to the industrial sector. BDET as "administrator" of (and participant in) the program was to be responsible for guiding, including a review of subprojects, and monitoring the activity of the participating commercial banks, playing the role of an apex institution. (b) Utilization of Bank Funds 26. Utilization of the Bank funds in both SSI operations ran into a host of problems, which are fully detailed in the PCR (paras. 2.12-2.22 and Summary and Conclusions). Despite a rapid growth in manufacturing during 15/ FOPRODI (Fonds de Promotion et de Decentralisation Industrielle) was created in 1974 as a budget-financed fund intended to encourage the sponsors of small industrial projects, especially those located outside Tunis. Under the FOPRODI scheme, eligible entrepreneurs (Tunisian citi- zens with technical qualifications willing to devote themselves full- time to the new enterprise and sponsoring a project costing less than D 500,000) can obtain subsidized personal loans to supplement their cap- ital and to help them acquire majority ownership in the equity of new enterprises. Smaller projects (total cost under D 75,000) are also eli- gible for subsidized long-term credits to the SSE itself, as opposed to the entrepreneur. Eligibility for FOPRODI assistance is determined by API. FOPRODI is administered by participating commercial banks, which are expected to contribute their own resources in term-loan financing necessary to complete the financial plan for FOPRODI supported projects (SAR No. 1734b-TUN, Loans 1504/1505-TUN, a joint appraisal, Annex 24). According to API (Appendix) eligibility for FOPRODI assistance is specified in Decree No. 78-578 of June 9, 1978 and in that sense not determined by API. A study for FOPRODI reform is being undertaken. - 12 - 1976-79, commitments and disbursements of both SSI operations lagged behind projections. Cancellations amounted to 20% of the loan amount for the SSI Loan, 36% of the US$2 million SSE component of the Seventh Loan. The loans actually financed 37 subprojects instead of 70-90 anticipated at appraisal. Participation by the commercial banks was disappointing, As two banks sub- mitted no projects at all, while the other three submitced 11 out of the total of 37 subprojects. The remaining 26 subprojects were financed through BDET. 27. One reason for the shortfall is attributed to inflation, which in- creased the total investment cost of some subprojects above the agreed ceil- ing, thus reducing the number of eligible subprojects. Other significant reasons were that the commercial banks were not authorized to meet their "medium-term lending ratio"16/ by using Bank resources; the high administra- tive costs of SSE lending; and BDET's cumbersome appraisal procedures as applied to SSE projects. As the Bank was not very familiar with SSI opera- tions at that time, "the Bank was relatively slow in reacting and helping im- plement the necessary solutions" (PCR, para. 2.22). Most of these problems were addressed by the 1981 SSI project (Loan 1969-TUN, SSI I). (c) Characteristics and Problems of Subprojects 28. Of the 37 subprojects financed under the two operations, about 70% were new projects. The subprojects were sectorally well diversified; how- ever, the majority (65%) of them were still located around Tunis. These sub- projects generated 1,260 jobs, or about half the 2,300 originally estimated, due to cancellations and design problems. The average cost per job was TD 3,582 compared with the covenanted TD 4,600 (both at 1976 prices) (in 1978 US$ equivalent, the average cost-per-job was $2,064, with the maximum being $9,157, minimum $1,250 and median $2,339. (To compare with investment cost- per-job non-SSE subprojects, see Table 1, Chapter III). Implementation de- lays were experienced by 11 of the 26 subprojects (or 42%) financed by BDET, and were attributed to slow customs clearance, delays in utility connections, procurement problems. cumbersome disbursement procedures, etc. The PCR points out (para. 2.25) that these delays could have been limited by more careful subproject preparation and appraisal and by better supervision by BDET. In this respect, the Bank could have played a role through its super- vision missions. Bank staff, however, feel that this should be the responsi- bility of BDET alone and Bank staff should not interfere directly with the implementation of subprojects. Cost overruns were another problem of sub- projects due in part to insufficient project preparation and follow up (PCR para. 2.26). They were experienced in 11 of the 26 projects financed by BDET. Cost overruns were on equipment and related expenditures (e.g., installation, transport, etc.), construction (including utility connections 16/ The Central Bank requires commercial banks to allocate a certain percen- tage of their deposits to medium-term loans to the private sector; since 1976, this percentage has been 18%. If a bank does not meet this requirement, it is penalized by having the counterpart of its shortfall frozen in a non-interest-bearing deposit at the Central Bank. For changes to the ratios required by the Central Bank and agreed under ITPAL see President's Report, ITPAL op, cit. - 13 - and site preparation), and from underestimation of working capital require- ments.17/ As of September 30, 1984, three SSE subprojects financed by BDET were in arrears due to technical and financial difficulties, and 2 subproj- ects were in litigation (PCR para. 2.26). 2. Technical Assistance 29. The joint SAR (para. 7.10) indicated that the establishment of a system to deliver technical assistance to SSEs was a major objective of the project. In fact, what was provided was only assistance in project identifi- cation and preparation through the use of two experts. There was no provi- sion for developing an extension service or a link with an existing technical assistance delivery agency. Thus, an important objective of SSE assistance has not been advanced. With respect to technical assistance for project identification, preparation and implementation, the API was the focal point. Special efforts were made to build up its capabilities and they were substantially successful. Most stgnificantly, API created an SSE Department with the help of three expatriates, hired four professionals and sent them abroad for training. The Department, which is now well established with 20 specialists, also set up a country-wide network to extend assistance to SSEs. Efforts to establish a special SSE Unit in BDET (for appraisal and supervision) were not successful. BDET's review of subprojects submitted by participating banks through this SSE unit took a long time, although BDET's approval has resulted in significant improvement in subproject appraisals. In the 1981 SSI project (Loan 1969-TUN), BDET was replaced by API as an apex institution. VII. SUSTAINABILITY 30. BDET's profitability is guaranteed by the Government through trans- fers from the budget (paras. 20-21). The level of this annual transfer, as shown in the table below, raises questions about BDET's financial viability without Government financial support. 17/ No data are available on subprojects financed by participating commer- cial banks. - 14 - ble 2: Er RIOFTIS /a AND GWERWT SUllSID (1D '000) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 A. Net inease before subsidy 810 1,033 1,081 936 900 1,079 557 1,090 100 -2,850 232 B. Gmetument subsidy * - - 248 324 768 454 1,030 460 2,950 5,848 2,978 Govement subsidy as % af earned Imoo (B/A) 23 35 85 42 185 42 2,950 /b 1,283 DLvidendS 270 420 480 480 560 580 670 680 1,260 1,407 n9a. Reserves 455 526 579 624 891 809 773 760 1,130 as. n.e. /a br further details, see Attafcknt 3. nExtrnly laqe percentqe. Bak staff indicated that since 1982 mst af the pMnmnts were overdue eOSS.M for leases due to fOreign ehab losses. Sm staff prefer to call the overdue payamts "re1shrseants". Even before the emergence of exchange losses in 1981, without the Government contributions, DET would have earned barely enough to distribute dividends, and not enough to build up reserves, in part as a result of the controlled lending rates. Although, in recent years BDET moved away from public sector investments, its financial viability continues to be an issue due to insuffi- cient spreads, foreign exchange losses and high level of arrears. Under the Second Electrical and Mechanical Industries Project (EMI) (Loan 2113-TUN), it was agreed that Government transfer payments to BDET will be phased out by 1986. This agreement was also discussed in the SAR for the Export Industries project (Tunisia - Export Industries Project, Report No, 5251-TUN, March 25, 1985, paras. 5.08 and 5.18) which refers to the transfer payment as a subsidy. 31. Also, for new loans the Government will not bear the foreign ex- change risk at a fee except for SSIs (para. 20). Should the issue of spread be resolved and the danger of exchange risk lose permanently eliminated,18/ BDET may be in a better position to face competition and to improve its fi- nancial position. Nevertheless, the task will be difficult as the institu- tion has always functioned in a controlled environment and its profitability has been guaranteed. Quality of management will be of particular importance, in view of the increasing competition from new development banks and the need for adaptability in a changing environment. However, the composition of BDET's Board of Directors and two organizational reforms undertaken in 1972 and 1976 and ongoing efforts made for further improvement augur well for the future. BDET remains a well managed institution, has competent staff, and 18/ For a detailed discussion of this exchange risk issue, see Tunisia - Financial Sector Report, IBRD Report No. 5263-TUN, op. cit. See espe- cially Chapter III for an excellent treatment of alternative solutions to exchange risk problem. For recent developments see President's Report, Industrial and Trade Policy Adjustment Loan, December 5, 1986, op. cit. - 15 - well established procedures. Supervision remains BDET's main weakness; but significant efforts are being made to improve the system, including a report- ing mechanism which should enable BDET management to monitor staff involve- ment in supervision, the number and type of projects visited, the problems encounts..ed by subprojects, and actions taken by BDET and project sponsors to resolve them. In recent years, BDET has also placed increasing importance on identification and promotion of projects which should help expand its opera- tions. The Promotion Department has been active in finding local project sponsors and foreign partners. Some 20 subprojects have been promoted since 1978, of which 15 have been successfully implemented. 32. A question related to sustainability is how fast BDET can become a viable borrower in the international financial markets. This issue will depend in part on a change in past practice, whereby BDET seems to have to compete with the Government to tap the same market. BDET could freely borrow on the international market and the Government's intervention was not pre- emptive but reduced BDET's chance to borrow. Aside from establishing more firmly its creditworthiness, BDET's credibility will be enhanced by following through with the loans once they were initiated with international lenders. Recently BDET has succeeded in entering the Yen bund market with a government guarantee. VIII. CONCLUSIONS AND LESSONS LEARNED 33. The three Bank Loans under review have achieved their objectives with varying degrees of success. The loans have achieved their traditional dual objective of helping BDET fill a resource gap and assisting BDET to im- prove its organization, particularly appraisal and promotion work. But more remains to be done to strengthen BDET's supervision capability, and the Bank has acted belatedly and tentatively when the arrears situation worsened. The objective of assisting BDET to establish itself as a viable borrower in the international financial markets has not met with total success, in part be- cause of the Government's substantial foreign borrowing program makes it dif- ficult for BDET to tap the same market simultaneously. 34. The two SSI operations were part of a pilot program designed for Tunisia in the early years of both the Government and the Bank's joint attempt at promoting SSI in the late 1970s. Viewed as a learning process, both operations were useful and beneficial to the country and the Bank. Al- though not all objectives were achieved, these operations were instrumental in enhancing API's capability to deliver technical assistance to SSI, partic- ularly-in project design and preparation. It is disappointing that the com- mercial banks, for various reasons, were not as active as originally ex- pected. 35. The implementation of the pilot program made it possible to assess more accurately the specific problems associated with SSE development, in- cluding the often underestimated administrative costs involved, the appropri- ate spreads required for greater participation by commercial banks, and the - 16 - problems of working capital which are particularly difficult for SSEs, Sub- sequent SSI projects benefited from the important lessons drawn from the pilot program, and were in a better position to address many of these issues. For instance, SSI-I, addressed the issue of spreads by proposing a substantial increase in the levels of commissions for commercial banks parti- cipating in the scheme, increases in rediscount quota with the Central Bank, and an improved risk-sharing scheme. 36. The lessons that can be drawn from the loans reviewed pertain main- ly to the special aspects of SSI operations, including eligibility criteria, administrative costs, and the risks involved in SSI financing. They suggest the need for flexibility in designing, and modifying in light of on-going ex- perience, eligibility criteria; taking into account inflation in setting lim- its; and assuring DFCs an adequate spread to defray higher costs and risks. The experience with two traditional DFC lines of credit suggest the need to closely monitor both a DFC's supervision effort and the changing economic en- vironment when the first sign of arrears emerge. Other lessons include: - Early action to identify client problems and develop solutions should be undertaken on a continuous basis as part of the Bank's normal follow-up work. - DFC operations may not be suitable by themselves for broad policy dialogue, but they provide good opportunities to identify problems related to policy environment particularly on financial sector issues; these issues can be addressed in other lending operations. In the case of Tunisia the approach of a continuous dialogue with the Government by using related project and subsequent non-project lending opportunities has proven to be effective to bringing about desired policy changes particularly in the financial sector. - The Bank should have early on in its supervisions suggested the need for streamlining approval and processing procedures for SSE operations to encourage commercial bank participation and facili- tate loan commitments. TUNISIA - MANAU Uk UktvLUVftfhI ftUWUMayuk Ut luibit (MUI (Loans 1504-TUN and 1505-TUN) Approvals and Disbursements of Loans and Investments, 1975-1983 (million dinars) 1976 1977 1978 1979 1980 1981 1982 1983 Amount No. Amount No. Amount No. Amount No. Amount N*. Amount No. Amount No. Amount No. Approvals (current price) Loans Industry 15.3 22 18.7 18 15.3 26 17.5 21 13.4 15 22.1 34 28.0 16 14.6 3 Tourism _5.3 18 5.0 11 4.2 10 3.5 10 8.5 14 23.1 13 12.6 23 10.0 14 Subtotal 20.6 40 23.7 29 19.5 36 21.0 31 21.9 29 45.2 47 40.6 39 24.6 17 Equity Participation Industry 1.9 8 2.4 10 2.2 6 0.8 4 0.9 8 2.6 13 4.4 8 2.5 12 Tourism 1.2 1 1.1 2 0.5 4 0.6 - 2.0 2 4.1 4 1.8 1 2.0 2 Subtotal 3.1 9 3.5 12 2.7 10 1.4 4 2.9 10 6.7 17 6.2 9 4.5 14 SSI Loans /a 6.6 75 5.9 72 6.4 62 8.1 70 7.3 76 8.7 76 15.9 84 11.4 67 Total Loans and Investment 30.3124 33.1113 26.6 108 3.5 105 32. 