Tunisia - Second Small and Medium Scale Industry Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6752-TUN STAFF APPRAISAL REPORT TUNISIA SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT January 12, 1988 Industry & Energy Division Country Department II Europe, Middle East and North Africa Regional Office This document has a restricted distribution and may be used by recipients only In the perfo nauce of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - i - CURRENCY EQUWALENTS Currency Unit = Tunisian Dinar (TD) Value of TD Value of US$ 1985 (average) US$ 1.321 TD 0.757 1986 (average) US$ 1.259 TD 0.794 December 31, 1986 US$ 1.190 TD 0.840 November 17, 1987 US$ 1.255 TD 0.797 GLOSSARY OF ABBREVIATIONS AFI - Agence Foncière Industrielle API (new)- Agence de Promotion de l'industrie API (old)- Agence de Promotion des Investissements ASAL - Agricultural Sector Adjustment Loun BCT - Banque Centrale de Tunisie BDZT - Banque de Développement Economique de Tunisie BIAT - Banque Internationale Arabe de Tunisie BS - Banque du Sud BT - Banque de Tunisie BTEI - Banque de Tunisie et des Emirats d'Investissement CEPEX - Centre de Promotion des Exportations CETIME - Centre Technique des Industries Mécaniques et Electriques CNCCV - Centre National du Cuir et de la Chaussure CNEI - Centre National des Etudes Industrielles CNEL - Caisse Nationale d'Epargne Logement CTMCCV - Centre Technique des Matériaux de Construction, de la Céramique et du Verre EMI - Electro-Mechanical Industries FNG - Fonds National de Garantie FOPRODI - Fonds de Promotion et de Décentralisation Industrielles (Industrial Promotion and Decentralization Fund) ITPAL - Industrial and Trade Policy Adjustment Loan MITAP - Medium Term Industrial and Trade Adjustment Program OCT - Office du Commerce de Tunisie SMI - Small and Medium Scale Industries SSI - Smail Scale Industries STB - Société Tunisienne de Banque UTICA - Union Tunisienne de l'Industrie, du Commerce et de l'Artisanat - ii - FOR OFFICIAL USE ONLY TUNISIA SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: The Republic of Tunisia. Amount: US$28.0 million equivalent. Terms: 17 years, including 4 years of grace, at tha standard variable interest rate. Project Description The project would assist in financing economically and financially vi '51e small and medium scale industrial enterprises through a credit line of US$27.5 million to five participating banks. The project would alo include technical assistance to assist SMI iti resolving managerial/technical problems and in designing and formulating new or extension/ modernization/rehabilitation projects, and to help comwercial banks develop the necessary expertise to improve their appraisal and supervision of SMI. The cost of technical assistance would be covered of US$0.5 million from the loan amount and a ut US$2.15 million from local and bilateral sources. Participating Banks: Banque de D6veloppement Economique de Tunisie (BDET), Banque de Sud (BS), Banque de Tunisie (BT), Banque de Tunisie et des Emirats d'Investissement (BTEI), and Soci6t6 Tunisienne de Banque (STB). Beneficiaries: Small and Medium Scale Industrial Enterprises: defined as (i) for new enterprises: those for which total investment does not exceed TD 1.5 million, including working capital, and (ii) for existing enterprises: those for which total investment for expansion, modernizftion or rehabilitation does not exceed TD 2.5 million, including working capital and existing net investments. Onlending Terms to Participating Banks and Beneficiaries: In order to insulate individual SMI from interest and exchange rate variations, to permit banks a reasonable intermediation margin (yet not larger than 4), to give the Government the opportunity This document has a restricted distribution and may be used by recipients only in the performance of their offiial duties. Its contents may not otherwise be disclosed without World Bank authorifation. - iii - to adjust interest rates during the commitment period and to conform with the overall market-oriented, flexible interest rate policy agreed between the Government and the Bank under ITPAL, the following onlending scheme has been agreed upon: initially, the participating banks would pay the Government the Bank's interest rate applicable at the time of signing of the Loan Documents plus a 1% flat fee for foreign exchange risk coverage which would be borne by the Government. The participating banks would onlend the Bank funds to the beneficiaries at 12% per annum, which would give the banks a margin of nearly 4%. The beneficiaries would also pay the banks the 1% flat fee for foreign exchange risk ccverage. Subsequently, the onlending rates to the participating banks and the ultimate borrowers may be revised for the uncommitted balance of the loan, on the basis of an annual review -- the first to be held no later than September 30, 1988 -- to be conducted by the Government, the participating banks and the Bank, which will take into account changes in the Bank's interest rate, the cost of other external resources, the interest rate structure in the country (particularly, the interest rate for long-term lending) and the rate of utilization of the Bank loan. The participating banks would repay their loans to the Government according to the composite amortization schedule of the subloans financed out of the proceeds of the loan. Subloans to beneficiaries would be for a maximum of eleven years, including three years grace. Estimated Disbursements Thi proceeds of the loan are estimatad to be disbursed according to the schedule below, which is based on the disbursement profile for similar loans in Tunisia (in US$ '000). Calendar year 1988 1989 1990 1991 1992 1993 1994 1995 Annual 1,600 2,300 6,100 6,800 5,000 3,600 2,100 500 Cumulative 1,600 3,900 10,000 16,800 21,800 25,400 27,500 28,000 MAP: No IBRD 18707, of May 1987 (Tunisia; General Features). - iv - TUNISIA STAFF APPRAISAL REPORT SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table of Contents Page No. I. INTRODUCTION................................... 1 IL MANUFACTURING SECTOR ................................. 2 A. Main Characteristics ................................ 2 B. Main Constraints and Issues ......................... 6 C. Bank Strategy in the Manufacturing Sector ........... 12 M SMALL AND MEDIUM SCALE INDUSTRY SUBSECTOR ........... 13 A. Characteristics and Performance ..................... 13 B. Institutional Framework and Incentives .............. 14 C. Main Constraints to SMI Development ................. 17 (i) Production and Management Constraints ............... 18 (ii) Financial Constraints ............................... 19 (iii) Institutional and Regulatory Constraints ............ 22 D. The Bank's Role in the SMI Subsector................. 24 IV. FINANCING OF THE SMI SUBSECTOR ......................... 26 A. The Financial Sector ................................. 26 B. FOPRODI and FNG ...................................... 29 C. The Participating Banks .............................. 31 a. The Commercial Banks .............................. 33 b. Banque de D6veloppement Economique de Tunisie (BDET) ............... . . . . . . . . . . . . . 37 c. Banque de Tunisie et des Emirats d'Inv3stissement (BTEI).................. 45 V. TMOPRODJE(CT ....................... 47 A. Project Objectives and Components .................... 47 a. Credit Line ....................................... 48 b. Technical Assistance .............................. 54 B. Project Benefits and Risks ......... .............. 55 VAL A*GRUEEESM .................................... 56 ANUNEXEUS...................................................... 58-102 This report is based on Preparation Missions that visited Tunisia in April and July 1986, and an Appraisal Mission that visited Tunisia from November 3 to 20, 1986. The members of the missions were: Mr. Bernardus H. Pottker (Chief) and Ma. S. N'Daw (EMPID), Messrs. B. Chavane (ILO) and C. Barltrop (Consultant). A Pre-Negotiations mission visited Tunisia from September 19 to 30, 1987; it was carried out by M. Carrere, who has modified this report to reflect the latest developments in the country. I. INTRODUCTION 1.01 This report appraises a project designed to provide financial and institutional support to Tunisia's small and medium scale industry (SMI). The proposed project is a follow-up to the small-scale industry (SSI) project" (Loan 1969-TUN) approved in April 1981 and an earlier pilot line (Loan 1504/1505-TUN in 1978), which introduced commercial banks to SSI financing to foster economic development and job creation. Preparation of the proposed project was based on the Bank's earlier work on the financial sector- , the industrial sector- and the Industrial Trade Policy Adjustment Loan-l. 1.02 The proposed Bank loan of US$28.0 million would be made to the Government of Tunisia, which would pass on the loan proceeds as follows: (i) A line of credit of US$27.5 million to three commercial banks and two development banks through subsidiary loans agreements, for financing eligible projects in the SMI sector. The five participating banks are: Banque de D6veloppement Economique de Tunisie (BDET; US$ 6.J million), Banque du Sud (BS; US$ 6.0 million), Banque de Tunisie (BT; US$ 5.0 million), Banque de Tunisie et des Emirats d'Investissement (BTEI; US$ 4.0 million) and Soci6t6 Tunisienne de Banque (STB; US$ 6.0 million). Each of the participating banks would receive an allocation to cover part of its estimated resource needs for 30 months. Eighteen months after effectiveness, the utilization of the loan would be reviewed with the Government and the participating banks. On the basis of past progress and expected future utilization of the loan, the unutilized balance of the loan could be reallocated. This would be formalized through amendments to the subsidiary loan agreements; and (ii) US$0.5 millioVL for technical assistance to Agence de Promotion de l'Industrie (API), a non-financial institution which provides technical assistance to SMI. 1.03 The principal objective of the proposed project is to assist new entrepreneurs with the financing of their SMI projects and to help existing entrepreneurs in the sector to expand, modernize or rehabilitate their firm. The proposed loan, together with equity finance to be provided by sponsors and other local funds, is expected to finance investments totalling about US$70 million. Support of SMI should lead to the creation of employment at a relatively low investment cost, which continues to be a major goal of Tunisia's industrial development: about 4,000 new jobs would be created, at an average projected cost of US$17,500 per job. Three commercial banks and two development banks specialized in SMI financing would benefit from financial and institutional assistance from the Bank through reviewL, of the projects financed through the loan (about 20 per participating bank). Technical assistance for helping to resolve managerial/technical problems and for improving design and implementation of SMI projects is expected to lead to more efficient and better operated projects. This assistance would benefit the projects directly financed by the Bank, as well as the whole SMI subsector. 1/ Tunisia - Small Scale Industry Project, Report No. 3266-TUN, dated March 25, 1981. 2/ Tunisia - Financial Sector Review, Report No. 5263-TUN, dated December 16, 1985. 3/ Tunisia - Industrial Sector Policy, Report No. 5665-TUN, dated July, 1985. 4/ Tunisia - Industrial and Trade Policy Adjustment Loan, President's Report No. P-4449-TUN, dated January 28, 1987. - 2 - 11. THE MANUFACTURING SECTOR A. Main Characteristics 2.01 Performance. Over the last decade, Tunisia's manufacturing industry has grown and diversified at a relatively fast pace. It has contributed successfully to the Government's main economic objectives of creating employment, attracting foreign investments and know-how, and generating foreign exchange earnings to offset part of the decline in oil revenues. For the medium-term, traditional exports (such as phosphate-based industries and agricultural products) are expected to offer only modest growth prospects, and further import substitution will provide only limited opportunities for industrial growth because of the small size oi the domestic market. Manufacturing exports, therefore, will be the principal instrument for creating additional employment, stimulating growth and alleviating balance-of-payments problems. 2.02 In the 1960's and the 1970's, the manufacturing sector grew by 7.4% and 12 per annum in real terms, respectively, and was one of the main sources of GDP growth, which averaged 7.4% per annum in real terms in the 1970's. The trends since 1981 are shown in the following table: Table 2.1: CONTRIBUTION OF MANUFACTURING INDUSTRIES TO GDP, 1981-1986 1/ (TD million, at 1980 prices) Average growth rate () 1981 1982 1983 1984 1985 1986 /2 81-86 Total GDP 3,736.0 3,733.0 3,917.0 4,133.0 4,317.0 4407.0 3.4 Manuf. Value Added 469.0 482.0 521.0 557.0 590.0 640.0 6.4 Manuf. VA/GDP (%) 12.6 12.9 13.3 13.5 13.7 14.5 - In the last six years (1981-1986), GDP growth slowed down (to a 3.4% annual average), due to weak export merkets for Tunisian products (notably, phosphate based fertilizers), poor performance of the agricultural sector and growing inefficiencies in the country. During the same period, the manufacturing sector grew by 6.4% per year on average. As a result of the faster than average growth of the manufacturing sector, its share in GDP increased, from an average of 7.5% in the 1960's to 10.0% in the 1970's and 14.5% by 1986. 1/ Unless otherwise stated, the source for all tables in this Chapter is: Ministry of Plan - Economic Budgets 2/ Estimate -3- 2.03 Tunisia's manufacturing sector has substantially evolved since 1971 and is now well diversified, as shown in the table below. Table 2.2: VALu ADDED IN THE MAIUFACTURING SECTOR. 1971-198 (To million, at 1980 prices) Share (%) Rates (%) In tatal Growth 1911 1981 198M 1982 19M 1.5 198 ' 1M21 1951 1M 1971-s8i 19gl-8 Food processing 63 115 107 110 131 132 140 41.5 24.5 21.9 6.2 4.0 Const. materials 11 70 71 82 84 91 101 7.2 14.9 15.8 20.3 7.6 EMI 19 63 69 '5 81 86 93 12.5 13.4 14.5 12.7 8.1 Chemicals 14 53 56 63 63 67 79 9.2 11.3 12.3 14.2 8.3 Textiles & leather 30 111 11 120 121 129 135 19.7 23.7 21.1 14.0 4.0 Misc. & industries _] J7 _.A 11 ..Z ._ll .." _ .I.j 1W il 1.4 1a1 TOTAL 48 U SaU WS5 ASM MA Ja.8.MI Ua.A .ILA &.A 6.4 1/ Estimate 2318L/8 Food processing accounts for the largest share of the sector, contributing 21.9% to manufacturing value added in 1986, followed by textiles and leather (21.1%). The fastest growing subsectors in the 1971-1981 period have been construction materials (20.3% average annual growth in real terms), miscellaneous industries (14.3%), chemicals (14.2%) and textiles and leather (142). From 1981 to 1986, miscellaneous industries, chemicals and electro-mechanical industries (EMI) have been the leading subsectors with average growths of 10.1%, 8.3% and 8.1%, respectively, in real terms. 2.04 Investments. In the period 1981-86, Tunisia maintained a high investment level, averaging about 29% per annum of GDP. Investments in the manufacturing industry, which constituted 11.7% of total investments in 1971, kept increasing and reached 21.5% of total investments in 1983, but decreased to 16.0% in 1985 and 1986, respectively, as shown below: Lll-4: INVESTMENTS IN MAUPACTURING INOUSTRIES. 1971-198 (TO million. at 1980 prices) Growth Rates (Sp.a.) 1I=. 1281 18 18 =A 1/ 1Z1at ISAL.8 1971-8 121-aqi Total investments 355.0 1.157.9 1.229.3 1,203.9 1.2S8.0 1,145.5 1.066.0 12.6 1.6 12.6 (1.6) Total investment as % of GOP 19.4 31.0 32.9 30.7 30.4 26.5 24.2 - Investments in manufacturing 41.4 193.9 226.0 258.3 241.2 184.5 170.3 16.7 2.5 16.7 (2.5) Investments in ag. as % total invest. 11.7 16.8 18.4 21.S 19.2 16.1 16.0 - - - 1/ Estimate 2374U/1 The lower level of investments in 1985 and 1986 partially reflects the Government's policy to reduce its overall budget deficit, as revenues from oil exports and import duties declined. Also, the strong demand pressures experienced prior to 1985 had to be curtailed through restrictive monetary and credit policies, which had a negative impact on overall demand (both consumption and investment) and in turn lead to low capacity utilization in 1985/86. Strict foreign exchange controls by the Central Bank to alleviate pressures on the balance of payments resulted in shortages of imported raw and intermediate materials and of spare parts, which led to further declines in investment. Also, in 1985, the Government announced its plan to disengage progressively from the productive/competitive sector, where private initiative was to take over. 2.05 The public sector has traditionally been dominant in the manufacturing sector. The table below shows the distribution of investments and value added in the 1982-86 period, between the different industrial subsectors, on the basis of their ownership status (public/private). Table 2.4: INVESTMENTS IN MANUFACTURING BY ACTIVITY AND SOURCE 1982 - 1986 1/ (TD million, at current prices) Investments Value Added Public Private Total Amount (%) Amount () Amount Amount Food processing 88.4 43.4 115.1 56.6 203.5 12.8 859.0 23.4 Construction materials 286.7 69.2 127.8 30.8 414.5 26.0 582.0 15.8 EMI 155.0 46.4 179.0 53.6 334.0 20.9 560.0 15.2 Chemicals 320.0 91.3 30.6 8.7 350.6 22.0 241.0 6.6 Textiles & leather 49.4 31.3 108.5 68.7 157.9 9.9 895.0 24.4 Miscellaneous 17.2 12.9 115.8 87.1 133.0 8.4 537.0 14.5 TOTAL 2J1kd 5 iz. IQ. .J5LI 1/ 1986 data are estimates. Over the 1982-1986 peziod, the public sector averaged almost 58% of total investments in the sector, of which most was self-financed by internally generated funds or by bank or supplier's credit. Public sector investments were generally capital-intensive and had high incremental capital-output ratios. Whereas 48% of total investments in 1982-1986 were in construction materials and chemicals (the two subsectors where the public sector is most dominant), the contribution of these subsectors to total manufacturing value added was only 22.4%. In contrast, the three subsectors where the private sector was dominant (textiles, miscellaneous industries and food processing) accounted for on1- 31.1% of total investments during this period, but contributed 62.3% o total manufacturing value added. 2.06 Employment. Employment creation has been one of the main objectives of the Government's industrial policy. Between 1975 and 1980, over 30% of total new employment (equivalent to 65,000 jobs) was created in manufacturing industries, and the share of manufacturing industries in total employment increased from 17.2 to 19.1%. However, over the 1975-1981 period, the - 5 - increase in employment in manufacturing industries (5% per year on the average) remained well below the 10% annual increase in capital stock in the sector. This development reflects the increasing cost of creating a job in the non-agricultural productive sectors, which rose from about TD 6,000 in 1972-1976 to TD 10,000 in 1977-1981 and to TD 15,000 in 1982-1986 (all expressed in 1980 prices). To a large extent, this increase was due to the substantial investments made in the chemical and construction industries. 2.07 Given that the rapid growth in labor supply has become a major issue affecting Tunisia's future development, a priority objective of the Government is the allocation of investment resources to more labor-intensive activities. So far, employment creation in the manufacturing sector has fallen short of Plan targets. Under the Sixth Plan (1982-1986), the 80,600 new jobs created only met 75% of the projected level, primarily because of large shortfalls in agricultural processing, engineering and miscellaneous industries-'. 2.08 Export orientation. As a result of the greater emphasis given in the early 1970's by the Government to the development of export-oriented industries (Law 72-38 enacted in 1972 and revised in 1985 as Law 85-14), manufactured exports increased by an average annual rate of 13.6% in real terms from 1971 to 1981, which was substantially faster than the increase in manufacturing value added (11.9%). However, this tread was reversed in the last six years, as shown in Table 2.5 below: Table 2.5: COMPOSITION OF EXPORTS, AND SHARE OF MANUFACTURED EXPORTS, 1971-1986 (TD million, at 1980 prices) Growth rates () 1971 1981 1982 1983 1984 1985 1986 /1 71-81 81-86 Total exports 240.8 1037.8 904.8 904.1 942.5 952.9 967.0 15.7 -1.4 Petroleum exports 64.5 552.9 416.2 404.3 417.0 388.9 323.8 24.0 -10.2 Non-petro.exports 176.3 484.9 488.6 499.8 525.5 564.0 643.2 10.6 5.8 Mfg. exports 120.0 429.9 441.1 441.3 457.0 499.0 568.9 13.6 5.8 (food processing) (63.5) (68.4) (54.1) (29.9) (48.7) (46.5) (51.0) 0.8 -5.7 Share of mfg. products (other than food process.), in total non-petro. exports (%) 32.0 74.6 79.2 82.3 77.7 80.2 80.5 n.a. n.a. 1/ Estimate. During the 1981-1986 period, manufactured exports increased by 5.8% per annum, which was less than the growth of the manufacturing value added (6.4%). The slowdown in exports is explained in part by that in the phosphate fertilizer 1/ This excludes new jobs created in SSI industries, not covered in the original plan, but which are estimated optimistically at a total of 37,700 during the 1982-1986 period. - 6 - industry, which grew by over 20% in the 1970's but by less than 8% in the 1981-1986 period, and basically stagnated in 1985 and 1986. Furthermore, adverse weather conditions in 1982 and 1985 caused a slowdown in agricultural output. Over the 1971-1986 period, the share of manufactured exports (excluding processed food) rose from 321 of non-petroleum exports in 1971, to 80.5% in 1986. 2.09 During the 1970's, the composition of Tunisia's manufactured exports changed substantially as shown in the table below: Table 2.6: MANUFACTURED EXPORTS, COMPOSITION AND GROWTH, 1971-1986 (in percentages) Growth Rates (real) 1971 1981 1982 1983 1984 1985 1986 1/ 71-81 81-86 Food processing 52.9 15.9 12.2 6.8 10.7 9.3 9.0 0.8 (0.6) Textiles & Leather 5.7 39.4 41.5 43.8 39.7 40.8 39.7 37.9 5.9 Chemicals 17.8 31.3 31.9 34.6 31.9 33.7 34.3 20.2 7.7 EMI 8.6 8.0 10.3 9.3 13.0 10.4 10.6 12.8 11.9 Miscellaneous 15.0 5.4 4.1 5.5 4.7 5.8 6.4 2.5 9.5 Total 0O 10 1 1 1/ Estimate. Whereas 52.9% of all manufactured exports in 1971 consisted of processed food, this share fell to 9.0% in 1986. The share of textiles and leather increased from less than 6% in 1971 to almost 40% in 1986, and the share of chemi'cals doubled to reach one-third of manufactured exports in 1986. Exports of electro-mechanical industries (EMI) also grew substantially in the second half of the seventies, and now resiresent 10.6% of total manufactured exports. B. Main Constraints and Issues a. The Need for Adjustment 2.10 During the 1960s and 1970s, Tunisia pursued industrial policies that (a) gave considerable protection and subsidies to new industries (particularly, those catering to the local market, creating employment and located in the less developed regions of the country); (b) provided attractive incentives to export industries, through a speclal investment law for off-shore industries; and (c) relied on public enterprises in those areas where private initiative or capital resources were lacking despite high protection and generous incentives. 2.11 While manufactured exports accounted for an important part of total non-petroleum exports, textiles and fertilizers accounted in 1986 for two-thirds of manufactured exports, which shows that Tunisian exports remain - 7 - dependent on a very limited number of products. All other sub-sectors have a predominantly domestic market orientation. This strategy did not present much of a constraint to growth during the 1970s when manufacturing was still small, possibilities for import substitution were large, and domestic demand expanded rapidly, fueled by the two massive world-wide oil price increases and substantial raises in local salaries. By the mid-1980s, however, the limits of the past strategy became obvious; by then, the sector was no longer small, the most obvious import substitution activities had all been exploited and growth of domestic demand slowed down markedly because of declining oil production and prices as well as wage freezes that began in early 1.983. Furthermore, at about the same time, the only two export-oriented subsectors encountered increasing difficulties: phosphate-based fertilizers because of depressed world market conditions, and textiles because of increasing international competition and a slowdown of demand in Western Europe. 2.12 Two other weaknesses became increasingly apparent in recent years: namely, the extreme dependence of manufacturing production upon imports, and the high production costs. Given Tunisia's very limited endowment with raw materials, food processing and fertilizer production are the only two subsectors that use a significant amount of domestic inputs, and the latter is crucially dependent on imports of sulfur. Thus, when foreign exchange earnings fell in 1985, the introduction of import restrictions seriously hampered the normal functioning of manufacturing enterprises, as the country could not afford to import all the inputs needed to permit these enterprises to produce at or near capacity. 2.13 Production costs became high for a variety of reasons; but primarily because of inefficiencies fostered by high import protection and large investment incentives granted almost indiscriminately to new enterprises. This led to the financing of economically unwarranted projects, over-investments, loose management, low labor productivity and little regard for quality. In addition, labor costs were quite high; in particular, after the large we.ge increases in 1982 and early 1983, which were exacerbated by high social security charges. Finally, the appreciation of the Tunisian Dinar in the early 1980s eroded the competitiveness of manufactured exports. 2.14 In the future, economic policies in the manufacturing sector will have to focus predominantly on stimulating exports -- particularly, in non-traditional subsectors - for two reasons: (i) together with tourism, manufactured exports will have to make up for moat of the declining foreign exchange receipts from oil exports and workers' remittances; and (ii) given the very limited size of the domestic market, manufacturing production can grow at a satisfactory rate and crevte sufficient new employment only if the sector starts to export on a much larger scale. In fact, in many subsectors, satisfactory economies of scale can only be achieved if production for the domestic market is supplemented by substantial production for exports. The fact that Tunisian export industries tend to be labor intensive is an additional argument in favor of manufactured exports, at a time of increasing unemployment and underemployment. 2.15 The need for adjustment in industrial policies is being addressed by a large macro-economic and sectoral adjustment program, to be implemented in 1987-1991, which is supported by the Bank through two sectoral operations: the Agricultural Sector Adjustment Loan (ASAL; Loan 2754-TUN) and the Industrial and Trade Policy Adjustment Loan (ITPAL; Loan 2781-TUN). -8- b. The Macro-Economic Adjustment Program 2.16 The main objective of this program is to restructure the economy through a progress-ve overall liberalization, including that of prices, investments and imports. The restructured economy should be more conducive to growth (mainly through exports), create more efficient and more remunerative employment, and improve the allocation and use of scarce resources. The main policy measures and instruments to achieve these objectives are the following: (i) Wage and Salary Policy: The Government is determined to maintain the restrictive wage and salary policies started in 1983, and to limit during 1988-1991 the growth of the total wage bill to that of GDP, while limiting it to less than the increase of the CPI in 1986-1987 -- when only minimum wages were raised; (ii) Exchange Rate Policy: An appropriate exchange rate, allowing for competitive exports of non-oil/non-phosphate goods and services is a vital pre-condition for the success of an export-oriented growth strategy in Tunisia. Over the mid 1985-end 1986 period, the measures taken reduced by 27% the nominal exchange rate on a trade weighted average, by more vis-i-vis the major European currencies (DM, FF) and by less vis-a-vis the U.S. dollar. The Government is committed to pursuing a flexible exchange rate policy with the objective of maintaining the real effective value of the Dinar and ensuring the international competitiveness of the Tunisian economy; (iii) Interest Rate Policies: The Government is committed to a more flexible and liberal interest rate policy. This policy is applied to lending (with the exception of certain agricultural credits, export credits and medium-term loans to SMI) as well as to two-thirds of deposits with commercial banks; (iv) Monetary and Credit Policies: These policies have four objectives: (i) to limit the growth of M2 in line with the growth of GDP; (ii) to phase out the special discount facilities at the Central Bank and start operating through the money market; (iii) to reduce the prior approval by the Central Bank for individual loans provided by the commercial banks; and, in general, (iv) to reduce the Central Bank's intervention in the commercial banks' day-to-day management; (v) Budget Policies: In the context of the VIIth Development Plan (1987-1991), the Government plans further reductions in the overall budget deficit, with the objective of eliminating the overall budget deficit by 1991 at the latest. This objective would be achieved largely through cuts in expenditures; (vi) Price Policies: The Government intends to abolish price controls for all manufactured goods by 1991. With respect to the 25% of manufactured products for which price controls will continue for an interim period, a new more flexible price control system was introduced in early 1987. The new system will avoid the major shortcomings of the past cost-plus - 9 - system (such as over-investment, low use of installed capacities, and lack of incentives to control production costs and energy use), and will allow the enterprises to adjust prices unilaterally by reference to world prices. In the few cases of goods where the domestic price is below the world price (medical products essentially), the Government will authorize annual price increases sufficient to reach by the expected date of liberalization the level of the world price of these goods. Thus, prices would become more market-oriented; (vii) Investment Policies: The new Investment Law of August 1987, foresees the full decontrol of all investments. Government approval will be limited to the granting of a number of special investment incentives. However, these will be available only to a restricted number of high priority projects; particularly, agriculture, export industries and investments creating employment in the most underdeveloped areas of the