1 60.6 140 62.7 132 40.5 98 Prioe Index (1976 * 100) 100 106.7 112.5 121.1 133.3 145.2 165 179.8 Approvals (1976 constant price) Loans Industry 15.3 17.5 13.6 14.4 10.0 15.2 17.0 8.1 Tourism 5.3 4.7 3.7 2.9 6.4 15.9 7.6 5.6 Subtotal 20.6 22.2 17.3 17.3 16.4 31.1 24.6 13.7 Equity Participation Industry 1.9 2.3 2.0 0.7 0.7 1.8 2.7 1.4 Tourism 1.2 1.0 0.4 0.5 1.5 2.8 1.1 1.1 Subtotal 3.1 3.3 2.4 1.2 2.2 4.6 3.8 2.5 SSI Loans 6.6 5.5 5.7 6.7 5.5 6.0 9.6 6.3 Total Loans and Investment 30.3 31.0 25.4 25.2 24.1 41.7 38.0 22.5 Disbursement Current price 18.1 20.4 22.3 25.6 23.5 25.5 42.9 48.4 1976 Constant Pri ce 18.1 19.1 19.8 21.1 17.6 18.2 26.0 26.9 /a Project cost is equal to or below TO 500,000. Source: BOET. The detailed data were provided by SOET at OED's request during the preparation of the PPAM to supplement Annex 3 In the PCR. TUNISIA - DANQUE V EVELOPPGENT EC0~6IQ9UE DE TUNISIE (BET) (Los 1504-Ti8M and 1505-TUN) BDlanc. Sh~ts, 1975-85 (TD '000) 1975 1976 1977 1978 197 19M 1981 1912 193 1g4 1985 CWrnt AGsts 9,521 12,907 9,249 8,6m 9,972 7,837 13,768 15,720 30,230 38,866 60,067 ~imta ~nd lng-Tcr Los 43,627 54,803 65,624 76,802 88,624 99,989 112,028 139,410 168.660 194,227 210,632 Equity Participatios 4,603 6#576 8293 9,964 11,203 11,814 13,803- 18,020 23,32D 25,773 28.549 TotaM frtollo (gqrs) 4,230 61,379 73,917 86,766 99,827 111,712 125,831 157,430 191,980 258.866 2991248 Lmss ftovrsions (934) _1,339) (1,752 (2,228> (2,797) (3401 (4,104 (4,910 (569 (6.775 7.740 Total Phrtfo&1o <not> 47,296 60.040 72,165 , 84,538 97,030 108,311 121,727 152,520 186,290 252,091 291,508 ~ot Flaed Asets 221 501 518 1,408 1,834 1789 1,877 2,290 3290 3,248 4,088 Total Assots 57,037 73,448 81,932 94,628 108,856 117,937 137,372 170,530 219,810 255,339 295,596 """m --"'--""-'---u------- ----- u--- ---- ----- 0 LIAOILITIES Curre~t Lablities 8,350 9,000 12,464 18,924 15,492 19,269 36,241 61,100 55,420 80,946 57,282 Long-Twrm Imrrouings 39,360 54.548 59,023 63,016 78,944 83,668 83.664 88,440 137,290 146,410 199,354 Share Capittl 6,000 6,000 6,000 7,000 8,000 8,000 10,000 15,550 20.000 20,000 30,000 Sovernmnt Oontrybutfon 500 500 500 500 500 500 500 500 500 500 500 Roservas 2.827 3,400 3,945 5,188 5.90 6,500 6.967 4,940 6,600 748 8,460 Total at eorth 9,327 9,900 10,445 12,608 14,400 15,000 17,467 20,990 27,100 27,983 38,960 TotM Lfabilities 57,037 73,448 81,932 94,628 108,836 117,937 137,372 170,530 219,810 255,339 295,596 Sourc : BOET: Audit Reports for 1975-1983. For 1984, 1985, the figures are taken frco BOETts Rapport sur los Cm~ptes dos Eercics Clos los 31 Dcemubr 1985 et 1984, dated May 30, 1986, TUNISIA - BANQUE DE DEVELOPPEMENT EWONOMIQUE DE TUNISIE (80ET) (Loans 1504-TUN and 1505-TUN) Income Statements, 1975-85 (TD '000) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 INCOME Interest Income 3,145 4,228 5,142 5,982 7,141 8,110 8,947 10,870 13,700 16,798 19,171 Interest on deposits 244 275 216 252 480 197 200 710 690 386 626 Dividend Incom 104 128 149 219 210 217 - 250 250 302 275 Capital gains 86 66 115 124 131 267 370 410 170 264 232 Other income 299 453 593 361 430 360 540 230 330 604 590 Total Income 3,878 5,150 6,215 6,938 8,392 9,151 10,057 12,470 15,140 18,354 20,894 EXPENSES Financial expenses 1,927 2,804 3,659 4,400 5,580 - 6,184 7,610 9,110 12,750 18,563 17,569 AdminIsrative expenses 768 912 968 1,080 1,170 1,180 1,070 1,540 1,630 1,698 1,949 '0 Provislons 300 300 300 300 400 400 400 400 400 600 600 Depreciation 38 44 100 120 190 198 260 210 210 62 104 Other Expenses 35 57 107 102 152 111 160 120 0 281 440 Total Expenses 3,068 4,117 5,134 6,002 7,492 8,073 9,500 11,380 15,040 21,204 20,662 Not income before subsidy 810 1,033 1,081 936 900 1,079 557 1,090 100 -2,850 232 Government subsidy - * 248 324 768 454 1.030 460 2,950 5gb" 2,978 Not Incame before tax 810 1,033 1,329 1,260 1,668 1,533 1,587 1,550 3,050 2,998 3,210 Income tax 85 87 270 156 156 217 144 110 660 644* 703* Not Income after tax 725 946 1,059 1,104 1,451 1,389 1,443 1,440 2,390 2,354 2,507 u=... am u... u.. ....... urn... u.... mm - u ........ u.r.n... mu. Div1d.s 270 420 480 480 560 580 670 680 1,260 1,407 n.a. Reserves 455 526 579 624 891 809 773 760 1,130 n.a. n.a. * Delayed payment was included. Source: BDET's Audit Report, 1975-1983. For 1984 and 1985, the figures are taken from BDET's Rapport sur tes Comptes des Exerclces Clos les 31 Decembro 1984 et 1985. - 20 - ATTACHMENT 4 TUNISIA - BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) (Loans 1504-TUN and 1505-TUN) BDET Gains and Losses (-) Due to Foreign Exchange Fluctuations Outstanding Annual Amount at Year End Difference on Principal 1980 244,343,099 +72,927,905 1981 2,480,260,805 -2,407,332,927 1982 1,828,651,362 -4,235,984,289 1983 8,477,794,061 -12,713,778,356 1984 5,631,729,210 -16,245,326,484 /a 1985 9,511,951,317 -25,757,277,801 Difference on Interest 1981 1,009,964,769 -0- /b 1982 1,552,889,244 -0- 1983 2,220,698,159 -0- 1984 2,746,094,577 -2,746,094,577 1985 2,243,213,499 -4,989,308,076 Accumulated Losses (Principal and Interests) 1984 -18,991,421,061 1985 -30,746,585,887 1986 -20,132,807,531 /c /a Government reimbursed in January 1984 TD 2,100,000. /b During 1981-83, the Government made annual payments to BDET which were recorded in BDET's Income Statement (Attachment 4) as "Government Subsidy". The subsidy was not specified as compensation for profit guarantee or for foreign exchange loss. During discussions with Bank Staff these payments were described as compensation for loss due to foreign exchange on interest. In BDET's books the subsidy was labelled as "somme compensatoire" (see Rapport sur les Comptes des Exercices Clos les 37 Decembre 1985 et 1984. /c Government reimbursed in May 1986, TD 10.6 million. Source: BDET. The data was provided during the preparation of the PPAM. - 21 - APPENDIX Page 1 of 3 COHMENTS RECEIVED FROM THE BORROWER Translation of Incomin Telex Atta. Mr. Alexander Novicki Chief, OEDD2 Further to your letter of April 7, 1987, we give below our coaments and viewpoints regarding the PPAR (Loans 1189, 1504, and 1505-TUN) 1. Return A. It is stated (p. 19) that SDET is a subsidised institution; in fact, laftleted sa it is its clients who are subsidized because in the past BDET charged a PPAM, pare. 21 relatively low interest rate on its loans, for which it then receives a compensatory amount. BDET therefore receives compensation and not a subsidy. B. With a view to improving BDET's rate of return an alternative is suggested (p. 16) to increasing the margin (the margin has in fact been improved appreciably since 1985 following the raising of BDET's interest rates sflected i and the easing of rates on the external markets, and this effect should PPAM, para. 19 continue since the higher interest will be reflected increasingly in BDET's earnings); the alternative suggested is reduction of administrative expenses, which we do not consider very realistic in view of inter alia: - the already low level of these expenses, as admitted by the World Bank itself (less than 1% of portfolio for 1986 and hardly 7.21 of total costs); - its negative impact on the bank's activity (appraisal, promotion, supervision), which we are moreover trying to expand. 2. Borrowings on International CaPital Market and Liquidity A. In the context of its policy of diversifying resources and ensuring an appropriate balance between its lending and borrowing conditions, DDET has endeavored to mobilize the maximum volume of concessional resources, thereby avoiding excessive recourse to the international capital market. This was a Reflected io deliberate choice and not (as stated under 3.19 and 3.24 of the PCR) because PCM, part. of difficulty of access to international markets (creditworthiness). Neither 3.19 footnote has it been because of difficulty of borrowing that BDET has contracted short-term bridging loans to be consolidated later by means of medium-term international borrowings, but because such bridging loans offer several advantages (avoid excessive fragmentation of amount of loans to be raised on international market, reduce finance charges and lessen exchange risk). B. The smaller number of approvals in 1983 is stated to have been due to lack of resources among other things (p. 14). This interpretation is not Reflected In correct because BDET was not short on resources (the residue of available PPAM, para. 16 foreign exchange at end of 1983 was D 28.8 million). Moreover, a development bank (except in the extreme case of having lost all creditworthiness and being - 22 - APPENDIX Page 2 of 3 unable to borrow) does not vary its approvals according to its present resource situation in view of the significant time that elapses between approval, cowmitment and disbursement. 3. Supervision Deflected i PC, Vifth It is asserted (PCR 1189-TUN, para. 2.15, p. 7) that management L4, pa"s. rarely Implemented any of the recommendations made in the supervision 2. 15 footnote reports. We fall to understand the grounds for this statement. 4. Finally, regarding the share of private Industry, we are unabl. to reconstitute the figures at the bottom of page 14 (35.99 for 1978 and 27.4% for 1983). For your Information we give below the following figures from our annual reporta A. BDET Contribution to Financing of hanufacturing Industries (in 2 of total investments) 1978 1983 Reflected t Private sector 25.9 15.4 16 p Public sector 1.8 3.5 S. Share of Private Industry in Total BDST financings Approved for Industry 198 123 (a) Total financings approved for industry (D 1000e) 23,382 28,305 (b) Private sector sbare ($ of (a)) 94.8 98.7 We remain at your disposal for any further information you may require. Best regards, IDST -23- APPENDIX Page 3 of 3 Translation of Incomiga TeIeg 490/87 Attention: Mr. Alexander Novicki Operations Evaluation Department World lank Subject: First Draft of Evaluation Report for SDBT Loans 1189, 1504 and 1505 Thank you for letting as have the above-eastioned report for comment. I sincerely consider it most satisfactory but would draw your attention to a few points of details 1. From data available to us, the value added of the manufacturing uetted Ia sector Increased on average by 9.8 during the period 1971-81 and not 6.92. PPAM, para. 1 footnote 2. During that 10-year period, manufacturing Industry was responsible for almost 391 of total job creatoA*, and not 221. 3. During the Sixth Plan, the average annual growth rate posted by the manufacturing sector we 5.4 (you suggest 3.91 for the first three years of the plan). [4. The incentive system adopted at the beginning of the 70s for Reflected in industries devoted entirely to the esport trade is not unfavorable to RAK, pare. 2 exportas Law 72-38 of April 27, 1972, establiphed a wide range of benefits, including 10 years' exemption from Industrial and commercial profits tax. 5. Ve estimate that there are presently somewhat fewer than 17,000 SI, 12,000 of them operational (you suggest a figure of 18000 for the end of 1976). 6. The conditions for access to FOPRODI are specified in Decree Reflected In No. 78-578 of June 9, 1978 revising the regulations governing this fund, and PPAR, para. 11 not by API. Eligibility is reviewed Initially by the bank concerned, following which the API board decides whether or not assistance from the fund would be appropriate. Best regards ALI UDDA, President, API, Tunisia THIS PAGE IS BLANK - 25 - TUNISIA PROJECT COMPLETION REPORT (SUPPLEMENTAL) SIXTH LOAN TO BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (B.D.E.T.) Loan 1189-TUN April 17, 1986 Europe, Middle East and North Africa Regional Office THIS PAGE IS BLANK - 27 - PROJECT COMPLETION REPORT TUNISIA SIXTH LOAN TO BANQUE DE DEVELOPPEMENT ECONOMIqUE DE TUNISIE (Loan 1189-TUN) I. INTRODUCTION 1.01 Loan 1189-TUN, in the amount of US$20 million was the sixth loan extended to BDET 1/. BDET was created to provide term loans for industry and tourism in Tunisia. By the end of 1975, BDET had received five Bank loans totalling $49 million, the last of which amounted to $14 million and was signed in February, 1973. IFC's holdings in BOET at the time had declined from 20% to 10% of capital. 1.02 Over the three-year 1972-74 period, BDET's relative share in term lending by Tunisia's financial sector had almost doubled; by the end of 1974, it held about 40% of the outstanding term loans to manufacturing, 35% of term loans to tourism, and 11% of term loans to the construction industry. BDET's quantitative performance had measured up to Government expectations and far surpassed its own as well as Bank's forecasts. By late 1974, BDET's project financing was showing a healthy diversity in its characteristics, and its economic impact was demonstrable. Although the quality of the manufacturing projects financed by BDET had generally been good, this was not always the case in tourism, where sectoral problems hampered operations. BDET also played a significant role in the capital market through a variety of activities. 1.03 Since the appraisal of the previous loan in 1972, BDT's institutional and financial performance was mixed. Good progress was made in business promotion, appraisal work and recruitment of qualified staff. However, supervision of borrowers and efforts to validate mortgage security on loans remained inadequate. BDET had also occasionally assumed a greater exposure to single borrowers than allowed under its own policy. Significant success was achieved in mobilizing new resources, which proved most timely in view of the 63% and 103% increases in approvals in 1973 and 1974, respectively. Nevertheless, BDET approved more loans than it could service with available funds, and commitments could not always be met. Also, this significant increase in business occurred at a time when problems in BDET's hotel loans portfolio were worsening. Had BDET made larger provisions against portfolio losses as the auditors and the Bank had recommended, BDET would have shown no profits in 1973 and 1974, and would also have had to limit its growth to keep within the debt/equity limit agreed upon with the Bank. I/ DET was established in 1959 as Soci6t6 Nationale d'Investissement, and it was renamed in 1973. - 28 - II. THE SIXTH LOAN TO B*D.E.T. A. Context of the Loan 2.01 In the fall of 1973, BDET requested a sixth Bank loan. At the time, a Bank supervision/appraisal mission considered that the need for another loan following so quickly after the fifth loan was not fully justified, and that BDET had possibilities for raising funds from other sources to help meet its resource requirements for 1974. In the subsequent months, BDET succeeded in mobilizing new resources and was able to meet the unexpected surge in business which accompanied the 1974 boom in the industrial sector. 2.02 Several missions were undertaken in 1974 and the first six months of 1975 to continue the appraisal process and monitor BDET's progress. Discussions on this loan started in January, 1975, and were concluded in September. The primary reasons for the protracted preparation of the loan were the various problems which emerged during the appraisal/negotiation process and the difficulties in reaching agreement on remedies. The loan that was eventually approved amounted to $20 million and was to meet about 10% of BDET's resource requirements over a two-year period. It constituted a relative decrease in Bank assistance, as was appropriate for a maturing development finance company (DFC) which was able to raise funds from other foreign sources on favorable terms. B. Objectives 2.03 Loan 1189-TUN was intended to support BDET's operational strategy in a number of ways. First, BUT had a substantial resource gap which needed to be filled. Although the $20 million Bank loan was to cover only 10% or so of the resources required over the 1976-77 period, experience had shown that continued association with the Bank Group facilitated BDET's efforts to raise new resources on favorable terms from European leaders and capital surplus Arab countries. Also, IFC membership on BDET's Board was useful, particularly when there were opportunities to act in concert with other foreign shareholders in promoting BDET's interests. Second, BDET was a maturing DFC; yet, there was scope for further institution building assistance in appraisal, supervision, and financial practices. BDET was creditworthy for a sixth Bank loan --it had made adequate provisions and was taking steps to deal with problem loans and to strengthen its portfolio--, in this context the loan enabled the Bank Group to continue helping improve BDET's portfolio management. - 29 - C. Utilization of the Loan 2.04 Economic and Se-,toral Environment. Tunisia's economic performance was good during the 1970s. This camae as a result, primarily, of the country's new policy orientation (although economic management continued to rely heavily on a complex system of administrative control, and unemployment was widespread), but also, as a result of increased agricultural production, and favorable changes in commodity prices. In 1969-70, Tunisia shifted from a controlled economy to a market economy, with emphasis on industrial development and exports. The Government gave greater responsibility to the private sector and supported this orientation with a generous incentive system. As a result, during the 1970-1977 period, real GDP grew at an average annual rate of 8.6%, nearly twice as fast as during the 1960s. Per capita GNP reached $840 in 1977, 74% above its 1969 level in real terms. Production and investment in the industrial sector grew rapidly, even though it took private investors two to three years to recognize that the time of nationalization was over and they resumed investing in 1972-73 only. Until 1973, when the inflow of tourists declined, tourism was the favorite sector of private investors. 2.05 However, while investment incentives were introduced and trade controls were somewhat reduced in the 1970-77 period, little progress was made on the reduction of price controls and the adjustment of prices to changing economic conditions. The credit system continued to rely heavily on administrative credit controls and low interest rates, and the budget provided most of the resources needed for investment financing. These rigidities hampered domestic and international competition, restricted domestic development, entailed great costs to the budget and tended to perpetuate inefficiencies throughout the economy 1/. 