country; and (viii) Import Policies: In this respect, the Government has taken decisions on two sets of measures: (a) the gradual phasing out, from early 1987 to 1990, of all quantitative restrictions on imports; and (b) a reform of the tariff system (including the reduction of high import tariffs and disparities in the levels of effective protection between the different sectors of the economy) which aims to achieve a lower and reasonably uniform effective protection rate of about 25% by the end of the VIIth Plan. e. The Industrial and Trade Policy Adjustment Prograni 2.17 While the macro-economic adjustment program is essential to the creation of an overall economic climate conducive to more efficient growth, a wide range of sectoral measures is also needed to complement and reinforce this program. These measures would have three specific objectives: (i) to stimulate growth of manufacturing production, in the short-term, through economically efficient use of existing installations and, in the longer term, through an increased role of the private sector in investment; (ii) to stimulate exports of manufactured products; and (iii) to stimulate creation of employment in manufacturing industries. The Government has now adopted a Medium-Term Industrial and Trade Adjustment Program (MITAP), the content of which is presented below. - 10 - I. The New Investment Law. The new law brings about six important changes: (i) All investment control and licensing are abolished. No prior investment authorization will be required -- only a simple declaration, for statistical purposes; (ii) Only a limited number of investments, considered particularly important to the economic and social development of the country, will be eligible to receive -pecial investment incentives after approval by the Investment Incentives Approval Committee, the secretariat of which will be provided by Agence de Promotion de l'Industrie (API). They will apply only to enterprises exporting part of their output, in agriculture, creating new jobs in certain priority areas of the country, or introducing new technologies; (iii) Special incentives are to be granted automatically, provided specified criteria are met. The two main criteria -- exports and location -- are clear -ut. Only the relatively minor incentives for the acquisition and adaptation of new technologies are based on an approval process involving a judgemental element; (iv) The incentives will no longer make any distinction between projects of different sizes, nor among new, extension or replaZement investments; thus, small and replacement investments will no longer be discriminated against; (v) The new incentives will be much less generous than under the previous law, as some major incentives are being withdrawn. In particular, only off-shore enterprises exporting all their oucput (and covered by Law 85-14) will continue to benefit from lower tariffs and lower turnover taxes on capital goods imports. Thus, the bias in tariff exemptions against labor-intensive projects has been removed; and (vi) All incentives, apart from a few designed to encourage export operations and multi-shift production, are temporary in nature; they are either linked to the act of investing, or extend over a maximum of six years. II. Government Support and Regulatory Institutions. The main institutional improvements to be achieved through MITAP are: (i) merging three institutions - the old API (Agence de Promotion des Investissements), AFI (Industrial Estates Agency) and CNEI (National Center for Industrial Studies) responsible for industrial promotion, industrial estates and feasibility studies, respectively - into a single institution (the new API, Agence de Promotion de l'Industrie; see Chapter III, Section B); (ii) merging two Government institutions, CEPEX (Export Promotion Center) and OCT (Tunisia Trade Office), both responsible for export promotion, into a single one with increasing orientation towards the private sector; and (iii) making the technical centers (responsible for technical assistance to EMI, lea*her and building material enterprises) more self supporting and more directly responsive to the private - 11 - -ector. It is expected that all these institutions will strengthen their promotional activities, now that most of their regulatory actitties have been abolished. III. Export Promotion. The main measures concern the custo.. and indirect taxation systems, including temporary admission and warehousing, and include: (i) Reducing all customs forms required for export to a single one, and -- more generally -- simplifying and computerizing procedures; (ii) Ratifying the treaty on international road transport (TIR) customs procedures, thus integrating Tunisian road transport into the EEC transport system; (iii) Reducing -- from 100 percent to 5 percent - the bank guarantee required for imported goods to be used in exports, and abolishing the guarantee in case of permanent or intermittent supervision of operations by the customs administration; (iv) Permitting occasional exporters to supply themselves from resident companies without payment of the domestic sales tax, instead of reimbursing this tax after export; (v) Abolishing the import licensing document (titre de commerce ext6rieur) for imports under the temporary admission regime, including imports of packaging materials for exports; and (vi) Improving the processing of the reimbursement of taxes on imported export inputs. IV. Money and Credit: Besides the measures agreed within the macro-economic package (para. 2.16) and those agreed with the IMF in the context of the Stand-by Agreement (October 1986), two additional liberalization measures were agreed as part of MITAP. First; the prior authorization requirement from the Central Bank for commercial bank lending to industrial enterprises was raised further in January 1987 to TD 5 million (except for "overdraft" borrowings in the trading sector where a limit of TD 500,000 million remains). Thus the system has been made considerably simpler and less cumbersome; the TD 5 million ceiling now affects only about 50 enterprises, mostly from the public sector, whose situation still requires monitoring. The 1-w private enterprises still affected by this requirement will no longer be subject to it after January 1, 1988. The Governement has clearly stated its intention to remove the system of prior authorizations. Second; in the past, the commercial banks had to earmark a large proportion of their deposits (except for foreign accounts) to medium and long-term lending operations. This proportion- eventually totalled 43%: 20% in development bonds issued by the State, 5% in bonds of the Caisse Nationale d'E?argne-logement (CNEL), and 18% in medium-term loans to industrial enterprises-'. The objective of the 18% ratio was to get the banks to 1/ In French, "Ratio Global de Financement du D6veloppement" (RGFD). 21/ In French, "Ratio d'Effets Priv4s i Moyen Terme" (REPMT). - 12 - participate more actively in investment financing, which may have been justified at a time when the institutions catering to such lending were not sufficiently developed. When banks did not comply with the ratio, they had to maintain equivalent interest free balances with the Central Bank. With the creation of a large number of development banks since 1981, it is less essential to maintain such a high and undifferentiated lending ratio. Accordingly, it was replaced on September 30, 1986 by a lower and more specific ratio, known as the "priority activities ratio", which applies only to the financing of investment in the crafts/ artisan sector and for SMI, agriculture and export activities. Initially, the new ratio is fixed at 7% of deposits; it will rise by one point per semester to reach its final level of 10% by March 31, 1988. The Government has also agreed to study the reform of the Foreign Exchange Risk Coverage scheme for long-term lending through the banking system, with the medium-term objective of having the ultimate borrowers assume the foreign exchange risk on loans from abroad. The adoption of an improved foreign exchange risk coverage scheme is a condition for second tranche release of ITPAL. V. Industrial Employment. In addition to the measures affecting employment and wages that are part of the macro-economic framework, MITAP would support the following: (i) In an effort to prevent any further increases in social security charges, the Government will study the feasibility of reallocating the total revenues of six social programs so as to maintain their longer term overall equilibrium, and will review the structure of the various benefits being provided under these programs; (ii) Helping enterprises implement the policy of basing wage adjustments on changes in productivity and the financial condition of the enterprise, is a priority task that the Government would like to see followed on a wider scale. The practical application of such a policy requires the assistance of experts which the Bank has agreed to finance; and (iii) As part of the efforts to prepare the Seventh Plan, the Government is undertaking a review of labor and employment legislation to ensure that it is sufficiently flexible to promote employment, it incites entrepreneurs to hire more staff, and -- at the same time -- it is not an obstacle to enterprise rehabil tion and restructuring efforts. C. Bank Strategy in the Manufacturing Sector 2.18 The Bank's lending ami ESW strategy in the sector aims at supporting the country's transition from a petroleum/phosphate-based economy to a more sectorally balanced and efficient one, while taking measures to increase employment and to target development to low-income areas. In support of this, the objective of Bank lending is to emphasize projects which have a direct and rapid impact on production, employment and export, and which minimize Government budget contributions. The Bank is encouraging the - 13 - development of the industrial sector, through credit lines with special focus such as the First Small-Scale Industries Loan (Loan 1969-TUN), Export Industries (Loan 2522-TUN), Electro-Mechanical Industries (Loan 2554-TUN) and through Industrial and Trade Policy Adjustment Loans (ITPAL; Loan 2781-TUN). Operations in the Export, SSI and EMI sectors as well as sector policy lending are intended to bring about the afore-mentioned transition. The Financial Sector Review, the Employment Study, the Industrial Sector Review and the planned Public Sector Enterprises Study (1987) provide the analytical base for recommending appropriate government policies and supporting the Bank's operations in the sector. WH. THE SMALL AND MEDIUM SCALE INDUSTRY SUBSECTOR A. Characteristics and Performance 3.01 Tunisia has a relatively high share of small and medium industrial enterprises which are generally defined" as units with total investment, including working capital, of less than TD 1 million:' (US$1.255 million) and employing more than ten workers- . Like in other Mediterranean countries, the SMI sector in Tunisia is composed of a mixture of traditional workshops, artisanal production units and small modern factories. Even though figures are not collected in a systematic manner, it is estimated (on the basis of approvals by API) that SMI enterprises comprise over 80% of all manufacturing enterprises and over 65% of employment created in manufacturing (i.e. excluding services, mining, tourism, energy and transport). During the period 1980-85, the number of projects approved by API in the SMI and the manufacturing sectors, and the estimated investment and created employment were the following: Table 3.1 PROJECT, INVESTMENTS AND EMPLOYMENT APPROVED IN THE MANUFACTURING SECTOR, 1980-1985 a/ All Manufacturing SMI Amount % k' Projects (number) 10,426 9,787 (94%) Investments (TD million) 2,874 932.41 (32%) Employment (number) 198,806 149,019 (75%) a/ The source of all tables in this chapter is API's Department of Statistics. b/ Of all manufacturing. 3.02 The activities of SMI have been mainly oriented towards the production of consumer goods for the local market, though it has started 1/ There is no uniform definition of SMI in Tunisia. While most financial and fiscal incentives are based on a maximum amount of investment, the Statistical Office uses the number of employees (10-50). 2/ Until late September 1987, this ceiling was set at TD 500,000. 3/ For enterprises with less than 10 workers, no license is required; they are called "artisans" or cottage industry. For enterprises with at least 10 workers and with total investment of less than TD 500,000, a license is required; they are defined as SMI. - 14 - contributing more to exports, both directly and indirectly. The dominant sectors are textile/leather (about 40%), food processing (16%), and EMI (14%). In general, the geographical distribution of SMI follows the sime pattern as the larger units, with a majority concentrated in the Greater Tunis area and the major coastal cities (e.g. Sfax, Sousse, Bizerte). In 1985, SMI investments accounted for 33% of total industrial investment; the cost of creating a new job averaged TD 8,500 (about US$11,000 at the then prevailing exchange rate), i.e. less than 40% of the average experienced in all manufacturing (about TD 22,000) or about 17% of the average cost for larger manufacturing enterprises (about TD 50,000). This amount, however, varied from TD 3,000 in traditional firms, to TD 25,000 in modern enterprises. 3.03 Based on the API's 1985 approvals, as shown in the table below, the food processing and textiles/leathers subsectors represented 59% of SMI total employment and 46% of SMI total investment. Table 3.2: SUBSECTORAL DISTRIBUTION OF SMI BASED ON APPROVALS - 1985 SMI Employment SMI Investment as % of as % of Total Mfg. Total Mfg. SMI Sub- Total SMI Sub- Total Sector Sector Sector Sector Food Processing 16 81 12 21 34 7 Textiles & Leather 43 94 34 25 60 8 Mech. & Electric. Inds. 14 55 10 19 23 6 Chemicals 2 74 2 4 28 1 Construction Materials 9 54 6 15 21 5 Others (Wood/Paper/etc..) 16 84 13 16 62 5 Total SMI Sector Za ZA 13 a3 3a SMIs are particularly predominant in textiles and leather, in which they accounted for 34% of the total manufacturing employment while requiring only 8% of total investment. This is mainly due to the fact that SMIs are concentrated in the garment and confection production, while the larger units are in spinning and weaving which is much more capital intensive and has more opportunity for economies of scale. 3.04 The above analysis illustrates the importance of SMI for employment creation and its dynamic role in the manufacturing sector; particularly, with regards to creating large numbers of new projects and jobs through relatively small investments. They are expected to be even more important in the future, as the Government reduces its direct involvement in the industrial sector. Deepening, strengthening and enlarging the SMI sector is the main objective of the proposed Bank project. B. Institutional Framework and Incentives 3.05 There is no single specialized agency directly responsible for SMI assistance and promotion, but a number of organizations are indirectly involved. Overall direct Government assistance to private industry has been - 15 - mainly to SMI. Thus, even though several institutions were established to help private enterprises in general (i.e. large and small), in practice they were oriented essentially to relatively small enterprises and entrepreneurs. The above mentioned institutions are presented below. (i) Agence de Promotion de l'Industrie (API) 3.06 In 1973, Agence de Promotion des Investissements (old API) was established (Law 72-38 of April 27, 1972) with the dual responsibility of: (i) providing information on industrial opportunities, assisting promoters to identify projects and, in general, helping entrepreneurs with the appraisal and operation of their projects, and (ii) licensing all enterprises over 10 persons and approving all investments under the investments laws (Law 72-38 of April 1972, revired in 1985 with regard to off-shore export companies; and law 81-56 of June 23, 1981 concerning manufacturing industries, in general, and decentralization, in particular). API's Board was a large body with 15 permanent members (all Government officials) and a dozen observers from government agencies, the majority political party, technical centers and UTICA (paras 3.10 and 3.11). As of December 31, 1986, API had about 360 employees including those in regional offices. 