2.06 Apart from Government policies, two other factors contributed to Tunisia's remarkable performance. First, favorable weather conditions resulted in increased agricultural production; during the 1970-77 period, agriculture generated some 20% of GDP and accounted for 40% of total employment. Second, in 1972-73, world commodity prices -- especially for petroleum and phosphates -- increased and this resulted in a sizeable windfall income for Tunisia. 2.07 In 1974-75, at the time of preparation of the Loan, the single most important problem facing the Tunisian economy continued to be widespread, open and hidden unemployment. Starting in 1970, the Government, seeking to alleviate unemployment, began giving generous tax incentives to investors, provided favorable terms for investment financing, and created jobs in public enterprises. During the 1973-1976 period, Tunisia was able to exceed by 37% its planned employment creation; yet, on average over the period, unemployment 17 In 1984, the Bank undertook a review of Tuni.ia's Financial Sector, which led in 1985 to discussions with the Government and resulted in a number of improvements to the sector, inter alia raises of interest rates and opening to offshore banks. - 30 - still affected close to one-third of the labor force. In 1977, about 15% of the non-agricultural labor force was still officially unemployed and, because of the considerable underemployment in agriculture, real unemployment over all sectors was about 25%. Under the Fifth Plan (1977-81) and the Sixth Plan (1982-86), the Government took a number of measures to address the unemployment problem and the creation of new jobs was substantial, yet not enough to result in a significant improvement of the rate of unemployment 1/. 2.08 Characteristics of Subprojects. Loan 1189-TUN achieved the objective of providing BDET with foreign exchange resources to finance industrial projects. It assisted in the financing of 62 projects, with a total investment of TD 36.5 million (US$84.9 million), equivalent to more than 4 times the loan amount. The Bank approved a total of 34 subprojects above the free-limit 2/, for a total commitment of US$15.7 million, and 28 subprojects below the free-limit, for a total commitment of US$4.1 million. Disbursements amounted to US$19.6 million. Based on individual approvals, subloans for projects above and under the free-limit averaged $1.09 million and $149,000, respectively. The projects financed under the loan had costs ranging from TD 47,500 to TD 7,935,000; the average cost was about TD 411,000. Of the 62 projects financed, 15 vere in the construction materials subsector (15% of Bank financing); 12 in EMI (22% of Bank financing); 11 in food and beverages (32% of Bank financing); 11 in textiles, clothing and leather (10% of Bank financing); 10 in wood, plastic and paper (19% of Bank financing); and 3 in agro-industries (2% of Bank financing). The majority of the projects were located in the Tunis area. These results can be summarized as follows; Table 2.1; Characteristics of Subprojects Financed Number of projects 62 Job created 3,471 Cost of projects (TD million) 36.5 Foreign exchange cost of all subprojects (US$ million) 19.5 Average cost per job created (TD) 10,520 During appraisal, the mission assumed that the loan would be committed in one and a half years and disbursed within four and half years; actually, Loan 1189-TUN was committed in more than two years and disbursed over a period of nearly six years. Commitments had a slow start because of delays in the effectiveness of the Loan and Guarantee Agreements, and disbursements fell behind schedule mainly because of problems experienced by promoters during implementation (para 2.09). 2.09 Implementation of Subprojects. All projects financed under the loan have been completed and have started operations. In 1984, actual sales for projects with available data were on average 64% higher than appraisal estimates. BDET has full documentation on 48 of the 62 projects financed; 34 experienced cost overruns (with the most important reaching 3004); 7 projects 1/ For a more recent analysis of the evolution of the economic setting, refer to the full Project Completion Report for Loan 1504-TUN, dated June, 1985. 2/ The free limit was US$467,000. - 31 - experienced major delays (i.e. 5 years or more). Delays and cost overruns were caused mainly by Government administrative procedures, difficulties in finding additional financing to meet cost overruns, by management problems, and by shortcomings in project appraisal and supervision (see PCR on Loans 1504-TUN and 1505-TUN). 2.10 As of December 31, 1984, 7 projects were in arrears and 16 in litigation. Total arrears amounted to TD 2.8 million (TD 1.52 for overdue principal and TD 1.28 unpaid interest) and affected TD 9.1 in outstanding loans. Arrears were mainly due to management problems, economic downturn or changes of ownership. For the 7 projects in arrears, BDET has taken the necessary action. Calculations of economic rates of return were not required for subloans below TD 200,000. The larger projects (for which the ERR was computed) showed -- in most cases -- an ERR higher than 20%, which needs to be adjusted downwards to take into account BDET's occasionally optimistic assumptions, but still remains satisfactory. 2.11 Employment Creation. Loan 1189-TUN contributed only marginally to the creation of new jobs during the 1977-83 period; the 48 subloans on which information is available generated about 3,471 new jobs, about 61 lower than appraisal estimates. The average cost per job was TD 10,520, which is low compared to BDET's 1976 average cost per job (TD 12,000), but somewhat higher than those achieved under previous Bank loans (TD 8,000 for SNI III, IV and V). The average cost per job was low because investments were in the industrial sector rather than in the more capital-intensive tourism sector. D. Institutional Performance 2.12 Loan 1189-TUN was designed to help BDET improve its financial practices, as well as its appraisal and supervision capabilities. The loan was successful on the financial and institutional side, except for supervision which remained the area where BDET still had to improve its procedures, and it is in the process of doing so (PCR on Loans 1504-TUN and 1505-TUN dated June 1985). 2.13 At the time Loan 1189-TUN was negotiated, the Bank was concerned about BDET's low capitalization, the quality of its portfolio and the need for further management improvement. During 1976-1977, BDET improved very substantially on all these aspects. First, BDET secured TD 24.8 million in foreign loans and TD 4.5 million in local resources. Its capital was increased from TD 6 million to TD 10 million, which was the increase necessary to maintain BDET debt equity ratio below the agreed 5:1 limit. Second, BDET increased its provisions to a satisfactory level, as recommended by the auditors. Third, although BDET's interest paynto.s on borrowings increased by 140%, BDET was able in 1977 to raise the dividends that it distributed, from 6% to 7%. Fourth, in 1976, BDET reorganized in six departments (against three, previously) to improve management effectiveness and to decentralize decision-making, and appointed capable nationals to head all these Departments. During 1977, BDET streamlined its information system, prepared an organization manual and commissioned a study to competurize its data processing system. - 32 - 2.14 BDET's appraisal and promotion activities also improved significantly. Appraisal reports became more comprehensive and reliable, even if further improvements were still possible in market assessment, in estimates of employment creation, and in the evaluation of physical and financial contingencies. Those weaknesses were corrected during the 1978-83 period (see PCR on Loans 1504-TUN and 1505-TUN). BDET's promotional efforts shifted away from a regional concern (which proved little effective) to the identification of large innovative industrial projects; BDET was also more successful in finding reliable Tunisian promoters as well as foreign technical and financial partners for its projects. The significant success of the Promotion department in 1978 could be attributed to the decision to appoint as head of this department, the person who had been responsible during 1972-76 for the Appraisal department. 2.15 Supervision remains the weakest point in BDET's performance. At the end of the period under review, progress in this area had fallen short of expectations; while 100-120 projects needed close supervision in 1976, only 40 were visited that year. In 1977, during negotiations of Loan 1504-TUN, BDET agreed to take actions such as recruiting staff, strengthening the quality of supervision reports, and introducing systematic planning of visits to customers during their start-up period. In 1978, the Staff of the Supervision Division was increased from 4 to 6, and 80 supervision reports of good quality were produced. However, recommendatifps submitted in these reports were rarely followed by management action,-essentially because of the sudden increase in the volume of BDET's other activities which were the major preoccupation of the staff. Following the Bank's recommendations, BDET created in 1979 a Management Committee, which started weekly reviews of supervision reports; results, however, fell short of expectations. An extensive supervision program was initiated in 1984; so far, this program appears to be effective (See PCR on Loans 1504-TUN and 1505-TUN). 2.16 The description of BDET's ownership and control, Policies, Management and Staff, Operations, Portfolio, and Financial Position and Profitability can also be found in the PCR on Loans 1504-TUN and 1505-TUN. III. CONCLUSION 3.01 Loan 1189-TUN achieved the two objectives of helping BDET (a) fill its resource gap, and (b) improve its organization and financial practices. During the 1976-1977 period, BDET not only attracted substantial foreign resources but also issued a bond (of 7 million Kuwaiti dinars) on the international market; this issue was the first of its kind undertaken in Tunisia by a financial institution. BDET revised its provision for losses, reduced its administrative expenses and increased its net profits. The improvement of BDET's financial situation led the Bank to agree to an increase of its debt/equity ratio from a maximum of 5:1 to 8:1. BDET also undertook a major reorganization in 1976, which helped improve appraisal and promotion; supervision, however, still needed improvement. BDET has since taken appropriate measures to address the latter problem. 1/ BDET in its comments (see Appendix) questions the basis for this statement. - 33 - TUNISIA-SDET PROJECT COMPLETION REPORT SIXTR LOAN TO BANQUS DR DEVELOPPENT ECONDMIQUE D TUNISI5 (BDET) LOAN 1189-TUN List of Projects Financed Project No. of Investment BDET Loan (TO '000) Cost Jobs Cost per Job Total IBRD (TD'000) (TD1000) Financina Textiles. Clothing and Leather ld. Tunis. Broderie Automatique 2,090.0 91 23.0 1,080.U 178.9 Std. Tun. Fabric. Quir et Peaux 594.0 50 11.9 120.0 111.3 8t6 Non Tricot 335.0 54 6.2 80.7 80.7 Sodevic 270.0 65 4.2 100.0 98.8 St6. Tun. Ind. Chaussures (STIC) 252.0 50 5.0 150.0 140.3 Std. do Tissu Sponge Spongitex 250.0 78 3.2 147.7 147.7 Manudra 200.0 22 9.1 111.0 87.7 Simar 120.5 24 5,0 33.8 33.8 Std. Bonnetterie at Coaf. de Bdy-Bel 75.0 23 3.0 43.0 30.0 Malica (1) (1) (1) 105.5 105.5 Macotri (1) (1) (1) 310 Subtotal 4,186.5 95 .1. 2,017~ 1,027.0 wood Plastic and Paer Sociiti Nabli-Plastiques 673.0 53 12.7 280.0 160.0 St Ramocart 420.0 8 52.5 228.0 212.9 Manuf. Panaeaux de Bois du Sud 367.0 27 13.59 (1) 122.6 Cipap 354.0 70 5.1 210.0 206.1 Coaptoir National du Plastique 354.0 35 10.1 255.3 255.3 Inoplast 312.0 128 2.4 217.2 217.2 Seac 285.0 10 28.5 93.0 79.6 Menuiserie Hedi Khrouf & Cie. 219.0 15 14.6 100.0 99.8 Soci6ts Stramica (1) (1) (1) 462.0 424.1 Stf Tunisia Heubles (1) (1) (1) (1) 221.5 Subtotal 2,984.0 346 8.6 1,845.5 1,999.1 Others it Agro. Flora (Agro-Industries) 258.0 10 25.8 224.0 93.8 Sti Touni Couvoirs (1) (1) (1) 100.0 43.4 Sotaca (Alimentation B6tail) (1) (1) ( 35.6 29.1 Subtotal 258.0 10 25.8 . 166.3 TOTAL 363516,0 .471 10.5 14.887.7 10,461.5 T18 ~c - 35 - TUNISIA PROJECT COMPLETION REPORT LOAN TO THE REPUBLIC OF TUNISIA FOR SMALL SCALE ENTERPRISES AND SEVENTH LOAN TO BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIS (BDET) Loans 1504-TUN and 1505-TUN June 28, 1985 Europe, Middle East and North Africa Regional Office プ J 一自勺 J 8 て ー戸G入】 rc 電 石ト g r - 37 PROJECT COMPLETION REPORT TUNISIA LOAN TO THE REPUBLIC OF TUNISIA FOR SMALL SCALE ENTERPRISES AND SEVENTH LOAN TO BANRUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) (Loans 1504-TUN and 1505-TEIN)_ 1. INTRODUCTION 1.01 Loan 1504-TUN (in the amount of US$30 million to Banque de Dfiveloppement Economique de Tunisie, BDET) and Loan 1505-TUN (in the amount of US$5 million to the Republic of Tunisia) were appraised in June 1977, and processed together for the following reasons: (a) in the later part of 1976, the design of Tunisia's Fifth Plan (1977-81) was completed and proved consistent with a number of recommendations which the Bank had made earlier and was willing to support financially, especially as regards the'promotion of Small Scale Enterprises (SSEs) lh and (b) BUT had plans to keep expanding its operations and still needed assistance to meet its resource requirements; also, BUT was expected to help promote the development of SSE9. Thus Loans 1504-TUN and 1505-TUN were designed te help concurrently the Government start implementing its new SSE development/job creation policy, and BDET pursue its expansion program. A. Context and Origins ofthe Loans The SSE Component of the Loan 1.02 Starting in the early 70's, the development of Tunisia's manufacturing industry gradually changed orientation, from import substitution towards export oriented activities. The Fifth Plan (1977-81) foresaw (a) investments of TD 950 million in the manufacturing sector, with priority given to decentralization; (b) an increase in value added of 11.7% p.a. in real terms; (c) the doubling of manufacturing exports; and W the creation of 90,000 jobs. Most employment creation was to be in the private sector; this called for incentives to new entrepreneurs in both medium- and small-scale industries, the latter having been identified as offering a significant potential to contribute to efficient industrial development and job creation. 1.03 In late 1976, there were an estimated 80,000 SSEs in Tunisia, of which 18,000 in the manufacturing sector. SSE development had been at a disadvantage in the past, because the development strategy of Tunisia had given priority to large and medium enterprises. The Government, however, gradually came to perceive SSEs as important possible contributors to solve the country's unemployment problem, and in 1975 the Government set up a l/ An SSE was defined as an enterprise for which total project cost including permanent working capital is below TD 200,000 at 1976 prices and with an investment cost per job (created or maintained) of less than TD 4,.600 at 1976 prices. - 38 - budget-financed fund, Fonds pour la Promotion et la Ddcentralisation Industrielles (FOPRODI) 1/, to provide financial assistance to new SSEs. 1.04 Because of the large geographical dispersion of SSEs in the country and the Government's policy to promote decentralization, commercial banks -- with their network of branches all over the country -- became the main channel for directing FOPRODI funds. These banks were also expected to contribute some of their own resources to the financing of SSEs. Commercial banks, however, lacked experience in financing this kind of enterprise and projects, and therefore, needed technical assistance in this new endeavor. Following Bank advice, the Government decided that Banque de D6vetoppement Economique de Tunisie (BDET) -- the country's only industrial DFC at the time -- would so assist the commercial banks; 1iso, that Agence de Promo4 ion des Investissements (API) 2/ -- already in charge of determining (on behalf of the Government) projects' eligibility for FOPRODI financing -- would provide technical assistance to the SSEs involved. 1.05 The Bank supported the Government policies of promoting SSEs and encouraging decentralization, and was ready to assist in those directions. However, FOPRODI did not finance extensions of existing SSEs and the Bank recommended that the needs of such entreprises be also addressed. The Government endorsed the recommendation and selected BDET to be responsible for supporting SSE extensions. The Bank then agreed to financially support a pilot SSE project through the financing of new SSEs (Loan 1505-TUN of US$5 million, to the Government, for onlending to such enterprises through FOPRODI, administered by commercial banks), as well as the financing of extensions of existing SSEs (US$2 million, within the framework of overall Bank assistance to BDET, under Loan 1504-TUN). The Seventh Line of Credit to BDET 1.06 As the Fourth Plan (1972-76) was coming to a close and the Government was introducing the policy changes described above, BDET carried out a reorganization (in 1976) which resulted in considerable improvement in the effectiveness of its management, particularly in the areas of financial management and quality of portfolio. BDET's procedures were satisfactory, 1/ FOPRODI is a fund financed with allocations from the State budget and administered by banks who have signed an agreement with the Ministry of Finance. FOPRODI, through its subsidized loans (at 3%), encourages promoters of small industrial projects, especially those without many capital assets and located outside the Tunis region. Participating commercial banks benefit from a risk sharing mechanism (50%) with the Government. (For more details see Annex 24 of the Staff Appraisal Report No. 1734b-TUN dated November 29, 1977). 