3.07 In 1978, API started developing extension services to SMI. These were carried out by a Special Assistance Unit and included: (i) assistance in the preparation of projects; (ii) help in obtaining public utility services; and (iii) assistance in overcoming administrative procedures. To ensure the proper implementation of the SSI project (loan 1969-TUN) the Bank utilized API's Special Assistance Unit for (i) administrating the loan, (ii) providing technical assistance in preparation of small projects for API's approval, (iii) providing extension services, and (iv) reviewing subproject appraisal reports. The Unit was staffed by six professionals, including a foreign expert financed by the Bank under the SSI project. As discussed below (paras. 3.28 - 3.30), API's assistance to SMI has not been very effective and the level of effort has not been commensurate with the size of the sector. 3.08 In the past, API's approval was required for the enterprises to receive financial assistance from the banks and FOPRODI (paras 4.11 - 4.15) and to obtain a license for imported equipment. Therefore, all entrepreneurs at one time or another had to deal with API. This situation has now changed with the abolition of investment and import licenses as agreed under ITPAL. 3.09 As agreed under ITPAL (para. 2.17, II), API has now been merged with AFI (Agency for Industrial Estates) and CNEI (Industrial Studies Center), into a single organization responsible for the promotion of industrial development, called Agence de Promotion de l'Industrie (new API). The new API would essentially be an institution to carry out studies, advise the Government on industrial policy, and help implement this policy and monitor its effect; the new API would have no control or regulatory power. (Also, it would not provide directrindividual assistance to SMI anymore; this would now be carried out by UTICA). CNEI, which has been supported by the Bank (T.A. Project: Loan 2197-TUN), used to undertake sector studies and provide independent advice to the Government on industrial problems. Frequent changes in management have left the center somewhat disoriented; it has competent staff, however, and - with proper direction -- should be able to make a positive - 16 - contribution to the new API (particularly, in fields buch as market and sector studies, economic analysis of projects, evaluation of feasibility studies). AFI used to be responsible for industrial estate development and was fairly effective and successfull. Industrial estates have so far mostly benefitted large and medium-sized industry. This is not necessarily a shortcoming because SMI generally develop near the larger industrial enterprises. The integration of the three institutions (old API, AFI and CNEI) is expected to lead to better assistance to the industrial sector, in general, and SMI in particular. Under the proposed project, the new API will receive technical assistance to better perform its promotional role (para 3.31). This support will be supplemented by assistance to other organizations (UTICA and commercial banks). Details on staffing, organization, objectives and procedures are provided in Annex 1. (ii) Union Tunisienne de l'Industrie, du Commerce et de l'Artisanat (UTICA) 3.10 Created in 1946, UTICA is the federation of Tunisian employers; it promotes the interests of the business community. It is divided into sectoral groups . Its main function is to improve the contacts of the business community with the Government and to give its view on questions of industrial policy and reglementation. In addition, it has two others functions: (i) information and publications; and (ii) promotion and training. 3.11 In 1984, UTICA created an Assistance Unit for SMI (Centre d'Assistance A la PME), which started an experimental program financed by USAID and assisted by CRS (Catholic Relief Services). This two-year program, to help about 60 hand-picked very small (less than 20 employees) enterprises, consisted of three phases: diagnosis of the firm's problems, design of possible solutions, and implementation of the solution adopted. The program was successfully completed in 1986 and UTICA, USAID and CRS have decided to extend and enlarge the program for another two years, to cover about 200 enterprises by the end of the period. Under the new program, five permanent advisors will provide technical and managerial assistance to very small enterprises. However, there is a growing need of consulting services for other small as well as for medium-scale entrepreneurs who have asked UTICA to extend its assitance services. Under the proposed project, the Bank will work as a catalyst in establishing with bilateral donors, a more comprehensive program to assist UTICA in helping entrepreneurs improve their efficiency and productivity as well as undertake additional investments (see paras 3.16 - 3.20). Details concerning UTICA are provided in Annex 1. (iii) Technical Centers. 3.12 Three technical centers have been created so far by the Government to provide information, training and production assistance to enterprises in electrical/mechanical industries (Centre Technique des Industries M6caniques et Electriques; CETIME), leather and footwear (Centre National du Cuir et de la Chaussure; CNCC), and building materials, ceramics and glass (Centre Technique des Materiaux de Construction, de la Ceramique et du Verre; (CTMCCV). The technical centers provide their assistance mainly to the medium and small-scale industries because the large enterprises are generally - 17 - well equipped. CETIME, which was created in 1982 with the help of the Bank (EMI-I Project, Loan 2113-TUN), received in 1985 an additional US$2.1 million from the Bank under the EMI-II Project (Loan 2554-TUN), to expand its activities into foundry and electronics. The technical centers are non-profit enterprises that operate on the basis of approved budgets, which are partly financed by revenues from services sold to industrial enterprises. (CETIME, in particular, is well equipped, has a competent staff and benefits from technical assistance from the UNDP and bilateral sources). However, not unlike many other public institutions in Tunisia, the technical centers have occasional tendencies to become regulatory and bureaucratic, instead of promotional. Increased input from the private sector and reduced Government intervention may in the future secure a proper balance. The future role, scope and development of the centers is being studied in the context of the overall framework of industrial promotion (i.e. not limited to SMI) and is being addressed under ITPAL (para 2.17, II). Although the proposed project does not directly include assistance to the technical centers, both API and UTICA will closely cooperate with them. Additional information on the three technical centers is provided in Annex 1. (iv) Incentives. 3.13 There are very few SMI-specific incentives. In fact, corporate tax allowances, import duty exemptions, employment creation premiums and interest rate subsidies have generally been industry-wide and not related to the size of the enterprise. It has been, however, the Government's belief that SMI are more flexible in the choice of their location and that they can be instrumental in helping achieve regional development. Until early 1987, a preferential low interest rate (6.25%) was applied to loans to SMIs established in less developed regions-. Under ITPAL, all SMI specific incentives have been abolished except for a preferential interest rate on medium-term loans (up to seven years) under FOPRODI (Fonds de Promotion et de Dcentralisation Industrielles), which combines in a single scheme regional decentralization and SMI promotion. Chapter IV (Financing of the SMI subsector) gives a description of FOPRODI. C. MAIN CONSTRAINTS TO SMI DEVELOPMENT 3.14 Macroeconomic and industrial sector constraints are being addressed under ITPAL and have been discussed in paras. 2.16 and 2.17. The subsector specific constraints are of two kinds: one set of constraints is related to the subsector in general (production, management and finance) and is rather similar to the constraints found in other countries; the other set is country and project specific (institutions, regulations, definitions and criteria for special treatment). Below follows a discussion of the constraints and the recommendations proposed to overcome them. 1/ Until January 1987, for SMI projects under TD 500,000, rates for medium-term loans were 6.25% in less developed regions and 8% in already developed areas (i.e. Tunis, Sfax). Since January 1987, only an 8% rate has been retained; and, since late September 1987, the TD 500,000 ceiling has been raised to TD 1,000,000. - 18 - (M) Production and Management Constraints 3.15 SMI productivity is affected by internal problems such as: deficient production planning, accounting and management, poor product design and plant layout, inappropriate selection of equipment and lack of quality control. SMI growth is also constrained because they suffer from shortage of raw materials (e.g. delivery delays, unfavorable prices), and limited marketing capabilities (e.g. limited size of domestic market, lack of export outlets, and dependence on several intermediaries, resulting in higher costs). Because development policies have favored creation and investment -- rather than production and selling -- managerial, productivity and marketing services are generally not available to SMI. In addition, the majority of SMI promoters are not aware that they need or would benefit from assistance. These constraints to SMI development can only be removed by a more focused program of technical assistance to SMIs which, under the proposed project, would be provided for through UTICA. 3.16 UTICA will provide two forms of services to enterprises: (i) diagnostic assessment of overall operations; and (ii) specific analysis of particular problems. The assessment of overall operations, will consist in a general diagnosis by a multidisciplinary team (production engineer, market specialist, financial analyst, etc.) and will be completed by an action plan and by follow-ups to help the promoter implement the proposed solutions. About 1.5 staff months per enterprise will be necessary to complete an overall assessment. The analysis of particular problems will consist of advice and occasional technical assistance from specialists in studies of new products and markets, improvement of productivity, feasibility studies and financial planning. Consulting services would be extended to all SMIs across the country, from two centers; the first one located in Tunis, and the second one, starting in 1989, in Sfax. 3.17 UTICA will deliver its technical assistance through its SMI Assistance Center. The Center's goal -- with assistance from both local and international experts and consultants -- would be to train 20 Tunisian nationals as full-time advisers who would then work with about 300 enterprises over the three years from 1987 to 1990. By the time project implementation is completed, the SMI Assistance Unit should be'operating independently. UTICA will train its advisers in the main problem areas affecting SMI enterprises: accounting and finance (e.g. cost accounting, financial planning), production management (e.g., production planning, scheduling, inventory control), administration, organization, personnel management and marketing (e.g., advertising, pricing, distribution networks and market research). UTICA intends to merge the USAID and CRS program with the Bank program at the end of the third year; in thE. meantime, the two programs will have the same project chief and will share all documentation. 3.18 A technical assistance program has been designed to strengthen UTICA; the program would consist of the following elements (for details, see Annex 4): (a) two international experts (a specialist in management of SMI, and a multidisciplinary engineer specialized in production and organization); - 19 - (b) occasional international consultants/specialists in technologies that are either new or not yet available in Tunisia, and specialists in external markets; (c) occasional local consultants (technical centers, CEPEX, private consulting firms, etc.), commissioned to work in conjunction with the project advisers; (d) overseas training and internships for UTICA staff; and (e) equipment, and reference information. 3.19 The foreign exchange cost of this project component is estimated at about US$1.3 million for the 1987-1990 period. The local currency needs of UTICA to implement the project component and meet its operating costs are estimated at TD 485.500 in constant 1986 prices, after deduction of income received for its services (about TD 75,000). Table 3.3: TECHNICAL ASSISTANCE PROGRAM, UTICA (1987-1990)-' Foreign (US$) Local Total (US$) (TD) (US$) Personnel 950,411 491,500 616,833 1,567,244 Staff Training 100,525 - - 100,525 Equipment 128,387 92,000 115,460 243,847 Offices - 51,000 64,005 64,005 Program administration 67,895 142,OOC 178,210 246,105 Subtotal 1,247,218 776,500 974,508 2,221,726 Miscel. and contingencies 22,399 A - 22,399 Receipts from billing - (75,000) (94,125) (94,125) Total 2.150,00 1/ For more details, see Annex 4. 2/ Contingencies for lodal costs will be charged as fees, if needed. 3.20 For the next three years, UTICA will make its services available at very low cost: diagnostic services will essentially be free, while the design of action plans and the implementation follow-ups will be charged at an average cost of TD 250. At the end of the period, it is expected that the local staff will be able to continue the program without further assistance from abroad and that fee income will be sufficient to pay for the operating cost of the program. (ii) Financial Constraints 3.21 Insufficient Commercial Banks' Interest In SMI Investment Financing. The main concern of commercial banks under the SSI project (Loan 1969-TUN) was that margins were insufficient (only 2% on average) to permit adequate financial services to their customers, cover the risks associated with - 20 - SSI projects and provide them a reasonable profit. Consequently, medium- and long-term credit units in commercial banks were understaffed and underequipped. Another concern was that the subloans financed by the project were not accounted for in meeting the 18% medium-term lending ratio (para 2.17 (IV)). Nevertheless, the Bank loan has been utilized because, first, the Bank loan was considered less risky by the participating banks since the Bank's funds were managed at a fee and the FNG-' carried the bulk of the risk. Second, since early 1985, the Bank loan had practically become the only available source for investment financing because of tight liquidityl and restricted possibilities to use local currency loans for the import of equipment. 3.22 The proposed project would make the financing of SMI more attractive by providing better margins. The banks would no longer receive a management fee for an essentially low risk operation; instead, they would receive an adequate margin and assume the full credit risk on the loans made from the Bank loan. The margin permitted under the project would not exceed 4 %, which should be sufficient to cover the cost of project appraisal and supervision and to make provisions for the higher risks. As explained in para. 2.17 (IV), the medium-term lending ratio has been reduced from 18 % to 10 % and will basically be reserved for small industrial and agricultural enterprises and export operations; loans financed from the Bank funds would be included in the ratio. 3.23 Undercapitalization and Insufficient Equity. The investment code (Art. 8, Law 81-56 of June 23, 1981) requires that project promoters provide 301 of the investment cost from their own funds. A 30% equity contribution can be considered relatively small. However, sponsors tend to underestimate the total cost of their project in order to limit their contribution; frequently, as a result, when a project is completed, the promoter has no resources left because the cost overrun on the project had to be financed from his own resources. Expansion, modernization and rehabilitation investments are also adversely affected by this requirement because API used to consider that such investments also had to be covered for 30 % at least by self-financing, irrespective of the current value of the enterprise's equity. Thus, an entrepreneur who had repaid most or all of his loans and had built up a substantial equity in his company could not obtain a new loan for an expansion unless he provided again 30% of the project cost from his own funds. The consequence of this requirement was that it was better not to channel profits back into an existing company (and reduce the debt/equity ratio), and to keep the profits out of the company so that they could be used for a new project. From now on, as agreed under ITPAL, API will not be responsible anymore for approving the financial plans of investment projects; this will now be the responsibility of the commercial banks who will carry the risk (and not simply manage for a fee, as in the past). Generally accepted banking criteria of debt/equity, debt service capacity, overall project profitability and creditworthiness will determine the appropriateness of the financial arrangement being envisaged. 1/ Fonds National de Garantie (National Guarantee Fund); paras. 4.16 and 4.17. 2/ The utilization of the Bank loan increased the bank's rediscount olnota by a similar amount. - 21 - 3.24 Difficulties in Financing Cost Overruns and Delays. In order te benefit from incentives for SMI and to stay within the TD 1,000.000 limit -', sponsors often do not include provisions for cost overruns or price increases, and expect that cash flows in the early years will finance part or all of the working capital. As a result, cost overruns frequently exhaust the savings held by small investors. Since commercial banks from now on will be responsible for approving overall financial plans of SMI projects, the proper staffing of their term lending departments will become essential; it should ensure more sophisticated project appraisal and supervision, and should diminish the risk of project underfinancing (para. 3.27). 3.25 Inferences from visits to enterprises and API's knowledge of the sector indicate that a crucial problem is the lack of resources for financing working capital. The banking system is reluctant to finance new SMI enterprises because of insufficient financial reward, relative to the cost and risk of SMI projects. However, entrepreneurs have indicated th,qt the ready availability of funds was more important to them than the interest rate on these funds. 3.26 The proposed project is expected to overcome these problems by allowing sufficient margins on term lending by the banks; this will make this type of lending more attractive to the banks and encourage them to be more responsive to SMI customers. Thi. is also expected to reduce the banks' reluctance to meet permanent working capital needs when extending long-term loans- 3.27 Commercial banks selected to participate in the project would organize, staff and equip themselves to properly appraise and implement projects financed by term loans. The participating commercial banks have made satisfactory proposals to strengthen their term lending organizations, to which they will allocate sufficient and competent staff. .They will rely on outside services (including API) where needed. Training programs have also been formulated. Resources to finance these actions will come from the improved margins on term-lending and from the following two fiscal provisions: first, the possibility to apply directly up to TD30,000 of the cost of studies for tax deduction (Law 80-59); and, second, the possibility to get an exemption from the vocational training tax by using 2 % of paid salaries and wages for training. These two provisions would provide enough to cover the expected cost of a program (estimated at about TD 50,000 per bank and per year), which would include consultant costs for project studies, as well as cost of training, internships, seminars and study aids. During negotiations, these proposals were confirmed by the participating banks. 1/ see para. 3.33 2/ Workiag capital financing to profitable and proven companies is less risky and less costly, and thus more profitable. - 22 - (iii) Institutional and Regulatory Constraints 3.28 Lack of Appropriate Institutional Support. In the last few years, SMI promoters have not received adequate extension and management support, because, over the years, API had developed into a regulatory agency which spent most of its time reviewing and approving investment proposals, instead of fulfilling its promotional and assistance roles. In this context, the Special Assistance Unit, which helped SMI projects, had mainly provided administrative advice and information, since its staff had neither the qualification nor the experience needed to provide tecbnical and managerial assistance to SMI. Supervision of the implementation of SMI projects, which was handled by API's regional offices, was not properly carried out because each agent had to supervise a *.t 300 projects per year. Consequently, supervision was limited to gat..ering statistics and general progress data. 3.29 Under the SSI Loan (1969-TUN), the Bank financed an expert who was *esponsible for reviewing appraisal reports and giving engineering assistance during the preparation of appraisal reports. The expert assisted a large number of projects (about 80 per year), and sample checks indicate that the expert's advice was beneficial to project sponsors and to participating banks. However, the expert was not able to assist all promotors who requested his advice, and assistance was not given at the implementation and operational stages, which is crucial for SMI projects. Under the proposed project, technical and managerial services would be provided by UTICA, while API would only assist in the preparation of new SMI projects. 3.30 The new Investment Law, made effective in August 1987, requires API to take on a full-scale promotional role and abandon its present regulatory and controlling role. This means that API staff and financial resources will be channeled into promoting new enterprises, mainly through project identification work and sector studies. Under the proposed project, API's role would be: (a) to assist promoters in the identification of project opportunities and in the formulation of their projects; (b) to provide training for the staff of the SMI unit responsible for promotional work, and to prepare model feasibility reports for possible SMI projects; (c) to provide the participating banks - at their request -- with advice regarding the economic feasibility (studies of economic rate of return, market and product studies, etc.) of projects to be financed from the Bank line of credit; (d) to collect and analyze all information on SMIs of interest to the Government, supervisory institutions and lenders; and - 23 - (e) to provide agencies concerned with the sector, with information on macroeconomic matters and regulatory questions. 3.31 To assist API in performing its role, a technical assistance program has been designed which is described in detail in Annex 3. The main elements of this program are: (1) 24 staff months of expert assistance (at a foreign exchange cost of about US$8,300/month) to help SMI project sponsors in the preparation of project technical feasibility studies; (ii) 2 staff months of short-term consultants' assistance (at a foreign exchange cost of US$10,000/month) for market studies, subcontracting, promotional work and engineering services (new products or technology); (iii) training for API's staff; and (iv) and equipment for information services. The total foreign exchange cost of the program is estimated at US$500,000, which would be financed by the proposed Bank loan. (Office space, supplies and other local costs, estimated at about US$125,000 equivalent, would be financed by API). Table 3.4: TECHNICAL ASSISTANCE PROGRAM, API (1987-1990)-' - 1 expert (multidisciplinary engineer) US$200,000 - Short-term specialist consultants 20,000 - Fellowships and study tours for API staff 30,000 - Equipment: 6 personal computers (with software), 27 terminals, other office equip. (photocopiers, printers) 150,000 - Studies and project promotional work (consultants, travel and materials) 65,000 Subtotal US$465,000 Contingencies 35,000 Total US_500.000 The employment of the expert would be a condition of loan disbursement for this technical assistance component. The expert and short-term consultants will be hired in accordance with the Bank's guidelines. 3.32 The Definition of SMI Projects. In the past, SMI have been limited to projects with a total investment of less than TD 500,000, including permanent working capital requirements. This definition applied to the Bank SSI project as well as for obtaining incentives and assistance under the FOPRODI scheme (see para 4.11). The investment ceiling -- which dated from 1975, when TD 500,000 was equivalent to US$1,250,000 -- is no longer appropriate, not only because the present value of the dinar has substantially decreased (i.e. TD 1 = US$1.255 now, versus TD 1 = US$2.50 in 1981 at the time of the SSI project appraisal), but also because a tendency developed to try to fit too many projects in the SSI category, which resulted in the underestimation of project investment costs. 1/ For more detail, see Annex 3. - 24 - 3.33 In late September 1987, the SMI investment ceiling was raised to TD 1,000,000. Under the proposed project, the investment ceiling would be somewhat higher in order to include in the financing plans adequate provisions for working capital and contingencies, and to reflect the present costs of equipment and building. It is also proposed to have two ceilings: one for new projects, TD 1.5 million; and another one for existing enterprises, TD 2.5 million. In the past, it was fiscally more advantageous to create a new enterprise (with new equipment and new buildings) than to renovate, expand, modernize or integrate existing enterprises; because, under the old investment code, only new enterprises qualified for benefits and incentives. Under ITPAL (para. 2.17 I), the emphasis is placed on better use of equipment and capacity, improving labor productivity (by introducing two shifts, for example) and decreasing investment subsidies. The proposed ceiling of TD 2.5 million for expansion projects (including net existing assets) would enable the financing of the expansion of successful SMI enterprises. 3.34 The Investment Per Job Ceiling. This ceiling, which was among the eligibility criteria under the SSI Bank loan, was originally set at TD 6,900 (US$ 17,250 at the exchange rate prevailing in 1981). It was increased to TD 15,000 (US$ 20,500) in January 1984 and to TD 18,500 (US$22,000) in October 1985. In order to comply with the maximum investment per job criterion, promoters, API and commercial banks have sometimes inflated the expected job creation. In many cases, this ceiling has also aggravated the problem of total investments because it gives further inducement to decrease the estimated total project cost. Earlier limits appear to have contributed to the slow utilization of the loan; the present limit, however, seems to be appropriate. Under the project, it is proposed that the maximum amount of investment per job created be used as a guiding and flexible criterion. This amount would be TD 30,000 in December 1987 terms; this amount should enable the financing of existing projects that need additional investments to make them more efficient or productive, without necessarily creating more employment (see para. 5.10). D. The Bank's Role in the SMI Subsector 3.35 Pilot Project. In 1977, the Bank extended a pilot line of credit of US$7 million to finance SSI projects. The project was administered by BDET, which reviewed projects for Bank financing and coordinated the utilization of the loan by participating commercial banks. The loan main objectives were to help the creation of new enterprises, to create employment at low investment cost, and to initiate project lending by the commercial banks. 3.36 The SSI pilot line contributed to the financing of 37 projects (11 from the SSI component of Loan 1504-TUN, and 26 from Loan 1505-TUN ) of which 26 were financed by BDET!', 7 by BNT, 3 by STB, and 1 by BTEI. Of the 37 projects financed, about 70% were new operations and the remaining 30% 1/ Of the US$7 million, US$2 million was reserved for BDET to finance the extension of existing SSI projects (Loan 1504-TUN); US$5 million was lent to the government for utilization by the commercial banks and BDET to finance new SSI projects (Loan 1505-TUN). - 25 - extensions of existing enterprises. The main subsectors were: construction materials (27%), plastic, wood and paper (27%), textiles, clothing and leather (24%), food and beverage (11%), and FMI (11%). As for the regional distribution, 65% of subprojects financed were located outside the Greater Tunis area. Of the 26 subprojects financed under Loan 1505-TUN, 24 were FOPRODI assisted. The 37 subprojects generated 1,260 jobs, at an average cost per job, in 1976 prices, of TD 4,165 -- compared with the TD 4,600 amount covenanted. The lowest cost per job created was TD 2,000. 3.37 The pilot project achieved to a large degree the sectoral, institutional and operational objectives set at the time of appraisal. It constituted a major source of finance for econoxically viable enterprises, and it supported the creation or expansion of labor-intensive enterprises in various industrial subsectors. This confirmed the Government's perception that SSIs were a good vehicle for economic development and job creation. 3.38 The Small Scale Industry Project (Loan 1969-TUN). This project, approved in April 1981, built on the experience gained under the pilot project. In order to ensure more active participation from the commercial banks, which had shown reluctance to work under BDET's supervision, the tasks of administering and technically supervising the loan were given to the Central Bank and API, respectively. To make the utilization of the loan more attractive, a commission system was adopted to remunerate the participating banks for the appraisal and collection of loans. Also, the risk sharing was changed, by shifting a larger burden onto the National Guarantee Fund (FNG; paras 4.16 and 4.17). 