2/ API is a government agency under the responsibility of the Miristry of National Economy. API reviews project ideas and locations, and delivers preliminary authorization to promoters before they can submit their projects to banks for financing. - 39 - though improvements were still possible as regards project appraisals and -- especially -- supervision. Projects financed by BDET were carefully selected and had rates of return of 15% and above. BDET's arrears situation was under control and its provisions were satisfactory. The yield of BDET's equity investments remained low at less than 4% in 1976; yet BDET's profitability wasadequate. Recognizing the progress made, the Bank agreed in 1976 to an increase of the debt-equity ratio limit from 5:1 (as provided in BDET's policy statement) to 8:1. 1.07 BDET's approvals, which had declined in 1975 (essentially because of a resource shortage and the increased competition of commercial banks) 1/, picked up in 1976 (TD 30 million) especially with new projects -- as opposed to expansions of existing enterprises -- and with an increase in the average size and duration of loans. Between 1974 and 1976, total term resources available to BDET had almost doubled and the Bank's share in these resources had declined from 37% to 25%. Due to the thinness of the Tunisian domestic bond market, BDET's primary sources of domestic financial resources remained the Government and the Central Bank. 1.08 For the Fifth Plan period (1977-81), BDET -- in line with the Plan's guidelines -- was to give priority to projects (a) of high labor intensity; (b) export-oriented; (c) outside Tunis; (d) undertaken by new entrepreneurs; and (e) involving SSEs. BDET's yearly approvals were expected to increase gradually to TD 40 million ($100 million) by 1981. To finance this program BDET was to mobilize TD 143 million during the Fifth Plan (1977-81), and in late 1976, only TD 21 million had already been identified. A local bond issue was expected to mobilize only limited resources, and consequently, BDET had to borrow in the international markets a minimum of TD 20 million before the end of 1979. BDET, therefore, was seeking Bank support to help raise resources in the above markets and possibly fill its resource gap. B. The Loans 1.09 In the above context, the Bank undertook in late 1976/early 1977 the preparation of an operation to assist in the promotion of SSEs in Tunisia and in the further strengthening of BDET. The operation was appraised in June 1977. It comprised two loans; the first, extended to BDET (Loan 1505-TUN, of US$30 million), was composed of a line of credit of US$28 million to support BDET's operations (in priority sectors, in particular) and a pilot line of US$2 million to help BET finance extensions of existing SSEs; the second, extended to the Republic of Tunisia (Loan 1505-TUN, of US$5 million) to onlend to new SSEs (through the FOPRODI facility, administered by commercial banks). The loans were approved by the Board in December 1977 and signed in January 1978; they became effective in October 1978. 1/ Following the Government authorization that the limit of their medium-term credit be extended from 5 to 7 years. - 40 - 1.10 At the Government's request, BDUT was to administer Loan 1505-TUN, helping the participating commercial banks appraise projects and supervise their execution. The Government also requested API to serve as technical assistant to the small enterprises that would obtain financing under Loan 1505-TUN. 1.11 Because of the distinct objectives jointly pursued under Loans 1504-TUN and 1505-TUN, the review of the performance achieved under these loans will be clearer if it is conducted separately for (a) the traditional line of credit to BDET (Loan 1504-TUN, excluding the US$2 million line to BDET for SSE financing), and for (b) the pilot assistance program to SSEs (Loan 1505-TUN, plus the US$2 million line mentioned above). In the following, the implementation of this pilot assistance program will be reviewed first (since it was an experimental, policy-oriented operation which was expected to -- and actually did -- lay the basis for future loans more specifically focused on SSE development), followed by the review of the implementation of the Seventh line of credit to BDET (Loan 1504-TUN, excluding its small SSE component). II. THE PILOT SSE ASSISTANCE PROGRAM A. Context 2.01 Tunisians have a long tradition of craftsmanship and business capabilities. By 1976, the number of small non-agricultural enterprises (defined as enterprises employing less than 50 workers) was estimated to be close to 80,000, of which 18,000 in manufacturing 1/. Yet Tunisia's financial and industrial policies had not favored the development of SSEs until the late 1970s. Tunisia's past industrial development strategy had given priority -- and correspondingly, incentives and institutional support -- to large-scale public enterprises and, starting in 1970, to modern medium-size privately owned enterprises. This had not favored SSE development, because (a) investment incentives were linked to criteria such as the size of employment creation and value of exports; (b) SSEs had limited access to banks' financing; and (c) the authorities were providing no assistance geared to the specific needs of SSE9. 2.02 The gradual opening up of the economy in the early 70's -- and the consequent increased competition from imports -- exposed SSEs and revealed that most were barely efficient production units. Major problems adversely affecting their productivity and constraining their growth, included deficient production planning and accounting-mauagement, outdated machinery, lack of 1/ Traditionally, the SSE sector was mainly oriented toward the production of household goods for domestic markets. In 1973, three groups accounted for 63% of production: food and beverages (36%), metal products (15%) and textiles (12%); small firms were also important in furniture and building materials. A characteristic of Tunisian SSEs is the regional concentration, like weaving in Monastir, carpet making in Kairouan, and metal fabrication in Sousse and Sfax. - 41 - quality control, poor plant layout and product design, as well as poor working facilities. Also, in marketing their products, SSEs could not cope with market fluctuations due to acute shortages of raw materials (subject to import licensing) and to limited access to institutional finance. 2.03 A strategy to develop SSEs was to aim simultaneously at creating employment and improving productivity. Also, unemployment had been singled out by the Government and the Bank as the most important problem facing the Tunisian economy, and development of SSEs had been acknowledged as able to make a significant contribution to gainful emplcyment generation if the productivity and competitiveness of the small enterprises could effectively be increased. This was thought possible through upgrading operating techniqLes and replacing equipment. 2.04 A change in Government policy was marked by the creation (in 1974) of FOPRODI, a budget-financed fund to encourage the sponsors of new small industrial projects, especially those outside Tunis. Under the FOPRODI scheme, eligible entrepreneurs 1/ can obtain subsidized personal loans to supplement their venture capital and to help them acquire a majority ownership in the equity of the new enterprises. The smaller projects (total cost under TD 30,000 2/) are also eligible for subsidized long-term credits; these credits are made to the SSE rather than the entrepreneur. Eligibility for FOPRODI assistance is determined by API. FOPRODI is administered through participating commercial banks, which are expected to contribute their own resources in term loan financing, as necessary, to complete the financial plan for FOPRODI projects. From December 1975 (when FOPRODI became operative) to May 1977, FOPRODI had financed 81 projects, with total investments of TD 7.1 million and creating 2,550 new j6bs. In 1975, another significant step was taken towards an integrated program in support of SSEs: an SSE policy making unit was created in the Ministry of the Economy. 2.05 The transition from traditional small enterprises into efficient units, however, required some support by the Government, through various forms of technical and financial assistance. In the Tunisian environment, this meant establishing a specialized agency, through which all forms of public assistance to SSE development could be coordinated. API, which was responsible for selection of projects eligible for FOPRODI assistance, and already had a network of regional branches, appeared to be the most suitable agency to coordinate ongoing assistance to SSEs, and to establish within its organization an extension service catering to SSEs. Thus a countrywide system of technical assistance to SSEs, built around the API network of regional branches and combining efforts with Agence Foncibre pour l'Industrie (API), Centre National d'Etudes Industrielles (CNEI) and local governments appeared to be the optimal technical assistance support for the project. I/ Tunisian citizens with technical qualifications, willing to devote themselves full-time to the new enterprise and sponsoring a project costing less than TD 200,000 (this limit was revised upwards to TD 500,000 in October 1977) 2/ This limit has been revised upwards to TD 75,000 in October 1977. - 42 - 2.06 It is in this context that the Bank agreed to extend a loan (Loan 1505-TUN) to the Government to onlend to new SSEs within the framework of FOPRODI (administered by commercial banksT-ind a pilot line of credit (part of Loan 1504-TUN) to BDET for financing extensions of existing SSEs. B. Objectives 2.07 In response to the Government's concern with the country's unemployment problem, the Bank extended a pilot SSE line to the Government, designed basically to; (i) promote a faster growth of productive employment by creating, through SSEs, more jobs at an average cost significantly lower than in the rest of the industrial sector; (ii) develop the industrial base of less developed regions in the country; and (iii) assist new and existing SSEs increase their productivity to that of larger firms. Simultaneously, Bank assistance to SSE development aimed at helping the Government (i) establish its institutional and technical capacity to formulate an SSE development policy; (ii) improve the quality and volume of technical and managerial assistance provided to SSEs; and (iii) develop a financial assisLance scheme tailored to the requirements of small firms, facilitating their access to credit. SSE Development Policy 2.08 The Bank expected that, through the SSE component of Loan 1504-TUN and through Loan 1505-TUN, it could assist the Government in identifying and introducing policy changes and new legislation needed to promote the viability and self-sustained growth of SSEs. Technical Assistance 2.09 The establishment of a system to deliver technical assistance to SSEs was a major objective of the project. The Government intended to to entrust API with the responsibility for setting up such a system, and expected API to make use of its network of regional branches. The Bank expected that API would create an SSE Department (composed of four staff at API's headquarters, and two in each of its four regional offices), which would receive the support of CNEI and API. API's technical assistance staff would concentrate on identifying SSE projects and assisting promoters in preparing their projects, obtaining financing and properly implementing the projects. Later, extension services under API's supervision were to provide follow-up assistance, especially in the areas of financial management, marketing and productivity improvement. - 43 - Financial Assistance 2.10 In addition to increasing resources for SSE development, the Bank assistance was aimed at organizing and developing an operational framework for more efficient financial intermediation which could effectively reach SSEs all over the country. To achieve this objective, the program was to take advantage of (i) BDET's lending experience to the industrial sector, and (b) the extensive network of branches and contacts of the five participating commercial banks 1/. BDET as administrator of (and participant in) the program was to be responsible for guiding and monitoring the activity of commercial banks which were to promote the largest possible number and most diverse types of projects. 2.11 The loan was basically designed to finance projects that were potentially sound but could be hampered in their implementation by the lack of adequate credit (e.g., long repayment period, extensive coverage) and stringent requirements (e.g., as regards promoters' personal assets). The terms and conditions of subloans to promoters are described in Annex 1. C. Program Execution Utilization of the Loans 2/ 2.12 The Tunisian economy expanded rapidly during the period of project preparation. GDP increased at an average annual rate of 6.5% (1976-1979) and the manufacturing sector grew at an average rate of 11.5% p.a. However, the project implementation period was marred by several unfavorable developments, inter alia (a) wage increases beyond productivity increases, (b) a significant slowdown of export growth (especially of petroleum products, phosphates, agricultural products and tourism), and (c) stagnation of agricultural output. 2.13 Commitments and disbursements of the loans lagged behind projections due to these economic conditions and to some of the features of Loan 1505-TUN which momentarily made financing of subprojects unattractive to participating commercial banks. Cancellations amounted to TD 1.06 million (or 20% of the loan amount) for Loan 1505-TUN, and US$0.7 million (or 36%) of the $2 million component of Loan 1504-TUN. Overall, the project was executed according to the description presented in the loan agreement, and compliance with loan covenants was satisfactory. 2.14 Causes of Shortfalls. At the time of appraisal, the Bank expected Loan 1505-TUN (US5 million) to finance between 50 and 60 subprojects; taking into account the cancellation of $1.06 million, the loan should have financed 39-47 subprojects. The loan actually financed 26 subprojects, 15 through BDET 1/ Soci6tS Tunisienne de Banque (STB), Banque Nationale de Tunisie (BNT), Union Internationale de Banque (UIB), Banque Internationale Arabe de Tunisie (BIAT), and Banque du Sud (BS). 2/ i.e. Loan 1505-TUN and the SSE component of Loan 1504-TUN. - 44 and 11 through commercial banks; thus there was a shortfall of 33-45% of the number of projects financed under Loan 1505-TUN. In the case of the SSE component ($2 million) of Loan 1504-TUN, expectations were that 20-30 subprojects would be financed; or 13-19 subprojects after taking into account the cancellation of US$0.7 million. The loan actually financed 11 subprojects; which would correspond to a 15-42% shortfall. The total US$3.94 million drawn.from Loan 1505-TUN and the US$1.2 million drawn from the SSE component of Loan 1504-TUN contributed to the financing of 37 projects, of which twenty-six projects were financed by BDET, seven projects by BNT, three by STB, one by BIAT; UIB and BS submitted no project (Annex 2). 2.15 The shortfalls of the number of SSE subprojects financed with the funds effectively mobilized (i.e. after account is taken of cancellations) were in part due to: (a) inflation, which increased total investment cost of some subprojects above the agreed ceiling, thus reducing the number of eligible subprojects; and (b) the fall of the US$ against other major currencies (e.g., the French Franc, the Italian Lira and the Dautch Mark) especially during the 1979-80 period, which increased the amount paid (in foreign currencies) by the Bank for each subproject, thus showing a smaller number for the subprojects effectively financed. 2.16 The other causes of the shortfalls were stated by commercial banks as follows: (i) the banks were not authorized to meet their "medium-term lending ratio" 1/ through using Bank resources (para. 2.17); (ii) guarantees offered by SSE promoters to the banks were insufficient (para 2.18); (iii) the renumeration system was not particularly attractive (para. 2.19); and (iv) administrative procedures were cumbersome (para. 2.20). 2.17 The loans extended by commercial banks under the credit line were not accounted for towards meeting the "medium-term lending ratio" monitored by the Central Bank; therefore, as long as a high liquidity situation prevailed, the banks preferred using their own resources rather than the credit line. In 1/ The Central Bank requires commercial banks to allocate a certain percentage of their deposits for medium-term loans to the private sector; since 1976, this percentage has been 18%. If a bank does not meet this requirement, it is penalized by having the counterpart of its shortfall frozen in a non-interest-bearing deposit at the Central Bank. - 45 - that respect, BDET --which is not constrained by this "ratio" -- had no disincentive for using Bank funds. Subsequently (under Loan 1969-TUN), commercial banks were able to take advantage of incentives provided by the Government, especially in the form of additional rediscounting opportunities (para. 2.22). 