3.39 Commitments under the loan were initially very slow. The main problems were the cumbersome disbursement procedures and the unduly rigid project selection criteria. The disbursement problem was resolved by setting up a special account in the Central Bank, which overcame the participating banks' reluctance to pre-finance subloans. The maximum amount of investment per job created was initially too low and this was aggravated by the depreciation of the dinar. The Bank adjusted this criterion in steps (para. 3.34) and, as of September 30, 1987, almost all the loan amount had been committed (US$28.8 million-, out of US$30 million). In total, 142 projects were approved, of which 24.1% were in the EMI sector, 19.3% in textiles and leather, 15.2% in construction materials, 13.5% in wood, paper and plastic, 13.3% in food processing and 8.0% in miscellaneous industries. Almost all projects were creations (only 5% of commitments were for extension projects) and 64% of the projects benefited from FOPRODI assistance. The most active banks were Banque du Sud (19% of total commitments), STB (17%), BNT (17%) and UIB (13%). BDET accounted for 12%, while BIAT and ET accounted for 7% each, and UBCI and CFCT for 4% each (see Annex 2 for details). 1/ See Annex 2. - 26 - 3.40 Through the two previous projects, the Bank has learned about the constraints affecting the development of the SMI subsector. The Project Completion Report and the Project Performance Audit Report on Loans 1504/1505-TUN identified some of the constraints mentioned in paras. 3.14 - 3.33, and suggested solutions which have been taken into account in the design of the proposed project. The improvements required in the macro-framework and the overall manufacturing sector which were eventually addressed by ITPAL, were identified through the regular supervision of the two loans to the SSI sector, as well as the supervision of other loans to industry, whether through the development banks or directly to such enterprises as Sofomeca (foundry) and Sogitex (textile). Given that the Bank loans were practically the only source of long-term financing to SMI by the commercial banks-' (with the exception of a limited number of suppliers credits), the Bank has played an important role in the development of SMI. IV. FINANCING OF THE SMI SUBSECTOR A. The Financial Sector 4.01 Overview. The Bank undertook in 1985 a comprehensive review of Tunisia's financial sector (Report No. 5263-TUN, December 16, 1985). The financial system in Tunisia consists of the Central Bank, ten commercial banks, ten investment banks, two savings institutions, one leasing company (Tunisie Leasing), and eight portfolio management companies. The postal checking system, the stock exchange and seven off-shore banks complement the financial system. Considering the size of the country (about 7.5 million inhabitants) and its stage of development, this is a rather large financial sector. It should be mentioned, however, that the Central Bank, up to very recently, exercised very close direct controls over all aspects of credit to the economy -- in most cases, requiring prior approval. Under ITPAL and the IMF Stand-by Agreement, the Central Bank has agreed to liberalize its overall quantitative and quazlitative controls and to rely less on direct intervention (see paras. 2.16, (1:1) and (iv), and 2.17 IV). The objective of this new policy is to give the commercial banks more freedom in credit decisions; particularly with regard to credit terms and specifically interest rates. It is expected that this will result in increased competition between banks and more responsibility and accountability for management. Ultimately, this should lead to better and mcre competitive financial products. 4.02 Interest Rates. Traditionally, Tunisia has had a very detailed structure of interest rates, closely regulated by the Central Bank. This structure included the discount rates of the Central Bank for short- and medium-term paper, which varied with the sector (industry, agriculture, housing, tourism, etc.) and the purpose (construction, seasonal credit, medium- and small-size industry, exports, etc.). Interest rates 1/ Most long-term lending is channeled through the development banks. - 27 - on commercial bank loans were fixed accordingly, taking into account rediscountability and maturity. Interest rates on deposits (both sight and term) and savings accounts were also set by the Central Bank. Under this system, margins between borrowing and lending rates were set by the Central Bank for each type of operation. 4.03 In April 1985, the Government started using interest rate policies more decisively as an instrument of economic policy; general interest rates were raised by 1-2 points. Since then, rates on special savings accounts have ranged from 6.5% to 9.75% p.a. and rates on certificates of deposit and long-term accounts, from 5.5% to 10.5% p.a.. Compared to inflation (which ranged between 6 and 81), these rates were marginally positive in real terms. Also, lending rates on long-term loans (available from the development banks only or nearly so) were deregulated to reflect increasing interest rates abroad. Since then, these rates have hovered between 12 and 14% per annum. In the spring of 1986, subsidized low interest rates on special operations in agriculture, tourism and industry were raised by 3-4 percentage points. Together with the decline in the inflation rate (from 8.2% to 6.5%), itself a very satisfactory achievement, these increases of the nominal interest rates raised real rates by 3-5 points. Most rates are now positive in real terms, in line with the recommendations of the Bank's Financial Sector Report (No. 5263-TUN of December 16, 1985). With the agreements reached under ITPAL and the IMF's Stand-by Agreement, Tunisia's interest rate and credit policies are satisfactory. 4.04 The Government's interest rate policy for SMI is linked with the new 10% "priority activities ratio" (para 2.17 IV). This ratio, in effect since September 1986, obliges commercial banks to invest at least 10% of their sight-, time- and savings deposits in "priority activities" (i.e. in export, agriculture and SMI). With regard to SMI, only medium-term loans (up to seven years) qualify for admittance under the ratio. If the ratio is not respected, the commercial banks have to maintain interest free balances, equivalent to the shortfall, with the Central Bank. If the ratio is surpassed, the commercial banks can rediscount the loans (at 6.75%) at the Central Bank. However, because medium-term loans to SMI carry a client rate of 8.0%, the margin allowed on these operations is not very attractive. 4.05 Traditionally, long-term finance (i.e. over seven years) has been available from the development banks only. However, the developement banks - with the exception of BDET, one of the participating banks in the proposed project - have shown limited interest in SMI financing. The only long-term finance for SMI available in the commercial banks came from Loans 1504 and 1969-TUN. These funds, however, were only managed -- and not borrowed - by the commercial banks. As explained in para 3.21, the utilization of Loan 1969-TUN became attractive to the commercial banks only when lack of liquidity drove short-term lending rates up, which made the rediscounting facility very profitable. 4.06 Under the proposed project, long-term lending to SMI will be attractive to the banks and to SMI. The attractiveness of the proposed loan to the commercial banks stems essentially from two features: first, the sub-loans financed from Bank funds - because they involve a priority sector - will be admitted under the new 10% ratio, although they will not be rediscountable i-'. (This will enable banks to use their deposits for other operations, essentially short-term); second, the 1/ Only loans made from sight, term and savings deposits are rediscountable. - 28 - financial margin on the SMI operations financed from the proposed loan will be satisfactory (nearly 4%). 4.07 The proposed loan has several attractive features for SMI. First, long-term finance will be available from the commercial banks; without the proposed loan, the only source of long-term finance would be BDET, which has no branches and does not provide commercial banking services. Second, long-term finance can be combined with lower cost medium-term finance and thus provide SMI an attractive finance package with respect to maturity and average cost. Third, low cost medium-term finance -- as provided under the "priority activities ratio" -- is only available to new SMI with investments (including working capital) below TD1,000,000 (para 3.33), while the proposed loan would also be available to existing and larger SMI identified as high priority under ITPAL (para. 2.17 I (iv)). 4.08 The Development Banks. Till 1980, there were only two development banks, Banque de D6veloppement Economique de Tunisie (BDET) and Banque Nationale de D6veloppement Touristique (BNDT), specialized in medium and long-term (MLT) financing of industry and tourism, respectively. IFC has equity holdings in both, and the Bank has had a long financial relation with BDET, dating from 1957, now totalling ten loans for an aggregate amount of US$158.0 million (net of cancellations) -' of which US$42.7 million were still undisbursed as of February 28, 1987. Over the 1981-1983 period, another six development banks were created. Of these, four were joint ventures between Tunisia and other Arab countries: the Tuniso-Koweiti Development Bank (BTKD), the Tuniso-Saudi Investment Development Company (STUSID)A', the Tunisian and Emirates Investment Bank (BTEI) and the Tuniso-Qatari Investment Bank (BTQI). The other two were Banque Nationale de D6veloppement Agricole (BNDA) which only finances projects in the agricultural sector, and Banque de Coop6ration du Maghreb Arabe (BCMA) which finances only Tuniso-Algerian ventures. A main reason for their creation was to attract capital resources from oil exporting countries and channel them into productive uses, on the basis of sound financial, economic and technical criteria. More recently, two additional development banks were created in association with Italy and Libya, again with the primary objective of mobilizing foreign funds to finance development projects in Tunisia. The Tuniso-Lybian bank is inactive. Another development bank, set up with Senegal, has as a primary objective to provide financial assistance in the context of closer economic relations between the two countries. In comparison with commercial banks, the newly created development banks.have relatively large share capital (e.g., BT& ind STUSID, TD 100 million each; BTEI, TD 50 million; BTQI, TD 70 million) subscribed equally by Tunisia and each of the Arab states involved. 4.09 The creation of this large number of development banks in the 1982-85 period , attracted over US$200 million in foreign capital participation and enabled a high level of investment in the manufacturing industry, as shown 1/ Not including the amounts committed by BDET under loans 1505-TUN and 1969-TUN (SSI projects). 2/ BTKD and STUSID have been beneficiaries of two loans from the Bank, each amounting to US$15 million, for Export and EMI projects (Loans 2522-TUN and 2554-TUN). - 29 - in Chapter 2. A substantial part of the resources of the new banks have gone into large, capital-intensive and often majority Government-owned projects, many of which have long gestation periods, are highly import dependent and do not have an export orientation. Since mid-1985, following the decline in oil and phosphate revenues and the consequent pressures on the trade balance, imports of inputs and equipment have become more difficult, and this has negatively affected the implementation of these large projects. Depending on the exposure of each bank in these projects, they all face more or less significant problems. It is likely, however, that most of these portfolio problems will be temporary and will be resolved gradually as the macroeconomic and sector-specific measures agreed with the Government become effective. 4.10 In the past, the development banks (with the exception of BDET) have shown interest primarily in projects with investments over TD 5 million. Smaller projects were considered too difficult and too expensive because of the relatively high cost of appraisal and supervision per dollar loaned. Development banks also have no branches, which makes lending for relatively small projects outside the Tunis region difficult. B. Fonds de Promotion et de Deentralisation Industrieles (FOPRODI) and Fonds National de Garantie (FNG) 4.11 FOPRODI. FOPRODI, set up by Law 73-82 of December 31, 1973, is a fund to provide financial assistance to small and medium-scale enterprises essentially; in particular, to new entrepreneurs who have limited resources to start their own enterprises. It also provides financial incentives for regional development in the form of interest rate, investment and infrastructure subsidies to which enterprises are entitled under Law 81-56 (amended by Law 83-105) which encourages investments in the country's less developed areas, irrespective of the size of the enterprise. 4.12 The Fund is financed from budgetary allocations, administered by the Central Bank, authorized by API and operated through commercial banks that have signed participation agreements. There is no special staff employed by the Fund. Its commitments are automatic upon approval of projects by API. FOPRODI assistance to SMI takes the following forms: a) Repayable Advances: (i) For projects with investments below TD 500,000, the advance amounts to 70% of the share capital, with a maximum of TD 105,000. The promoter has to finance at least 10% of the project cost out of his own funds. (ii) For projects with investments between TD 500,000 and TD 1,000,000, the advance amounts to 45% of the share capital, with a maximum of TD 135,000. The promoter has to provide at least 25% of the project cost. Advances have to be reimbursed in 12 years, with 5 years grace. The interest rate charged is 4% p.a.. Advances are not subordinated to other debts. - 30 - b) Credit and Interest Subsidies (i) For projects with investments under TD 150,000, FOPRODI provides loans of ten years (including three years grace) at 4%; and (ii) For projects with investments between TD 150,000 and TD 500,000, there is an exemption1' of the first six months interest charges on medium and long-term advances. 4.13 Since its creation, FOPRODI has provided assistance to SMI for an aggregate amount of TD 37.4 million (about US$50 million equivalent), of which TD 21.8 million has been in advances, TD 15.2 million in low interest credits, and TD 0.4 million in interest subsidies. Another TD 16.9 million has been provided for non-reimbursable regional subsidies (of which TD 3.7 million to Agence Fonci6re Industrielle; API), which generally were granted irrespective of the size of the enterprise. About 1,350 enterprises have benefitted from FOPRODI's assistance; 840 in the form of advances, and 510 in the form of credits. These enterprises are for 45% located in less developed regions and are distributed over all sectors, but mainly in agro-industries (27.2%), EMI (20.0%), construction (13.7%) and textiles (10.4%). 