2.18 In the absence of extensive guarantees, commercial banks found the risk of financing SSEs very high. Commercial banks are accustomed to take multiple guarantees (mortgage on land and buildings, chattel mortgages on equipment and goodwill), which often cover 150% or more of the loan amount. This practice, however, could not be applied with most SSE projects, since entrepreneurs own only modest -- if any -- personal properties. As a result, many SSE projects approved by API proved unattractive to commercial banks. Although the risk under the pilot line was equally shared by the banks and the Government, the banks considered this provision inadequate. In contrast with BDET's experience, the commercial banks' reliance on personal guarantees was also exacerbated by their more limited ability to assess the viability of projects through project appraisal. 2.19 Commercial banks also came to perceive the remuneration that they received for their intermediation as inadequate. Because Bank funds were to be used according to a scheme agreed upon between the Bank and the Government, the banks could not secure a conventional spread; instead they were receiving various commissions from the Government, as in the case of the FOPRODI loans 1/. Under this arrangement, the banks' renumeration was linked to actual collection of principal and interest -- which was the banks' responsibility -- to avoid the build-up of arrears. Assuming smooth collection of the subloans, the bank's commissions were to be equivalent to a 1.5% spread, which is low compared to the usual commercial banks' spread of 3% and above. Consequently, commercial banks gave low priority to the use of Bank funds for SSE financing. This was not a problem for BDET which already had experience in assuming a development role, and received Government compensation to secure a reasonable profit margin permitting sufficient reserves and provisions as well as a reasonable return on capital. 2.20 Commercial banks perceived as excessive the requirements of BDET when reviewing their subprojects. They felt at times that BDET's standards for appraisal reports were too high. The situation was eventually resolved when it was agreed that the format of appraisal reports of SSE projects used by commercial banks could be simplified 2/ without affecting quality. Ultimately, to avoid any further possible or perceived conflict of interests 1/ i.e. one half of one percent of the amount of the loans extended, plus a percentage (from 5% to .5%) of the amounts recovered (principal and interest) depending of the recovery ratio achieved (from 100% to 60%). 2/ One purpose of the SSE line was to test the commercial banka' ability to channel financial assistance for development. This ability was proved, leading to the 1981 SSI project (Loan 1969-TUN) which involves the commercial banks along with BDET. -46 - between BDET and commercial banks, it was decided that the SSI project made in 1981 (Loan 1969-TUN) would be administered by API and the Central Bank; this proved to be an appropriate arrangement. 2.21 Another problem which was resolved during supervision after commitments under the credit line were slowed down, was the commercial banks' reluctance to finance working capital with medium-term loans. Special agreement under the subsequent Loan 1969-TUN made it possible to overcome this problem for the 1981 SSI project. 2.22 Drawing on the Experience. Because this was a new area for the Bank, the Bank was relatively slow in reacting and helping implement the necessary solutions; also, more flexible responses would have been desirable, considering that SSE financing was still untested in Tunisia. Nonetheless, Loan 1505-TUN and the SSE component of Loan 1504-TUN were instrumental in designing the subsequent SSI project (Loan 1969-TUN) which addressed the above shortcomings. First, the Central Bank agreed to increase the banks' rediscount quota 1/ by one Dinar for every Dinar they committed on the Bank loan. This increase in the banks' access to cheaper resources was offered to compensate the banks for the risk of incurring the penalty for not meeting their medium-term lending ratio; this measure translated into an additional renumeration of 0.75% to 1.75% per year. Secondly, the level of commission was increased from 1.5% to about 2%. Thirdly, the guarantee was improved and extended to all SSI projects. In particular, the Government agreed to increase its share of the risk from 50% to two-thirds for FOPRODI assisted projects; for other projects, it agreed to cover 50% of final risk. Finally, the credit program was extended to the financing of permanent working capital. Characteristics of Subprojects 2.23 The subprojects financed under the pilot program had costs ranging from TD 47,500 to TD 330,500 2/. The average cost amounted to TD 177,365. Of the 37 projects financed under Loan 1505-TUN and the SSE component of Loan 1504-TUN, about 70% were new operations, and the remaining 30% expansion of existing enterprises. The sectoral breakdown reflected the relative importance of the subsectors in the Tunisian economy; the main beneficiaries were construction materials (27%), plastic, wood and paper (27%), textiles, clothing and leather (24%), food and beverage (11%), and EMI (11%). 2.24 As for the regional distribution, 65% of the subprojects financed were located outside the greater Tunis area. Of the 26 subprojects financed under Loan 1505-TUN, 92% were FOPRODI assisted, compared to the 100% expected at the time of negotiations. The results achieved are summarised below. I/ Each commercial bank was given a quota of commercial paper which it can take to the Central Bank for rediscounting. 2/ This maximum cost being consistent with the TD 200,000 (in 1976 prices) ceiling adopted at the time of negotiations. - 47 - Table 2.1: Characteristics of Subprojects financed Under Loan 1505-TUN and the SSE Component of Loan 1504-TUN Loan 1505-TUN SSE Com2onent Total Number of projects 26 11 37 Jobs created 930 330 1,260 New enterprises 25 1 26 Total Cost of projects (TD million) 4.76 1.8 6.56 Average cost per job created (TD) 5,118 5,454 5,206 Implementation of Subprojects 2.25 All 26 subprojects financed by BDET.l/ under Loan 1505-TUN and the SSE component of Loan 1504-TUN are now operational. Of the 26 subprojects, 15 were completed in time and the remaining 11 (or 42%) experienced delays. The main causes of delays were: (i) administrative constraints (e.g., customs procedures, utility connections), (ii) procurement of construction material and equipment (e.g., delivery time, price changes, changes in suppliers), (iii) management problems (e.g., limited time to follow projects), (iv) long procedures to disburse the subloan proceeds, and (v) difficulties encountered by promoters in finding additional credit to meet cost overruns. Delays in the implementation of subprojects could have been limited by more careful subproject preparation and appraisal, as well as by better supervision by BDET. In this respect, BDET later agreed with the Bank on systematic supervision programs for 1984 and 1985 (para 3.38). 2.26 Of the 26 subprojects, 11 experienced cost overruns (42%). Cost overruns originated from procurement of equipment (and related expenditures, e.g., installation, transport, etc), and construction of buildings (including utility connections and site preparation); but mainly, from underestimation of working capital needs. Cost overruns were most frequent with subprojects that experienced implementation delays; they were caused in part by insufficient project preparation and follow-up. 2.27 As of September 30, 1984, 3 projects financed by BDET were in arrears due to technical and financial difficulties, and 2 projects were in litigation. Total arrears amounted to TD 59,352 (TD 48,160 for overdue principal, and TD 11,192 for unpaid interest) and affected TD 214,621 in outstanding loans. Given the small size of the subprojects, estimates of economic rates of return were not required. 1/ Commercial banks have not sent enough detailed information about the projects that they financed. - 48 - Employment Creation 2.28 The 37 subprojects generated 1,260 jobs, or 25% less than the 1,690 1/ estimated for the total amount disbursed. This was mainly due to design problems not foreseen at the beginning of implementation. The average cost per job was TD 3,582 2/ compared with the TD 4,600 amount (both at 1976 prices) covenanted. The lowest cost per job created was TD 2,000. The number of jobs that will be effectively created might eventually increase over time -- and the average cost per job decrease -- as firms mobilize their capacity more fully and hire additional personnel. D. Policy and Institutional Impact Policy Impact 2.29 Loan 1505-TUN and the $2 million component of Loan 1504-TUN were instrumental in firming up the Government's perception that SSEs were a good vehicle for economic development and job creation. As a result, at the Government's request, the Bank agreed to finance in 1981 an SSI project (Loan 1969-TUN). The SSI project established a framework for an integrated approach to SSI development in Tunisia and it is now being tested as regards its adaptability to changes in (a) the economic environment (e.g., slowdown in industrial investment), (b) the financial sector (e.g., relative availability and cost of financial resources), and (c) Government socio-economic priorities (e.g., public expenditure limitations due to budgetary constraints). 2.30 So far, the experience of the SSI project indicates that (i) SSI development deserves the priority it was given because it does generate substantial employment at very low cost and with limited Government intervention and subsidies, (ii) the institutional framework for SSI development established under the project is sound and can be basically maintained for future operations; and (iii) the capability of the institutions concerned with SSI development to respond to change should be enhanced. Concerning the latter, the Bank has encouraged API to develop a program to promote (a) the use of SSI credit in new industrial sectors with more advanced technology, and (b) industrial integration through identifying and realizing the subcontracting potential of SSIs; the Bank also asked the Central Bank to propose measures to make SSI financing more attractive for commercial banks (larger spread, increase of the cost per job created and of total investment cost, and direct onlending of Bank loan to commercial banks). Organization and Procedures 2.31 Loan 1505-TUN aimed also at: 1/ The number originally expected was 2,300; i.e. before $1.76 million were cancelled out of an original provision of $7.0 million. 2/ The actual average cost amounted to TD 5,206; the 1980-1976 deflator was established at 0.688. - 49 - (i) structuring the Government's intervention around API; (ii) assigning to BDET the role of credit program.administrator and; (iii) offering commercial banks' access.to Bank financing. 2.32 A most significant achievement of the loans under review was building API's capability to (i) identify SSE projects; (ii) assist sponsors in preparing their projects, obtaining financing, and implementing projects effectively; (iii) provide follow-up assistance (especially in the areas of financial management, marketing and improvement of productivity); and (iv) become a reliable advisor to participating banks. During project execution, it became clear that BDET could not easily play a central role in promoting SSEs, and that API -- which already had the responsibility for authorizing projects -- could indeed take a lead role in project identification and technical assistance matters if it effectively organized itself for that purpose. Special efforts were then made to build such capacities into API, and they were substantially successful. 2.33 From 1978 to 1983, API grew and improved considerably. To achieve its objectives, API created an SSE Department with the help of three expatriates, hired four professionals and sent them abroad for training. The Department is now well established and experienced, and operates smoothly with three Tunisians and only one expatriate. API also set up a country-wide network of assistance to SSEs. Technical assistance was also provided by API through its general pool of 20 specialists. 2.34 In order to ensure that SSE expansion projects would receive appropriate attention, BDET set up -- in response to Bank advice .-- a special SSE Unit staffed with two specialists, responsible for processing subprojects and administering Bank funds, whether these projects and funds were financed and used by BDET or by commercial banks. During project implementation, this administration by BDET gradually developed into an issue because the participating commercial banks perceived BDET's requirements on project appraisals as excessive, and saw as a situation bordering on a conflict of interest the fact that BDET was simultaneously a user and the administrator of the loan. For a number of subprojects submitted by participating commercial banks, clearance by BDET took A long time; this gives a partial explanation for the fact that 15 projects out of the 26 projects financed under Loan 1505-TUN were financed by BDET. (Alternative arrangements were assessed and a more suitable one -- using API as the apex institution -- was subsequently adopted under Loan 1969-TUN; para. 2.20). Nonetheless, BDET's inter4ention resulted in a significant improvement in the quality of the appraisals carried out by the participating commercial banks. 2.35 The participating commercial banks had to abide by (i) regulations of the FOPRODI scheme, (ii) BDET's technical clearance, and (iii) API's review, all these implying requirements as regards subproject eligibility, appraisal criteria, procurement procedures, and documentation on expenditures. The commercial banks met most of these requirements, although incomplete dossiers were occasionally submitted to BDET for project financing. In spite of the - 50 - difficulties encountered by the participating commercial banks, the project was rather successful in establishing an appropriate system of subproject appraisal. The participating banks were brought to review in a systematic way the financial and technical feasibility of subprojects, and to acknowledge the need of monitoring the projects' implementation and initial operation. E. Conclusions 2.36 Loan 1505-TUN and the SSE component of Loan 1504-TUN achieved to a large degree the sectoral, institutional and operational objectives set at the time of appraisal. They represented a major source of financing for SSE development, supporting the creation or expansion of labor intensive enterprises in various industrial subsectors. They were also successful in enhancing APIs capability to deliver substantive technical assistance to SSE promoters on project preparation and design, and in providing a significant base on which to design a concerted policy responsive to SSE needs. 2.37 A lesser success was achieved as regards the participation of commercial banks. Participating commercial banks were able to upgrade their project appraisal capabilities, but they did not utilize the pilot line as much as expected at the time of project appraisal, mainly because of low remuneration and the learning process involved in a new type of activity. The Bank -- on its part -- did not react as quickly to this situation as would have been desirable, essentially because SSE financing was also new to the Bank. 2.38 The implementation of the pilot program made it possible to assess more accurately and comprehensively the specific problems attached to SSE development, in particular the type of incentives (in terms of remuneration, risks and guarantees) that commercial banks would find necessary to consider favorably the possibility of participating in such promotional activities. The banks' remuneration was significantly improved, and the volume of their rediscountable paper with the Central Bank was increased by an amount equivalent to the amount of Bank funds withdrawn. As a result, commercial banks confirmed their interest in SSE financing, and they are the essential channel through which Bank funds under Loan 1969-TUN (SSI Project; 1981) are being onlent to small-scale industries. Also API was selected to review and evaluate project appraisals by commercial banks, and was made the apex institution to the development of the SSE sector. - 51 - III. THE SEVENTH LINE OF CREDIT TO BDET A. Context 3.01 In 1976, BDET -- the only industrial development finance institution in Tunisia -- contributed about 30% of totAl term lending to the industrial and tourism sectors. In the 1974-76 period, BDET-financed projects generated on average about 9,000 new jobs per year, at an average investment cost per job of about TD 9,000. Export projects were only 4% of BDET's 1976 approvals while 13% involved new entrepreneurs. Slightly less than one half of BDET's operations were in Greater Tunis and -- as agreed with the Bank -- tourism financing was reduced to 25% of the total. The financial and economic returns of BDET's projects were generally satisfactory (above 15%). After a slight decline in 1975, BDET's approvals returned in 1976 to a level (TD 30 million) more consistent with past volumes and trends. 3.02 BDET's resources nearly doubled between',1974 and 1976, including a successful bond issue of 7 million Kuwait Dinars in 1976. For mobilizing domestic financial resources, BDET remained largely dependent on the Government and the Central bank . 3.03 By 1976, BDET's arrears were significantly reduced and were under control, while provisions had been brought up to a satisfactory level. BDET's profitability remained adequate; in 1976, dividends were raised to 7% and the Bank agreed to an increase in the limit of BDET's debt/equity ratio from 5:1 to 8:1. 3.04 Over the Fifth Plan period (1977-81) BUDET expected its approvals to increase regularly, reaching TD 40 million by 1981 when BDET would still provide about 30% of total term financing for industrial projects. The sectoral orientation of BDET's projected industrial lending for the period of the Fifth Plan (1977-81) reflected that of the Plan itself, with the main emphasis on electro-mechanical industries (especially light industry), followed by the construction and construction materials industries, and by the textile, chemical, food processing, and wood and paper industries. The Plan also assigned priority to labor intensive and export-oriented industries and to the development of new entrepreneurships, and placed great emphasis on decentralizing industry away from the coastal urban areas, and Tunis in particular. In October 1977 BDET formally decided that, for the Fifth Plan period, it would strive to finance and promote certain priority projects, namely: (a) labor intensive projects (defined as having an investment cost per job not exceeding TD 4,600 at 1976 prices); (b) decentralized projects; (c) projects sponsored by new entrepreneurs; (d) export-oriented projects (defined as those expected to export more than 20% of production) promoted by Tunisians; and (e) small-scale industrial projects. A number of related quantitative targets were also adopted 1/. 1/ At least one-third of BDET's new approvals were to go to labor intensive projects; 60% to projects outside Tunis; 25% to projects of new entrepreneurs; and 10% to export projects. - 52 - 3.05 Over the Plan period, BDET's resource needs were estimated to amount to TD 143 million. Of these, about TD 56 million were to be met in 1978 and 1979 and only TD 21 million had been identified by late 1976. A local bond issue was expected to mobilize TD 1 to 2 million, and therefore some TD 34 million were still to be secured; about TD 20 million from the international markets, and the rest from the Bank. BDET was counting on Bank assistance -- in the form of a new line of credit -- to help bridge its resource gap and confirm BDET's standing in the international financial community. 3.06 By late 1976, expectations were for BDET's profitability to decline over the coming years because BDET was still subjected to the Government's low interest rate policy -- BDET's nominal lending rates were 9 and 9.5% in 1976 -- and could not afford raising its rates significantly without losing its competitiveness vis-h-vis commercial banks which extended loans to industry at rates of 8 and 8-1/4%. Thus a need clearly existed for (i) an arrangement to be adopted by which BDET's cost of resources would not worsen and its lending rates could be slightly raised; and (ii) BDET to increase its capital (probably by 1980, if BDET's debt equity ratio was to be maintained below 8:1). On the first point, BDET was counting on the Bank's support to obtain adequate Government assistance. B. Objectives 3.07 In the context described above, the Bank agreed to extend a seventh line of credit to BDET. The three main objectives pursued through this new assistance revolved around helping BDET (i) Meet its foreign exchange resource requirements for the financing of industrial projects, especially in the private sector, along the priorities it had adopted in line with those of Fifth Plan. The earmarking of the loan for priority projects was intended to encourage BDET to concentrate on areas where special efforts were necessary for the country's overall economic benefit. It was expected that (a) about 60% of the loan would finance projects located outside the Tunis area; (b) approximately 25% of the projects financed would be sponsored by new entrepreneurs; (c) export-oriented projects would represent about 10% of the projects; and (d) about one-third of the proposed loan would finance projects meeting the labor intensity criterion of TD 4,600 -- at 1976 prices -- invested per job created. (ii) Establish itself as a viable borrower in the international financial markets, thus becoming less dependent on concessionary financial resources, and on IBRD loans in particular. Continued Bank support was to help consolidate BDET's standing in the international financial community. The Bank's share in BDET's total borrowed resources was to decline from 23% of total term borrowing at end-1976 to 18% by the end of 1979, and 15% by 1981. - 53 - (iii) Further improve the effectiveness of its staff in appraisal and supervision work, as well as implement the agreements reached with the Government on resource mobilization, lending rates and Government compensation for BDET's losses on account of its foreign exchange borrowings. C. Utilization of the Loan The Economic and Sectoral Environment 3.08 Economic and Social Developments. Following the Government's decision in 1970 to adjust its economic policies, adopting an outward oriented strategy and encouraging private initiative, the Tunisian economy expanded rapidly in the 1970s 1/ and at a relatively slower pace from 1980 to 1983. GDP increased at an average annual rate of 6.5% during 1976-79; in 1980-1983, the GDP growth rate decreased to 4.3%. In the latter period, five worrisome factors were seen in the Tunisian economy: (i) the overheated conditions of the economy 2/, (ii) wage increases exceeding productivity increases, (iii) the significant slowdown of export growth (especially of petroleum products, phosphates, agricultural products and tourism), and (iv) the stagnation of agricultural output (especially in 1982). In 1982-1983, the domestic and external imbalances worsened severely, with the budget deficit rising to 5.5% of GDP in 1983, from 2.5% in earlier years. 3.09 In spite of the economic growth and high investment level, the employment situation did not improve during the 1977-1983 period, and unemployment still remains Tunisia's most important social and economic problem. It is estimated that 12 to 13% of the labor force was unemployed in 1980 and that an equal proportion was underemployed, particularly in the tural areas. 3.10 Under the Sixth Plan (1982-1986), the Government undertook to address the problems of rising unemployment and decline in net energy exports, by promoting more productive and labor intensive projects. The Government also adopted a new Investment Code (Law 81-56) and determined to (a) reduce investments in infrastructure, (b) promote labor intensive industries, and (c) slow down the growth of private consumption. While reducing low priority investments was expected to be relatively easy -- as most of these were under Government control --, slowing down the growth of private consumption and increasing more productive and labor intensive investments was expected to be somewhat more difficult. As of late 1984, actual developments had fallen short of expectations, with the investment rate remaining high, job creation still low and consumption still on the high side. 3.11 The Manufacturing Sector. Manufacturing industry has been a relatively fast growing sector of the Tunisian economy. In 1972, the country changed its sectoral policy orientation -- away from an inward looking one, 1/ Except for a short period of stagnation in 1973, due to drought. 2/ Due to excess demand in investments and consumption. - 54 - with most investments going to import substituting activities -- and adopted anew investment code (Law 72-38) which instituted a set of incentives for export industries, lightening taxes, exchange controls and customs regulations. Subsequently, investments in the manufucturing sector kept increasing (particularly off-shore investments) and went from 11.7% of total investment in 1971 to 22% in 1983. From 1972 to 1980, manufacturing grew at an average rate of 11.5% p.a., and from 1980 to 1983 at 7.3% on average. The share of manufacturing in GDP increased from 9.5% in 1970 to 13.7% in 1980, and to an average of 14.2% in 1980-1983. Howevar, the 1972 policy changes did not relax the excessive protection of domestic industry (in the form of high duties, stringent import licensing, and heavy taxation of imported inputs) that had developed over time into a system not conducive to either efficiency, high productivity, or optimal use of installed capacity. 3.12 In 1980, employment in the manufacturing sector accounted for 30% of total employment and employment created in the sector from 1977 to 1981 accounted for 45% of total new employment. Employment creation over the 1982-1984 period fell short of Plan targets (by about 23% in non-agricultural activities), in the public aswell as the private sector, primarily because factor prices changed to the detriment of labor 1/ and new investments were less labor-intensive than expected 2/. Over the 1977-1981 period, value added in manufacturing grew at a rate of 10.2% p.a., compared to 6.7% p.a. for GDP. The subsectors contributing most to growth of manufacturing and employment creation were textiles, construction materials, and electro-mechanical industries (EMI). Achievements 3.13 Financing of Priority Subprojects. The traditional line of credit to BDET (i.e. Loan 1504-TUN, minus the $2 million pilot line for SSEs) was intended to help BDET concentrate its promotional activities in areas where efforts were needed for the country's economic development, as presented in detail in para. 3.04. 3.14 Loan 1504-TUN (excluding the $2 million pilot line for SSEs) was fully used and assisted in the financing of 37 projects, with a total value of TD 40.9 million (US$57.4 million), creating about 2,550 jobs. The average maturity of BDET loans was 10 years, including an average grace period of 2 years. The essential results are summarized below: 1/ The accelerated rise in wages resulted in a 15% increase in the relative cost of labor between 1981 and 1983, largely offsetting the relative decline observed during previous years. 2/ The share of directly productive (as opposed to infrastructure investments, for example), mostly labor-intensive investments increased only marginally and, within the relatively labor-intensive sectors, actual investments were more capital-intensive than expected. - 55 - Table 3,1: Characteristics of Subprojects Financed Under Loan 1504-TUN Number of projects 37 of which, - in Tunis area, 13 - outside Tunis area 24 Jobs created 2,552 New enterprises 24 Labor intensive projects 13 Cost of projects (TD million) 41 Foreign exchange cost of projects (US$ million) 28.1 Average cost per job created (TD) 16,032 Nota: 1983 average exchange rate $1 = TD 0.713. 3.15 The subprojects financed under Loan 1504-TUN show that the objectives were substantially met. The credit line was fully disbursed. Of the 37 subprojects, 63% are located outside the Tunis area, 65% have involved new entreprises, and 22% are export oriented; for details, see Annex 7. Thus the project appears to have effectively contributed to implementing the Government's new industrial development policy. 3.16 The credit line mostly financed priority sectors. Of the 37 subprojects financed, EMI was the largest beneficiary (38.7%); other main beneficiaries were food processing (17.3%), construction (14.6%), and wood and paper (14.1%). A breakdown of the sectoral distribution of the 37 projects financed under Loan 1504-TUN is given in Annex 8. In general, projects were slightly more capital-intensive than expected; as a result, the loan did not contribute to the creation of as many new jobs as was originally hoped, which is partially explained by the increase of labor costs during the project implementation period and the preference that promoters correspondingly developed for less labor intensive undertakings. 3.17 All 37 sub-projects financed under the loan are operational now. As of September 30, 1984, 12 were in arrears (involving a portfolio of TD 3.8 million), of which 2 were under litigation. Of the 37 companies involved, 20 were operating profitably and 17 at a loss. About 20 projects had registered cost overruns and 18 experienced delays in implementation. The disappointing performance of some of the projects financed under the loan is due to a large extent to inadequate supervision by BDET, which did not permit that problems affecting the implementation or operation of the projects be identified early and promptly resolved. A more systematic supervision program (para 3.21) was agreed with the Bank for the year 1984 and as since helped identify and implement the measures necessary for improving this performance. 3.18 BDET's International Borrowings. Loan 1504-TUN was to help BDET become a significant borrower in the international financial market, thus becoming less dependent on concessionary financial resources and on IBRD loans in particular. At the time of appraisal, the Bank had expected that its share in BDET's borrowings would decline to 18% and 15% in 1979 and 1981 - 56 - respectively. This objective was not achieved; BDET's reliance on Bank funds increased and reached 23% and 26% of total outstanding borrowings in 1979 and 1981 respectively. This resulted from BDET's limited ability to borrow from the international market, in part because of the presence of the Government on the same market (para. 3.18) and of BDET's low financial margin on its portfolio (para. 3.31). 3.19 The Government's substantial foreign borrowing program made it difficult for BDET to tap the same market simultaneously, and the cost of international resources was too high in comparison to BDET's lending rates. Consequently, to meet part of its cash requirements, BDET had to borrow short-term resources in the local market and from Union Tunisienne de Banque (the Central Bank's branch which raises funds on the international market in Paris) and BDET's short-term debt increased from zero in 1978 to TD 32 million at the end of 1983. BDET's liquidity position improved in 1983 when BDET raised US$60 million (TD 43.5 million) in medium-term funds by issuing Floating Rate Notes (FRN). In 1984 however, the disequilibrium in the current ratio worsened again; short-term debt reached TD 50.6 milli?p at the end of 1n DET had to resort again to short-term borrowing.- Following the Bank's request for a more balanced financial situation, BDET made the necessary arrangements to borrow in mid-1985 an additional US$66.2 million (TD 55.0 million) on mediu-term conditions which enabled BDET to repay the bulk of its short-term borrowings and improve its current ratio 2/. In February 1985, during negotiations of the Export Industries Loan, BDET's resource mobilization plan for 1985 was reviewed and agreed with the Bank; it was also agreed that detailed plans for the mobilization of resources would be reviewed and agreed every year (starting in 1986) between BDET, the Government and the Bank. 3.20 Further Strengthenin of BDET. During the 1977-83 period, BDET kept improving the quality of its appraisal work in spite of significant changes in its staff and management (para. 3.24). BDET staff is carrying out project appraisals of good quality. The area where improvements are still possible is the economic analysis of projects. The Promotion Department was also effective during that period; however, to compete effectively with the new development banks, BDET will have to further strengthen this Department and be more assertive in finding new project ideas and promoting them. 3.21 On the other hand, since 1977, BDET's supervision has remained unsatisfactory. This was due in part to the fast increase of BDET's operations which absorbed the attention of the staff and management, and to the fact that the size of the staff responsible for this activity did not increase in line with the growth of operations. BDET, however, came to share the Bank's concern with this issue when arrears reached a very significant level in 1982 and 1983 (para. 3.35). In 1983, the Bank and BDET agreed on an extensive supervision program for the year 1984. During that year, BDET conducted about 100 supervision missions. A better coordination between the 1/ In its comments, BDET explains that it was not because of its difficulties in borrowing in its international market that BDET had to resort to short- term and medium-term funds. It was a deliberate policy made within the frame- work of a diversification financial strategy; BDET wanted to take advantages offered by these sources such as avoiding fragmentation of foreign borrowings, reducing financial fees and foreign exchange risks (see Appendix) Bank staff found the reasoning loose. 