4.14 The FOPRODI operations are highly subsidized and the interest rate (41) is substantially negative in real terms. The supervision of FOPRODI's operations (advances and credits) is not sufficiently organized and has led to important arrears on collection. Total collection since beginning operation (in 1976) has amounted to only TD 2.1 million of principal and TD 2.6 million of interest, against actual amounts due of TD 3.7 million and TD 4.3 million, respectively. Thus, 54.3% of interest and principal repayment is in arrears. Because of budgetary constraints which will curtail future funding, FOPRODI should improve collections by actively pursuing accounts in arrears and reduce its subsidy element through higher interest rates. 4.15 During appraisal of the project, the Government agreed that a committee be appointed to take stock of FOPRODI's ten years of experience, by analyzing the implementation of the projects financed, the utilization of the financing made available, and the results achieved (including repayments and arrears). The committee would also make recommendations on the Fund's future operations, terms, funding and management, in order to overcome the deficiencies affecting the present scheme. The members of the committee were appointed in January 1987, and their report will be sent to the Bank, before September 30, 1988, for review and comments. The Government has also decided that, while the study is being carried out, FOPRODI will: (a) intervene only in priority projects (as defined by ITPAL); (b) make sure that promoters who apply for its assistance are without sufficient resources of their own to implement their projects; and 1/ FOPRODI pays commercial banks the first interest payment due on their loans to SMI. - 31 - (c) limit its action to what can be funded from the amounts recovered from its current beneficiaries; a budgetary provision of TD 500,000 only is foreseen. 4.16 FNG (Fonds National de Garantie). Established by Law 81-100 of December 31, 1981, the FNG provides guarantees mainly for small and medium agricultural, industrial and artisanal production units, and primarily in connection with credits obtained to finance projects for the creation or expansion of such units and their export operations. An FNG guarantee covers between 50% and 75% of outstanding principal. The banks assume the risk in respect to the balance of the principal and to the total of the interest. 4.17 The FNG's main objective is to encourage banks to extend credit to agricultural and SMI projects. It essentially provides additional security for projects considered more risky. The Fund is administered by the Central Bank, managed by an interministerial commission, and funded by: (a) a 1/8% one-time levy on the total amount of the guaranteed credit, which is paid by the beneficiaries of such guarantees; (b) a 1/8% one-time levy on investment loans not eligible for FNG guarantee, which is paid by banks (out of their equity resources) for the benefit of non-agricultural sectors; and (c) a 5/8% levy on short-term bank overdrafts. For arrears on principal, the Central Bank provides immediate refinancing for the total amount of the arrears (excluding interest) at the rate applicable for the credit concerned, for an undetermined period until payment by the borrower or final settlement by the FNG. Arrears on loans guaranteed by the FNG, therefore, do not affect adversely the liquidity position of banks. C. The Participating Banks Overview 4.18 Tunisia's commercial banks are essentially deposit-retail banks. They are small by international standards. As of December 31, 1985, the assets of all commercial banks combined amounted to TD 3.8 billion (US$4.6 billion). Besides short-term credit, commercial banks can provide medium-term loans (up to a maximum of seven years) within limits set by the Central Bank. Long-term credits (over seven years) from regular commercial banks resources can be extended to public enterprises only, and these credits should not exceed 3% of the total deposits of the bank concerned. Long-term loans to private enterprises can be provided by commercial banks only from special resources (i.e. non-deposits, such as IBRD loans), themselves with a maturity of more than seven years. - 32 - 4.19 The commercial banks are subject to the monetary policy and credit controls of the Central Bank. In the past, these were rather specific and concerned interest rates (both deposit and lending), utilization of resources (the 43% "RGFD", see para. 2.17, IV), credit growth and sectoral priorities, access to rediscounting facilities and money market, as well as foreign exchange transactions. Despite these many constraints, the commercial banks can be regarded as true full-service banks. They receive deposits of all types; they grant a substantial volume of medium and long-term loans (about 27% of their total credit to the economy); they absorb nearly half the total refinancing facilities of the Central Bank; they effect operations with special resources supplied by the Government or raised abroad; they are the almost exclusive intermediaries in foreign exchange operations they hold a large portfolio of capital participations in enterprises; they control portfolio management companies, and they are the main intermediaries in stock exchange operations. 4.20 In recent years, with the creation of new development banks, the commercial banks' share in financing the Tunisian economy - as measured by the total amount of their outstanding credit balances to the economy (including Government and securities portfolios) -- declined from 78.9% at end-1980, to 75.8% at end-1983 and 72.5% at end-1985. This trend, however, is unlikely to continue in the next few years as the new development banks will have used up their initial capital. The table below shows the growth of credit to the economy in the period 1980-1986: Table 4.1: CREDIT TO THE ECONOMY BY THE BANKING SYSTEM (1980 - September 1986; TD million) Annual Growth Rate 1980 1983 1985 Sept. 1986 (M) Commercial Banks. I Short-Term 953 1,709 2,305 2,362 17.1 Medium-Term 236 512 609 600 17.6 Long-Term 124 204 256 269 14.4 Sub-Total 1,313 2,425 3,170 3,231 16.9 Other Financial Institutions 1/ 351 776 1,201 n.a. 27.9 TOTAL 1,664 3,201 4,371 n.a. 21.3 Share of Commercial Banks 78.9% 75.8% 72.5% n.a. n.a. Source: Central Bank Statistics. 1/ Essentially, long-term finance provided through the development banks. - 33 - Credit to the economy has been growing very rapidly during the period, which has led to overheating of the economy. Following the new monetary policy guidelines, the overall credit expansion in the future years will be curtailed sub.-tantially and should increase in a manner more consistent with the overall growth of the economy. In 1986, credit expansion was held at 3-5%. a. The Commercial Banks 4.21 The participating banks have been selected on the basis of objective criteria such as: the participation in the Bank SSI projects, the number of branches (particularly, outside Tunis), their capital base and debt: equity ratio, their medium and long-term portfolio condition, their investments in the industrial sector etc.. The very small banks (which have few branches and little institutional capacity to develop term lending), as well as the banks more oriented to agriculture or commerce, have therefore been excluded. The following paragraphs describe and analyze the main elements of the financial situation, management and organization, ownership, policies and procedures, operations and future prospects of the participating commercial banks. 4.22 The three commercial banks selected to participate in the project - Banque du Sud (BS), Banque de Tunisie (BT) and Soci6t6 Tunisienne de Banque (STB) - represent about 46% of the total assets and deposits of all commercial banks (see Annex 5). With a total assets value of TD 1.7 billion (US$2.1 billion) as of December 31, 1985 and outstanding loans of over TD 1.4 billion, these banks cover all sectors, regions and sizes of industry (public and private). Of the loan portfolio, about TD 260 million (US$321 million) is outstanding in medium and long-term loans to enterprises. Total share capital participation amounted to TD 23.7 million or about 27% of total equity of the participating banks; this is a prudent but still significant ratio. 4.23 The financial situation of the participating banks is generally satisfactory (see Annex 5): (i) Banque du Sud has the lowest liquidity ratio (4.1% of total assets and 6.2% of demand deposits), while Banque de Tunisie has the highest (14.2% and 25.6%, respectively); (ii) all participating banks have provisions of about 3% of risk assets except BT which has 7%; (iii) all banks have debt/equity ratios of about 18:1; and (iv) all banks have stayed very close to the required medium-term portfolio ratio of 18% (BS has the highest ratio of 19.8%); but as regards the percentage of loan portfolio, BT and STB have the highest ratio (21.4 and 18.9). Thus relatively unfavorable ratios in one aspect are generally balanced out by relatively good ratios in other aspects. Most banks intend to increase their share capital in the near future to further improve their financial position. It should be mentioned that the creation of provisions is made difficult for fiscal reasons, as provisions for unrealized losses are taxed as income; this aspect is under review by the Central Bank and the Ministry of Finance. 4.24 Intermediation margins are traditionally small in Tunisia, compared with other countries (see Financial Sector Report, para. 3.46). For the three participating banks, the overall intermediation margin for the year 1985 was 3.6%, of which 0.6% i#as for profit margin, 0.6% for provisions and depreciation and 2.4% for operating costs - including taxes --, of which 1.2% was for personnel (see Annex 5 for detail by bank). The low intermediation margin on the medium-term portfolio (about 2%) is one of the main causes of the relatively low profitability of the commercial banks. Return on equity (including reserves and retained earnings) and share capital - 34 - for the three participating banks was on average 11.4% and 27.5%, respectively, which has permitted an average dividend payment of 8% in 1985. These rates are satisfactory but reflect the low capitalization of most Tunisian banks. Increases in share capital are likely to reduce these returns in the future. In comparison with interest rates on term deposits, the return on equity is not very attractive. An increase in the average margin to about 4% will enable the creation of larger provisions, the extension of better and more professional services, as well as a marginal improvement in profits. 4.25 It has not been possible to make a case by case assessment of the portfolio situation of the participating commercial banks. There are four reasons for this: first, commercial banks have a large portion of their portfolio in the form of advances in current account ("decouvert") with no fixed maturity on repayment schedule. Second, non-performing loans to public enterprises cannot be put in litigation, provided for or written-off (neither the Central Bank nor the Ministry of Finance permit these actions, because both take the position that loans to public enterprises are fully secured). Third, term-loans are administered as a series of notes, each with its own maturity. Banks have a very good knowledge of the amounts due at any time but it is difficult to obtain a proper analysis of the age of overdues (company by company), or of the total outstanding related to overdue notes. Fourth, the long legal procedures encourage accommodation and rescheduling, rather than prolonged litigation or liquidation of collateral. Overall, however, banks are well secured; they also closely check non-performing clients. 4.26 Participating commercial banks are joint stock companies and are quoted on the Tunis stock exchange. STB and BS are majority government owned (54% and 56%, respectively). STB is 100% locally owned; it is the principal bank for industrial finance and is 2.7 times the size (in assets) of the next largest participating bank. A large proportion of its portfolio is invested in public enterprises. An Italian Bank (Monte Dei Paschi di Siena) has a 21% share holding in Banque du Sud. Banque de Tunisie is wholy privately owned, including share participations of French, Italian, Swiss and German financial institutions. Details on the ownership and shareholders of the participating banks are provided in Annex 6. 4.27 Because of the close supervision exercised in the past by the Central Bank (BCT), management is generally concerned with following the guidelines, ratios and procedures prescribed by BCT. Internal management is mainly oriented towards ensuring proper, low-cost administrative procedures for credit management. BT has put iAlatively more emphasis on information systems, professional competence and internal communications, while BS and STB rely more on committee decision making, with limited but clear delegation of authority and reliance on a stable staff with long experience. 4.28 The banking sector is not very competitive, partly because of the large role played by the Government and public enterprises until recently, and partly because of the regulations and controls which used to fix interest rates on deposits and lending. Competition on the basis of quality of service was also minimal because margins did not permit it. Within this environment, STB has maintained its leading position even though its market share as regards deposits is declining. BT is more conservative in its lending operations, but is aggressively attracting local deposits. Banque du Sud, which has traditionally focussed its services on the south, is expanding in the other regions; it is also strengthening, under new management, its internal controls and procedures. - 35 - 4.29 The commercial banks remain essentially providers of self-liquidating credits. Insofar as they were required to provide rsdium and long-term credit for industrial development, they did so in sectors promoted by the Government (initially, textile; later, construction materials and electro-mechanical products), to public enterprises or to clients with a past credit record. Banks still do not have elaborate study departments but have a good knowledge of their clients, of the sectors in which they operate and the effects of Government policies or of changes in the economic situation abroad. One weakness, however, is that insufficient objective, technical, financial, market and economic analysis is used in investment decisions. One of the main goals of the proposed project is to encourage this type of analysis as a tool for improving the financing of industrial projects; particular, for SMI. Improvements in this area are expected to be achieved quickly because most staff in the commercial banks have a good theoretical knowledge of financial and economic project appraisal. Management's insistence on the utilization of these analyses, some additional training and proper staffing of the credit departments are expected to bring these improvements about (para. 3.27 and 6.03 (g)). Better margins on long-term lending are also expected to induce these actions. 4.30 Subproject supervision and follow-up is mainly performed to ensure that the equipment and goods financed by the bank are physically present and that intended business plans are executed. If problems develop and financial solutions (including rescheduling occasionally) do not improve the situation, the banks generally stay at arms-length, and use outside lawyers to secure recovery of principal. 