2/ BDET's current ratio fell from 0.53 in 1980 to 0.30 in 1982, and rose again to 0,64 at the end of 1983 and 0.53 in 1984. - 57 - Equity Particip.tion and the Project Appraisal Departments was alsoestablished, so that complete financial documentation on companies in which BDET has an equity participation is now available in the Project Appraisal Department. Staff members in this Department now participate in project supervision; this has called for the recruitment of three additional staff in 1984. For 1985, a supervision program similar to that adopted for 1984, was agreed between BDET and the Bank. The situation appears to be under control. D. BDET's Institutional Performance 3.22 Ownership and Control. BDET's capital structure has undergone two changes since the Staff Apprai sal Report of 1977. First, in 1978, the capital was increased from TD 7 million to TD 10 million; second, in 1983, BDET doubled its capital (to TD 20 million) to limit its long-term borrowings andimprove its capacity to compete with the new development banks 1/. Since the second capital increase, the Government controls (directly and indirectly) 43% of BDET's capital. So far, BDET -- as all other development banks in Tunisia -- has been relatively free of Government involvement in its lending and borrowing policies. The Tunisian private sector holds 16.5% of BDET's capital, and foreign shareholders (of which IFC) 40.5%. 3.23 Policies, Management and Staff. BDET's Statutes and Policy Statements have not been modified since the Bank appraisal. Its exposure limits have remained the same and are closely monitored by BDET's Board; lending to public sector enterprises is to be less than 30% of total lending, to the tourism sector less than 25% of total lending, and to a single borrower less than 25% of its equity. 3.24 BDET's management has undergone a number of changes since the Staff Appraisal Report. A few months after the effectiveness of the loan, a new Deputy General Manager was appointed; in June 1981, the manager of the Credit Department was seconded by BDET to head the newly created Tuniso-Kuwaiti development bank (BTKD). Also, BUDET has lost or seconded in the last three years several experienced staff to the new development banks; BDET is recruiting new professional staff to replenish its ranks. These changes, however, did not alter significantly BDET's effectiveness. BDET remains well managed, has competent staff and well established procedures. 3.25 Operations. Approvals of loans and equity participations more than doubled between 1978 and 1982, to reach TD 63 million. In 1983, however, approvals fell by 35% as shown in the table below, due to (a) competition from the new development banks, (b) stagnation of the volume of SSE projects, and (c) a return to a more appropriate level of investments. I/ The two largest and most active new developments banks, BTKD and STUSID, have share capitals of TD 100 million each; they also take substantial equity participations which makes them particularly attractive to investors. - 58 - Table 3.2: BDET's Approvals, 1978-1983 (TD million) 1978 1979 1980 1981 1982 1983 a) Total approvals 28.6 30.5 32.0 60.6 62.8 40.5 b) Approvals to the industrial sector 24.0 26.5 18.5 28.2 46.0 28.3 b) as % of a) 83.9 86.9 57.8 46.5 73 .2 69.9 3.26 During 1978-1983, approvals grew at a slower pace (7.2% p.a.) than commitments and disbursements (14.8 and 16.8%, respectively; Annex 3) auguring a relative slowdown in operations in subsequent years. During 1978 and 1983, BDET approved mainly new projects (74%) -- as opposed to extensions -- in the private sector (88%). From 1978 to 1983, total equity participations 1/ approved were 9.6% of total approvals. 3.27 Two-thirds of BDET's total approvals went to the manufacturing sector, reflecting the leading role played by BDET in financing this sector. As detailed in the table below, BDI made a substantial contribution in the financing of the Tunisian private industry during the 1978-1983 period, especially before the creation of the new development banks in 1981. 3.28 Within the manufacturing sector, EMI approvals increased by 24% p.a. between 1978 and 1983 (reflecting the Government's decision to develop this sector) 2/, while approvals of construction materials projects fell from 17.3% of total approvals to 8.4%. 3.29 Portfolio. Between 1978 and 1983, BDET's total outstanding loan portfolio increased by 17% p.a., from TD 76.80 million to TD 168.66 million. Government guarantees cover 4% of this portfolio; the rest is secured by adequate collaterals. BDET does not make individual provisions for each loan but overall provisions, i.e. for its entire loan and equity portfolio; this provision amounts to 3% of BDET's portfolio. BDET's equity portfolio went from TD 9.96 million in 1978 to TD 23.32 million in 1983, averaging an 18.5% annual increase. 3.30 Financial Position and Profitability. BDET's financial position evolved quickly during the period under review (Annexes 4-6). BDET's share capital increased from TD 7 million to TD 20 million (para. 3.22). Total 1/ BDET's objectives in its equity participations are (i) to help promoters with insufficient equity, (ii) to participate in the development of the stock exchange, and (iii) to realize capital gains. 2/ The Government selected EMIs as a priority subsector in the Fifth Plan (1977-1981). - 59 - Table 3.3: Investment in Industry and Tourism, and BDET Share (TD million) 1978 1979 1980 1981 1982 1983 INDUSTRY Private Sector Textiles 8.2 9.3 13.7 18.7 21.7 24.6 Food processing 18.2 17.0 14.8 17.5 21.9 24.3 EMI 12.4 16.0 16.9 18.2 27.3 55.5 Others 22.5 19.0 27.4 43.5 56.4 67.0 Total 61.3 61.3 72.8 97.9 127.3 171.4 of which, BDET 15.9 18.8 17.2 19.6 24.1 25.5 (%) (25.9) (30.7) (23.6) (20.0) (18.9) (14.9) Public Sector 107.2 98.3 60.6 125.3 153.4 188.7 of which, BDET 1.9 3.1 2.1 0.5 7.4 7.3 (%) (1.8) (3.2) (3.5) (0.4) (4.8) (3.9) Priv. & Pub. Sectors 168.5 159.6 133.4 223.2 280.7 360.1 of which, BDET 17.8 21.9 19.3 20.1 31.5 32.8 (%) (10.6) (13.7) (14.5) (9.0) (11.2) (9.1) TOURISM Priv. & Pub. Sectors 16.6 15.9 31.8 32.8 47.8 61.4 of which, BDET 4.2 3.2 3.7 6.2 9.2 14.2 (%) (25.3) (20.1) (11.6) (18.9) (19.3) (23.1) Source: BDET assets increased by an average rate of 18.4% p.a. over the 1978-83 period, due to the growth of BDET's portfolio (para. 3.29) and a rapid increase of BDET'saccount receivables 1/. BDET's debt/equity ratio (5:1 as of December 31, 1983) remained well below the maximum allowed (8:1). 3.31 During the period under review, BDET experienced a decrease in profitability. Net income (before tax and Government compensations) which amounted to TD 0.94 million in 1978 fell to TD 0.10 million in 1983; as a result, the return on net worth declined from 8.12% in 1978 to 0.21% in 1983. BDET's financial performance steadily deteriorated for three reasons. First, BDET had difficulties bringing its lending rates in line with increasing borrowing rates since it had to remain competitive with commercial banks, whose cost of resources remained low. BDET's average spread 1/ fell from 1.20% in 1978 to 0.42% in 1983. The interest coverage ratio dropped from 1.2 1/ Resulting essentially from Government payments overdue to BDET on account of the Government's obligation to cover BDET's foreign exchange losses (for details, see para. 3.33). - 60 - in 1978 to 1.0 in 1983, reflecting BDET's poor financial performance towards the end of the period. This led BDET to increase in 1981 its interest rates to 10.5% for small-and-medium size industries, 12% for tourism projects, and 13% for large projects. Recently, in April 1985, BDET raised again its interest rates by 1%, and a further across-the-board increase of 1% is planned for 1987. 3.32 To remain viable over the next few years, BDET's average spread should be brought to at least 2%. This could be achieved if the structure of interest rates were adjusted, with a view to linking these rates with the cost of resources, as recommended in the Bank Financial Sector Study (FSS) completed in December 1984. The FSS reviews (i) overall monetary and credit policies, (ii) the institutional framework, and (iii) the utilization of monetary instruments, and interest rates in particular. The FSS proposes the introduction of a flexible system allowing that rates be more frequently adjusted to reflect changes in the banks' liquidity situation, the domestic inflation rate and international interest rates. The findings of the FSS have been discussed with the Government in April 1985 and interest rates were recently raised by 1.5% on average. During negotiations of the Export Industries Loan, the Government agreed that BDET would be allowed to take the necessary measures to secure a reasonable margin (i.e. 2%). 3.33 Since 1981, another factor affecting BDET's financial position has been the growth in BDET's foreign exchange losses. Under Government-BDET agreements, the Government (a) guarantees BDET against its foreign exchange losses, and (b) compensates BDET for the ceilings imposed by the Government on lending rates, with credits permitting BDET to secure a reasonable profit margin. From its creation in 1966 until 1984, BDET incurred no significant losses on account of tht- foreign exchange risk; Government related payments, however, did not cover the total amount of BDET's foreign exchange losses. G vernment payments compensated BDET regularly for its losses on account of interest payment on its foreign borrowings, and only once (in 1983) for its losses on account of principal payment. In parallel, to meet its second obligation vis & vis BDET (obligation under (b) above), the Government regularly credited BDET with funds, bup -- without exception -- theve funds fell short of the losses incurred on account of principal payment. This resulted in overd-e payments to BDET which, since 1982, have contributed to eroding BDET's financial position. The Government has now taken measures to meet its obligations; it has budgeted TD 10.5 million in 1985 to reimburse BDET for its foreign exchange losses up to 1983. It has also undertaken to reimburse BDET by end of 1986 for all 1984 losses. 3 34 The FSS has proposed new principles to cover foreign exchange risks in relation to borrowings in foreign currencies. A study by the Government on alternatives for foreign exchange risk coverage is under way. During negotiations of the Export Industries Loan in February 1985, the Government agreed to carry out a study on the coverage of the exchange risk on foreign currency borrowings and, no later thanI March 31, 1986, to review with the 1/ On margin on borrowings, i.e. the difference between the average lending rate and the average borrowing rate. - 61 - Bank the conclusions and recommendations of the study as well as the measures to implement these recommendations. In the meantime, the Government has introduced a fee to be paid by all commercial and development banks; the fee is one half of one percent on all lending by commercial banks, and one percent on all long-term lending by development banks. This is an intermediate step towards reducing the Government's burden related to covering foreign exchange losses. The above study should propose a comprehensive foreign exchange risk scheme. 3.35 The last reason for the gradual deterioration of BDET's profitability has been the worsening of its arrears situation (as shown in the table below) in part as a result of BDET's limited supervision of its subprojects in the earlier years of implementation of the loan (para. 3.21). Table 3.4: BDET's Total Arrears * 1978 1979 1980 1981 1982 1983 1984 A. Total loai portfolio (TD million) 76.8 88.6 99.9 112.0 139.4 168.7 193.8 B. Total Arrears - in TD million 3.2 3.4 4.4 7.2 8.1 9.5 15.9 - as percentage of A 4.2 3.8 4.4 6.4 5.8 5.6 8.2 C. Portfolio affected by arrears - in TD million 10.3 12.7 19.4 23.3 36.0 31.0 58.2 - as percentage of A 13.4 14.3 19.4 20.1 25.8 18.4 30.0 * Arrears in principal and interest. 3.36 In 1983, BDET's arrears situation substantially worsened and by December 31, 1983, these arrears amounted to TD 9.5 million (TD 5.9 millicn for overdue principal, and TD 3.6 million for unpaid interest) and affected TD 31.0 million in outstanding loans, representing about 18.4% of the outstanding loan portfolio. The situation led BDET and the Bank to agree on a detailed supervision program for the year 1984. 3.37 While arrears in 1983 were already somewhat high, they kept worsening in 1984 reaching TD 15.9 million by December 31, 1984, or 8.2% of the portfolio. In view of this evolution, the Bank asked BDET to formulate a detailed action plan encompassing supervision and collection of its arrears. In February 1985, during negotiations of the Export Industries Loan, a reporting system and a work program for 1985 concerning BDET's supervision activities was agreed upon, which should enable BDET's management and the Bank to monitor (i) staff involvement in supervision; (ii) the number and type of projects visited, (iii) the kind of problems encountered by subprojects; and (iv) actions taken by BDET and the promoters to overcome these problems. - 62 - 3.38 Also, in April 1985s prior to the negotiations of the Second Electro-Mechanical Industries (EMI-2) Loan, BDET submitted to the Bank an action plan for the 22 companies with arrears larger than TD 100,000 as of December 31, 1984, and detailed projections of arrears to end 1985 and 1986. During negotiations of the EMI-2 Loan, the Bank reviewed the above plan and projections with BDET. The action plan foresees that 19 of the 22 companies will have fully repaid their arrears to BDET by the end of 1986. The remaining three cases -- all involving public enterprises - are more difficult to resolve, and BDET is currently working out with its borrowers adjusted repayment schedules. Beginning with its recent case-by-case review of its portfolio, BDET has now made a firm commitment to bring its arrears back to their 1983 level (about 5% of the total portfolio) by the end of 1986. The Bank will closely monitor BDET's overall arrears position; quarterly reporting on this question was agreed upon to permit the Bank to stay abreast of future developments. 3.39 Overall, the actions taken in 1984 and 1985 with respect to adjustment of interest rates and to BDET arrears and supervision and the prospects for a satisfactory foreign exchange scheme appear to be satisfactory to secure BDET profitability at a moderately but acceptable level without Government support after 1986. E. Conclusions 3.40 The Seventh line of credit to BDET (Loan 1504-TUN) achieved most of its objectives. It contributed to the financing of projects in the priority sectors selected by the Fifth Plan (1977-81) and confirmed in the subsequent Plan (1982-86), i.e. EMIs, textiles, construction, food processing and chemicals. It also helped implement the Government's decentralization policy. Finally, it assisted BDT in going through a critical period during which a new management was-appointed and new staff joined BDET to substitute for the experienced staff who left for, or were seconded to, the newly created development banks, BTKD and STUSID. 3.41 During implementation of Loan 1504-TUN, BDET continued to improve its procedures and methodology. As a result in part of the significant increase in the volume of BDET's operations in the 1977-83 period, its supervision deteriorated and BDET's arrears situation worsened noticeably. However, with Bank assistance, BDET was able to reorganize and strengthen its supervision Department; operations of this Department were also brought into closer relationship with the Appraisal Department. Detailed supervision programs were adopted for the years 1984 and 1985, and expectations are that, by late 1986, BDET should have reduced its arrears to an acceptable level. 3.42 BDET was not able to mobilize funds on the international markets of a magnitude consistent with what it had originally expected. The main cause for this shortfall is that the Government takes a priority on tapping such resources and made significant borrowings on these markets, leaving only limited possibilities to BDET. As a result, BDET was compelled on two occasions to resort to short-term borrowings, which weakened its financial position. Delays in Government's payments on account of its compensation for foreign exchange losses also had an adverse effect on BDET's profitability. - 63 - This has now been resolved as the Government has agreed -- following Bank advice -- to annually review and endorse BDET's resource mobilization plans in the future, to compensate BDET in 1985 and 1986 for all the foreign exchange losses BDET gradually accumulated in the past and, beyond 1986, to make effective a new scheme to distribute more rationally the risk on foreign exchange borrowings. Expectations, therefore, are for BDET to be able by 1986 to operate on a significantly sounder and independent basis within a substantially improved financial environment. IV. CONCLUSION 4.01 The major objectives of Loans 1504-TUN and 1505-TUN, which were in line with Government priorities, were basically achieved; namely to: (i) strengthen and coordinate on-going activities in the fields of SSE development promotion and support; (ii) provide finance to the industrial sector; and (iii) assist in institution building. Assistance to SSE Development 4.02 Success was achieved under the SSE pilot assistance program (Loan 1505-TUN, and part of Loan 1504 TUN to BDET). The pilot program helped establish a concerted framework responsive to SSE needs, and ensure a satisfactory level of quality for project financing by participating commercial banks. Commercial banks did not utilize the pilot line as much as expected during appraisal, mainly because of relatively low remuneration and excessive initial (technical and administrative) requirements made on these institutions. The identified shortcomings were effectively addressed during project implementation and this permitted the subsequent extension of a better designed Bank loan for Small-Scale Industries (Loan 1969-TUN). The banks'remuneration was significantly improved, and the volume of their rediscountable paper with the Central Bank was increased by an amount equivalent to the amount of Bank funds withdrawn. Also, API exercised quality control over appraisals of projects by commercial banks. Under these improved conditions, commercial banks began to play a more irportant role in financing small scale industries (SSIs). Assistance to BDET and the Industrial Sector 4.03 During the period 1978-83, BDET assumed a central role in financing long-term investments, especially in the private sector. Also, BDET -- with assistance from the Bank -- played an important pilot role in the development of SSEs in Tunisia. After a period of vigorous industrial growth (1978-80) during which BDET lent with limited concern for priority sectors or institutional building, growth slowed and -- as opportunities for viable investments became more limited -- BDET became more selective and effectively promoted key sectors. However, in the early 1980s, the worsening gap between BDET's lending rates and cost of resources, and delays in Government payments to cover BDET s foreign exchange losses, led to a deterioration of BDET's financial position and profitability. 4.04 In the process of expanding its lending, BDET neglected somewhat its supervision and overlooked the risks attached to part of its loan portfolio, - 64 - e.g. in the tourism sector. This issue was addressed under more recent Bank-financed loans (Export Industries Loan, April 1985; and Second EMI Loan, May 1985). Detailed supervision plans and procedures were adopted; the staff responsible for this activity was expanded and their work brought into closer relationship with that of the departments in charge of project identification and appraisal. Arrears that had substantially worsened partly as a result of weaker supervision, are expected to be g adually brought back to an acceptable level by late 1986. 4.05 Achievements in establishing BDET as an effective borrower in the international financial market were limited. The Floating Rate Notes issued by BDET in 1983 contributed to BDET financial stability, but increased BDET's vulnerability to interest rate fluctuations. The Bank 1984 FSS addressed this issue and its recommendations were discussed with the Government in April 1985. Policy changes -- for example, on foreign exchange risk coverage -- are expected to take place in 1986. 4.06 Despite the above shortcomings, BDET remains the most experienced development bank in Tunisia. BDET has a solid experience in financing and appraising long-term investments, and should be able to successfully restructure its supervision unit; measures are also being taken in consultation with the Government to strengthen BDET's financial position. Due in part to the catalytic effect that the Bank loans have had on its policies and operations, BDET has developed into a mature and relatively efficient institution. BDET, however, will increasingly have to face competition from the new development banks created since 1981 and will have to define more precisely the specific functions that it will perform in the field of development finance. Because of its longer and more diversified experience, BDET should be able to keep a leading role among these institutions and remain the Government's main instrument for assessing new industrial strategies and promote programs in support of these strategies. 4.07 BDET's continuing dialogue with the Bank on sectors to be promoted, or from which to disengage, has been a fruitful one. At the same time, the Bank's policy of increasingly channelling their resources to selected industrial sectors -- combined with the fact that many of BDET's other lenders tend to adopt policies similar and in line with the Bank's -- is creating problems for BDET. BDET has recently been experiencing difficulties in mobilizing external resources for general purpose lending. BDET has expressed the wish that the Bank remain sensitive to its general needs and introduce more flexibility in the use of its funds. Prospects 4.08 Until 1977, Bank assistance to BDET consisted of general purpose loans. This was followed by a number of projects designed to support key priority areas in Tunisia industrial development strategy: Loan 1969-TUN for Small Scale Industries in 1981, Loan 2113-TUN for Electrical-Mechanical Industries (EMI) in 1982, and the recently approved Export Industries Loan (Loan 2522-TUN) and EMI-2 Loan (Loan 2554-TUN). In the future, the Bank intends to supplement its assistance in these areas with sector loans designed to further strengthen Tunisials industrial and financial policies. - 65 - ANNEX 1 Page 1 of 2 PROJECT COMPLETION REPORT LOAN TO THE REPUBLIC OF TUNISIA FOR SMALL SCALE ENTERPRISES AND SEVENTH LOAN TO BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) Loans 1504-TUN and 1505-TUN Terms and Conditions of SSE Subloans 1. Onlending by BDET and the participating commercial banks was to be done through one of the following two channels: (i) the pilot loan of $5 million (Loan 1505-TUN), which was to finance new SSEs, eligible for FOPRODI assistance, with total project cost TIncluding working capital) equal or below TD 200,000 (at 1976 prices) and with a cost per job created not exceeding TD 4,600 (at 1976 prices); and (ii) the $2 million component included in BDET credit line (Loan 1504-TUN), which was to finance existing SSEs, not eligible for FOPRODI assistance, with total net fixed assets (before expansion, and excluding land) valued at less than TD 100,000 (at 1976 prices) and a cost per job maintained not exceeding TD 4,600 (at 1976 prices). The major difference between the two channels was basically the risk coverage; repayment obligations of existing SSEs would be toward BDET, with no risk sharing mechanism between BDET and the Government. 2. By setting the eligibility criteria and the terms of the loan as they were, the Government and the Bank intended to finance labor intensive projects that experienced difficulties in mobilizing medium-term financing. 3. The cost of funds to SSE borrowers was to be the same as that charged by commercial banks on medium-term loans to larger industrial enterprises (i.e. 8 to 8 1/4%), except for subloans financing investments in less developed regions of the country and for industrial investments of export-oriented enterprises, for which the rates were between 6.75 and 7%. The foreign exchange risk was to be assumed by the Government. The maturities of the loans were to be those of FOPRODI loans. - 66 - ANNEX 1 Page 2 of 2 4. To be relatively consistent with the terms applicable under the FOPRODI scheme, Bank funds borrowed under the 888 component were to be repaid to the Bank over a period of 13 years, including 4 years of grace. Although Bank funds were to finance half of the total investment cost of SSE projects without distinguishing between foreign and local currency expenditures, it was expected that the local currency expenditures would be small. The foreign exchange cost of SSE investments in Tunisia was estimated to vary between one-third and two-thirds of total cost, averaging about 40% of total investment. EMENA/IDF June 1985 1656L PADECT COMPLETIME REPORT LOAN TO THE REPULIC OF TUNISIA FOR SML SCALE ENTERPRISES AND SEVEnTH LOAm TO BAMOUE DE DEVELOPPAET fCDMO0E OE TUNIIE (NBET Loans Is04-TUM and IOS-TUnm DET-Prformance Indicators. 1975-193 Profitability Indicators Net profit as X of average net worth 8.7 9.9 10.4 9.5 10.7 9.5 8.9 7.5 9.9 Profits before tax as X of average not worth 9.7 10.7 13.1 10.9 12.3* 10.4 9.7 8.1 12.7 Dividends as X of par value share 6.0 7.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 Book value of share as I of par value share 140.2 144.8 150.9 IS8.7 180.0 150.0 145.5 124.2 106.3 Operational Indicators Gross Income as X of average total assets 7.7 7.9 8.3 8.2 9.0 8.5 8.7 8.3 9.2 Adinistrative expenses as S of average total assets 1.6 1.5 1.4 1.4 1.4 1.3 1.2 1.2 1.0 Financial expenses as X of average total assets 4.5 4.8 5.3 S.4 5.9 5.8 6.3 6.1 6.7 Dividends and realized capital gains as X of average equity portfolio 4.3 3.4 3.5 3.7 3.2 4.2 4.3 4.1 2.0 Income from loans as S of average loan portfolio 8.4 8.5 8.5 8.4 8.6 8.6 8.4 8.7 8.9 Cost of total debt as X of average total debt 5.7 6.0 6.3 7.2 7.9 7.4 7.9 7.8 8.5 Financial Structure Indicatrs Total debt/year end net worth 4.2 5.5 5.7 4.9 5.5 5.8 5.9 5.1 6.3 Long term debt/year end net worth 4.2 S.5 5.7 4.9 5.5 5.6 4.8 4.2 4.6 Provisions for risk as % of total portfolio 2.2 2.2 2.4 2.5 2.8 3.0 3.3 3.1 3.0 Interest coverage ratio 1.4 1.4 1.4 1.3 1.3 1.3 1.2 1.2 1.2 Year end total assets (TO millionf 57.0 73.4 81.9 94.6 108.8 117.9 137.4 170.5 219.8 Year end net worth (TD million) 9.3 9.9 10.4 12.7 14.4 15.0 17.5 20.9 27.1 EMEMA/IDF March 1985 - 68 - ANNEX 3 PROJECT COMPLETION REPORT LOAN TO THE REPUBLIC OF TUNISIA FOR SMALL SCALE ENTERPRISES AND SEVENTH LOAN TO BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) Loans 1504-TUN and 1505-TUN BDET Operations, 1975-1983 (TD'000) 1975 '19,76 -197.7 1978 1979 1980 1981 1982 1983 Approvals 22,364 30,308 33,194 28,633 30,486 32,089 60,627 62,764 40,470 Commitments 18,246 21,662 21,770 22,622 22,239 22,613 26,354 57,486 45,050 Disbursements 15,712 18,130 20,372 22,280 25,561 24,093 26,531 42,930 48,340 EMENA/IDF March 1985 LOAN TO THE REPUBLIC OF TUNISIA FOR SALL SCALE ENTERPRISES AND SEVENTH LOAN TO BANOUE DE DEVELOPPENENT ECDNOMIOUE DE TUNISIE DET) Loans 1504-TUN and 1505-TUN BOET-Audited Balance Sheets. 1975 - 1983 (T1'000) ASSEIS Current Assets 9,521 12,907 9.249 8,682 9,972 7,837 13,768 15.720 30,230 Medium and long-term loans 43,627 54,803 65.624 76.802 88,624 99.989 112,028 139.410 168,660 Equity participations 4Ig0 67896 11223 1,814i 13,803 J802g 230 Total Portfolio (gross) 4,230 61,379 73,917 86,766 99,827 111,712 125,831 157,430 191,980 Less provisions 234) (139) (1,752 I=gt) (ZlgZ) LA401) (4.104) (.910) (5i.6f01 Total Portfolio (net) 47,296 60,040 72,165 84,538 97.030 108,311 121,727 152,520 186,290 Met Fixed Assets 221.,1 5. 1.],4 ...41,Jggg877 .-.2.290 3,250 Total Assets SZ..3Z 2L A 1A932 1A,12i2 18 6 1 132.372 120.53L0-- LIABILITIES t Current Liabilities 8,350 9,000 12,464 18,924 1S.492 19.269 36.241 61,100 55,420 Long-tenm borrowings 39,360 54,548 59.023 63,016 78,944 83,668 83,664 88,440 137,290 Share Capital 6.000 6,000 6,000 7,000 8,000 8,000 10,000 15,550 20,000 Government contribution 500 500 500 500 500 500 500 500 500 Reserves 2LA2Z 3AA 1.2A 199. LA2 AJAZ 6R7940 .66f.8 Total Net Worth 9J.2Z L.90 10.44 it2iA 14.400 IA000 LZAAZ 20,920 27..Q. Total Liabilities S7,11 2.M 81.AS32 SA2A 108A8A 11.92Z 132.32 lZAAll 11811 BDET: Audit Reports for 1975-1981 BOET/EMEA-IDF for Projections 一70- &‘翅胞醒 島 目胛門墨變門喜’州引壟 劉胛調三·才門曇嬋舟引‘變 勵妒’調霽胛門暴’馴引‘發 {,！露；丑。”日，,,!&,,&,,.&,,, ！弱！訕〕弄“&&&,&&&&&,&&&&& I糡〕辭荊’&&’界”邑”’荊’‘界邑，鳥―&& &!!&I&&&&:,&&&’荊”荊邑界·，&& i】劉華細界，荊邑藝丰聲‘鬥丰邑’―整界”& ，買華 ”。〔〔〕。〔〔〔〕〔〕〔’〕’! - 71- auw ÊMUM mm LM ZR M REPU&X IE WMUU en au KsR MaMM M smmiu LM Ta igLoppmff mg BMISIE (mm Mn - atist or EL £MM" de L.Ù» làe-ria Md LM-UWI--M Project swestmnt MET LM IIRUM lm Cost no. of cest Perim leu FinancInq I/ Mfflci -dowL fnooààl 1" Elnanclog fusionnai LM 1984-TM mm enterartsas TRICOMDE Sfax 123.0 26 4.7 70.0 67.S 142.4 Extattug enterartses SEMÎC Tunis 107.S 10 10.7 ?S.S 40.7 77.8 Ent. Mlladt A»Iez Tunis 208.0 5 41.6 32.4 32.6 45.5 efflia Tunisie Menastie 273.0 6S 4.2 90.0 87.8 168.9 Sté tnd. lingerie Wax 22S.0 ss 4.1 129.0 104.9 191.9 Imprimerle El Asrl4 Tunis 100.0 - - $0.3 SO.3 97.6 Plastic$ Monastir 213.0 17 12.3 74.0 6S.9 130.0 Espadrille tunisi Sfax 69.0 21 3.3 37.0 22.S 44.2 La Mille Tunis 233.0 21 11.1 71.2 38.S 64.9 NACOIIU Tunis 47.S 10 4.7 31.0 43.3 46.2 DLOUTEX Mabeul 201,0 lu La ijn,6 «.9 169,0 Subtotal 1,800.0 330 S.4 7s6.0 642.9 1.194.4 LM 1903-TIM mm Tunisie papiers Tunis 227.0 10 22.7 174.0 130.6 287.1 b9r. Papier Cart«. Z&~ 236.6 44 S.3 160.0 133.4 291.1 Sinatex confection Tunis 230.6 108 3.1 16S.0 137.7 291.8 Les Carrelages RIdha El OdJI Le Kef 162.6 is 10.8 S2.0 S2.0 130.7 Carrelages du Sud RederIne 283.6 40 7.4 74.0 74.0 170.0 Carrelages Kairouan Kairouan IlS3.0 22 6.9 87J $0.6 128.3 Exploitation des Carrières Kasserine 238.7 62 319 164.0 114.S 314.0 modebella Sfax 284.0 61 4.6 ISO.0 137.3 214.0 Production des Carrelages Kasserine 168.0 28 6.0 107.8 83.6 IS6.4 MTACIO $dia 100.4 23 4.4 73.0 61.9 136.1 rAndrel Plastic Tunis 139.0 là 11.6 94.0 6317 133.9 Orpnis. Prod. rademes Zàoh«M 196.4 30 6.6 104.4 82.2 128.7 Reg. expl. carr. sables 240howan 211.3 48 4.7 81.0 74.8 74.7 gt*bllssumts DOWNI Tunis 118.0 22 SA 64.0 0.0 0.0 Entreprise Chidnoul Mala --L4LA -a 74.0 0.0 O.Q Subtotal 2*994.0 S" S-S 1,624.7 1,1%.2 2.464.8 D"i . 4.794.11 la 2,281,2 1-839,1 2-699,2 soug: WET I/ Froc lm dtsbwsomt file DRWIDF Narch 198S ~72 - PRCJ1ECT tUIPLET!ON REPORT LOA TO MNE REPUBLIC F TMISIA FOR UMLL SCALg ENTERPRISES d SEVENTH LOM TO 8ANGUE E .E9L0PPENmNT ECumIUE DE TUISIE (METI Loans 1S04-TUN and ISOS-TUM SQRT - List of Prâoets Financed. Other than Sia Lu4n I104-TM Project Investment £TO'1oaf BOET Loan lmR0 Cost No. of Cost per Job lRD Financing / &M 13,8881 .1h TDOO0I To Finanging tUss'0ici Existina entriartas COTUSAL Tunis 310.0 - - 150.0 150.0 314.0 S.F.B.T. Tunis 1.067.0 80 13.3 ) 1200.0 1200.0 2.941.0 0 a Mahdia 1,78.0 72 21.9 ) Ent. Ali MNhenl Gafsa , 4,000.0 217 18.4 1800.0 1469.4 3.550.0 STkTAi Tunis 3.500.0 - - 2200.0 998.7 1.395.3 Savonnerie africaine Tunis 72.0 - - 31.2 31.2 76.8 Couvertex Sousse 420.0 32 13.1 160.0 160.0 356.9 il Airta Tunis 175.0 10 17.5 78.3 78.3 195.2 La uot. edition Tunis 110.0 18 6.1 74.1 74.1 175.9 Boissons du sud Sfax 580.0 64 9.0 300.1 300.1 747.5 Carr. Choisis Gabès Gabès 118.0 il 10.7 45.0 38.2 75.4 Centrale tun. tissage Tunis 205.0 21 9.8 168.0 147.9 362.8 Eallages modernes Tunis . 3 -U1 UA 47.ZS 377.4 528.2 Subtotal 12,968.0 540 24.01 6.381.3 5.025.3 10.711.1 am ses SORETRAP Sfax 1,610.0 240 6.7 1.000.0 174.S 391.0 E.C.C.I Tunis 448.0 250 1.8 169.4 74.6 187.4 Tunisie acier eizerte 6.334.0 114 55.5 288.3 695.1 1.729.6 Tunisie cibles Nabeul 2,700.0 159 17.0 964.6 964.6 2.339.0 lnd. biches. confection Tunis 1,420.0 57 24.9 670.0 564.8 1.295.4 Manuf. trico. méditer. Sfax 164.0 93 1.8 44.0 43.3 104.7 Cond. Impres. pub. Le Kef 1.566.0 31 50.5 716.0 500.0 1.207.1 B.N.V. Becker eéja 273.7 63 4.3 71.9 71.9 176.8 Les pltres tunisiens Sidi Bouzid 2.286.0 99 23.1 305.2 305.2 755.7 Les couscousseries du Sud Sfax 1.250.0 50 25.0 612.4 612.4 1,14.8 Etablissements AjaI Sousse 96.0 25 3.8 19.7 8.3 20.4 Cilnique les Violettes Nabeul 419.0 33 12.7 180.0 64.2 155.9 fintrep. a1e. Ind. inoxydable Tunis 340.0 15 22.7 250.0 26.8 64.8 L%t. tun. Ind. matériaux Mahdia 1,177.0 22 53.5 299.6 299.0 735.3 La gle. précontrainte Zaghouan 508.0 30 16.9 251.8 251.8 619.5 Tun. de filtres Zaghouan 1,300.0 100 13.0 700.0 610.0 1.388.7 sasma chaussures Tunis 151.7 30 5.0 115.0 93.3 229.1 Les fatenceries Kroumir Jendouba 649.2 54 12.0 138.3 138.3 298.6 ma1. cellulose moulde Zaghouan 280.0 23 12.1 173.5 147.0 312.6 Sivex Tunisie Tunis 200.0 88 2.2 100.0 13.9 34.7 Nrbrert Cap-Bon Nabeul 420.0 21 20.0 108.5 108.5 266.1 Ued. prod. aliment. Kairoun Kairouan 1.450.8 60 24.2 89Z.8 602.8 1«301.2 Carrires soularès séjà 330.0 55 6.0 175.0 175.0 407.8 Zaoul meubles Sousse 2.573.0 1200 .1. 1062.0 791.3 -1.4a Subtotal 27,946.4 2.012 13.89 11,902.7 7.337.0 17.385.0 AI 40.914.4 &u jL 19.284.7 12.362.3 28.896.1 5g : BoiT jy From IORD disbursement fIle oarch 1985 - 73 - ANNEX 8 PROJECT COMPLETION REPORT LOAN TO IHE REPUBLIC OF TUNISIA FOR SMALL SCALE ENTERPRISES AND SEVENTH LOAN TO BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) Loans 1504-TUN and 1505-TUN BDET - Analysis of Projects 1/, by Manufacturing Sector Loan 1504-TUN Sector No. of Total Cost BDET Loan Bank Loan Projects TDr000 % TDO00 % TD'000 % EMI 7 14,448 35.3 7,070 38.7 3,505 28.0 Construction 3 6,058 14.8 2,669 14.6 1,718 13.7 (Public sector) (1) (1,610) (1,000) (174) Construction Materials 7 5,488 13.4 1,323 7.2 1,317 10.5 (Public sector) (1) (2,286) (305) (305) Food Processing 5 6,236 15.3 3,155 17.3 2,865 23.0 Textiles 6 2,505 6.1 1,162 6.3 953 7.6 Wood and Paper 6 5,537 13.5 2,579 14.1 1,968 15.7 Others 3 643 1.6 326 1.8 189 1.5 Total Manufacturing 37 40,915 100.0 18284 100.0 12,515 100.0 Source: BDET 11 Other than SSEs. EMENA/IDF March 1985