4.31 Term lending is conducted on a fully secured basis with generally tight contr9ls over receipt of liens and mortgages on financed plant and equipment. Disbursements are made against presentation of documents of purchase or title, which includes a verification of reasonable cost and actual delivery. Existing procurement and disbursement procedures by the banks are adequate to ensure future compliance with Bank requirements (see para 5.15). 4.32 All banks are audited by qualified auditors, who are members of the Tunisian association of certified accountants, created in June 1983. Audits are conducted in conformity with accepted standards, and each bank has received a positive audit report. 4.33 The banks are important providers of employment; in total, about 3,840 people are employed in the participating banks of which 55% are in the head office and the remainder in the branches. Senior staff accounts for about 5%, middle-level staff for about 16% and clerical and general staff for 79% of total employment (see Annex 6) The staff structure in the two Government controlled banks (STB and BS) reflects their very centralized management. In general, and in all banks, important decisions are made in the head-office, which is reflected in the very low ratio of staff to clerical personnel in the branches. - 36 - 4.34 The branch network (see Annex 6) of the participating banks has grown more or less in line with the growth of assets (about 20% per annum) over the period 1984-1986. While STB and BS have on average 11 employees per branch, Banque de Tunisie (which relies relatively more on centralized electronic data processing and frequent communications with the head office) has fewer employees per branch -- some of which are essentially windows. The three banks have 136 branches outside the Greater Tunis area. In the main economic centers, all banks have fully staffed branches. The branch network should ensure satisfactory geographical coverage and quality of service. 4.35 The participating banks are full service banks, operate nationwide, in all sectors and provide service to all type of clients (public and private). No bank specializes in SMI financing. About 80% of the commercial banks loan portfolio is for short-term operations. Within the 20% reserved for term lending, totalling about TD 260 million as of September 30, 1986, it is estimated that about 40% is outstanding in SMI projects. With the exception of STB, which has about 70% of its loan portfolio outstanding in public enterprises, the participating banks have no particular preference for specific type of clients, subsectors of industry or size of projects. 4.36 On the basis of the requests for investment license received by API in the past, about 40% of all investments in manufacturi.Ig industries in the VIth Plan period, equal to about TD 130 million (US$160 million) per year, concern SMI projects. Since it is estimated that on average about 50% of these investments are financed by term loans, a total of about TD 65 million would have been financed annually. Managers of the commercial banks confirmed that, on average, they have approved financing for SMI projects in amounts coherent w4th t-be above total. 4.37 1 -ons of future operations. per bank are difficult to make. Pipelines oi .d projects do not exist because small projects disappear from the pipeline in about three months: either they are approved, or they are taken off the list within a six months period. Financing requests are accepted only after the sponsor has provided a minimum technical, financial and marketing proposal; they are processed within rather short periods. General economic conditions are the main determinants for the level of investment requests. The policy package agreed with the Bank (under the ASAL and ITPAL) and IMF should provide a favorable framework for SMI investment. 4.38 The commercial banks are conservative with regards to future medium and long-term lending to SMI. The banks agree that annual commitments of TD 5-7 million per bank (US$6.3 - 8.2 million), equal to the past level of commitments, is a reasonable assumption for future operations. However, with regards to financial requirements, the participating banks are concerned about the uncertainties in the economic situation and about paying the commitment fee. Furthermore, because the growth of deposits (which needs to be utilized first) is unknown, it is difficult to forecast other resource needs; particularly, for a sector whose future financial needs are not easy to predict and for a type of finance which is relatively new. Therefore, on the basis of total expected commitments of US$14-23 million per bank for the next 30 months period, resource requirements in foreign exchange were estimated at an average of US$5.5 million per bank for the whole period. 4.39 Based on the overall assessment of the participating banks, they can be considered financially sound, creditworthy and generally well managed. - 37 - b. Banque de D6veloppement Economigue de Tunisie (BDET) Ownership, Staffing and Organization 4.40 BDETI' was created in 1959 and reorganized with the assistance of the Bank Group in 1966. IFC is a shareholder in BDET with some 15 other foreign companies which, together, hold about 39% of the outstanding share capital of TD 30.0 million. Among the local shareholders (Annex 7, Table 1), the Government and Government-controlled institutions hold about 47.5%, while six private local banks and private individuals hold the balance of about 13.5% of the outstanding share capital. This wide shareholding has enhanced BDET's independence in decision making and access to resources. 4.41 BDET has a competent and experienced staff which consists of w3ll- trained economists, financial analysts and engineers. In the last five years, however, BDET has lost some of its senior and experienced staff, inter alia to the newly created development banks, but also to some of the projects it has promoted. Still, the staff have grown from 204 in 1983 to 231 as of end-1986. About half of this increase was for support staff (14), while the main increase in professional staff was for computer-related professionals (2), project staff (8) and administrative officers (3). 4.42 BDET's organization (Annex 7, Table 2) comprises two operational departments. The Project Appraisal/Supervision Department, with 19 professional staff, receives on average about 300 financing requests per year, of which about 100 on average are retained for financing. The department also reviews annually the progress of about 200 projects, or about one quarter of all outstanding loans. The Promotion Department, which was created in 1978 and has 12 professional staff (the majority of which are highly qualified engineers), has evaluated and implemented about 30 projects. Of these projects, 20 have been promoted with substantiai Government support- or are public enterprises, while 10 are private initiatives. BDET also has four non-operational departments: Administration, Personnel, Commitments, and Resource Mobilization and Participation. The latter department is responsible for resource mobilization as well as the supervision and management of the equity portfolio. All departments are managed by staff that have been with BDET for over ten years. Operations 4.43 Before 1981, BDET was the only development bank specializing in long- term project finance. Except for a few large projects promoted in the early 1970s (textile, automobile assembly), BDET specialized in the financing of medium- to small-size industrial projects. With the creation in 1978 of the Promotion Department, BDET started to actively develop on its own account some larger projects. Initially, these were co-sponsored by private individuals; 1/ A more detailed description of BDET's policies, management and operations has been made in the Appraisal Report for the Export Industries Project (dated March 20, 1985; Loan 2522-TUN) and the Second Electro- Mechanical Industry Project (dated May 1, 1985; Loan 2554-TUN) 2/ In the form of subsidies, fiscal advantages, duty exemptions on imported equipment and adoption of import restrictions on competing products. - 38 - after 1981, however, with the availability of more funds from the new development banks, larger projects were promoted jointly by BDET and the other banks, often with the Government's encouragement. These projects generally introduced new technologies in Tunisia, increased domestic value added by forward or backward integration and relied -- in their initial phase -- on considerable protection and a quasi-monopolistic position in the local market. 4.44 Annex 7, Tables 3-5 show BDET's operations for new and expansion projects by size, sector, region, ownership and maturity. The level of approvals has been uneven, closely reflecting economic conditions: in 1981 and 1982, approvals were above TD 60 million, while they amounted to TD 32 million in 1980 and in 1986. In the 1980-1986 period, operations for less than TD 500,000 (about US$600,000), which concerned mostly SMI projects, accounted on average for 26.5% of the loan amounts approved and involved a total of TD 85.1 million. These op-rations concerned over 550 enterprises and represented over 75% of BDET's operations. In this period, BDET also provided finance to 26 public enterprises for a total of TD 41.4 million, a little less than half the amount provided to SMI projects. The SMI projects financed by BDET are evenly distributed among the sectors: 19.2% for textile and leather, 17% for construction materials and ceramics, 17% for agro-industries and 15% in EMI. Profitability 4.45 BDET' s profitability suffers from three adverse conditions: (i) foreign exchange losses to be covered by the Government but not yet paid; (ii) arrears (in principal and interest) on the outstanding portfolio, and (iii) a low return on the equity portfolio. These problems are discussed in the paragraphs below. 4.46 (i) Foreign Exchange Losses. Traditionally, all lending in Tunisia by commercial and development banks is in local currency, irrespective of the origin of funds. Ia the 1970s, supported by growing oil revenues, the Tunisian dinar had increased in value and the foreign exchange risk coverage by the Government resulted in profits. Since 1981, however, the dinar has decreased in value resulting in considerable foreign exchange losses. BDET's losses on account of its foreign borrowings has totalled about TD 49 million (about US$60 million) in interest and principal; detail of the yearly accumulation of these losses since 1981 is given in Annex 7, Table 6. The Government is contractually obligated to reimburse BDET for these losses; so far, however, it has paid TD 20.5 million only, leaving as of April 30, 1987 an unpaid balance of TD 28.6 million. BDET, as a result, has been obliged to borrow an equal amount on a short-term basis to meet its debt service obligations. Its financial situation is affected further because the Government does not pay interest on its arrears. This situation has become increasingly difficult for BDET and the impact on its liquidity and profitability has become unacceptable. A solution has been found within the context of the proposed loan. The Government will pay BDET (i) TD 15 million (US$18.5 million) before effectiveness of the proposed loan; and (ii) the remainder of the losses incurred until January 1, 1987, before December 31, 1989.-1. Foreign exchange losses incurred after January 1, 1987 and until 1/ To compensate BDET for the increased borrowing cost, the Government would also be charged, effective January 1, 1987, an 11.5% interest per annum on the average outstanding balance of its arrears, equal to the interest rate charged by the Central Bank to BDET on short-term borrowings. - 39 - a satisfactory solution for the foreign exchange risk coverage is agreed under the study being conducted under ITPAL (para. 2.17 IV) would also be paid to BDET with a delay not exceeding those experienced in the past (i.e. 2 years) - . During negotiations agreement were reached with the Government on the resolution of BDET's foreign exchange losses as presented above. 4.47 (ii) Arrears on the Portfolio. As shown in the table below, BDET's arrears situation has worsened in the last two years both in terms of amounts as well as of the total loan amount outstanding affected by arrears Table 4.2: BDET'S ARREARS OVER THREE MONTHS 1983 1984 1985 1986 A. Portfolio (TD Million) 168.7 194.2 210.63 227.6 B: Total arrears over 3 months - in TD Million 7.1 11.8 16.1 24.2 - as % of A 4.2 6.1 7.6 10.6 C: Portfolio affecte. by arrears - in TD Million 22.7 33.7 40.6 72.6 - as % of A 13.5 17.4 19.3 31.9 Source: BDET. As of end-1986, the arrears originated essentially from some 25 large projects that had come into production recently and suffered from start-up problems as explained below. These projects have received more than TD 1 million each in loans, and account for a total of TD 45.9 million in loan amount outstanding (equal to 62.5% of BDET's total loan amounts outstanding as bhown in the table below). Table 4.3: ARREARS OVER THREE MONTHS BY SIZE OF LOAN AMOUNTS (December 31, 1986) Loans Outstanding Arrears Affected by arrears Nr. Amount % Amount % (TD Mil.) (TD Mil.) Loan below TD 300,000 127 6.8 28.1 10.4 14.4 Loans between TD 300,000 and TD 1 million 46 6.3 26.0 16.8 23.1 Loans over 1 million 25 11.1 45.9 45.4 62.5 TOTAL 198 24.2 100.0 72.6 100.0 Source: BDET. 1/ Any shorter delay would be unrealistic, considering the Government's recent and expected budgetary situation. - 40 - Among these 25 large projects are 8 public enterprises. In total, 14 public enterprises are responsible for 17.0% of the amount in arrears, while they account for about 14.5% in the overall portfolio of TD 227.6 million. The table below shows the distribution of arrears over the two sectors. Table 4.4: ARREARS OVER THREE MONTHS, BY !OURCE Oustandins Arrears Nr. Amount % Amount % (TD Mil.) (TD Mil.) Public 14 15.5 21.3 4.1 17.0 Private 184 52.3 78.7 20.1 83.0 TOTAL 198 67.8 100.0 24.2 100.0 Source: BDET The tourism portfolio has particularly been affected by arrears. On December 31, 1986, it had accumulated TD 5.7 million in arrears, equally divided between interest and principal, which affected a total of TD 17.5 million in loan amounts, equivalent to about one-quarter of the total amount of the loans affected by arrears (TD 72.6 million). 4.48 There are several reasons for the deterioration of BDET's loan portfolio. In the early 1980s, too many investments were made which were evaluated under over optimistic assumptions. They were often too large in scope and their competitiveness was not always assured. These investments were made possible by considerable oil revenues, the inflow of laige amounts of capital from abroad (particularly from petroleum exporting countries around the Persian Gulf) and the Government's desire to advance its industrial development with new large-scale projects in the EMI, fertilizer, construction materials and tourism sectors. The creation of seven new development banks provided an environment where project promoters were offered easy access to finance and where the banks were competing with each other to finance projects with marginal economic, financial and technical justification. 4.49 In early 1985, when the petroleum revenues fell and general economic conditions in Tunisia and abroad deteriorated, many of these projects (i) found themselves with insufficient working capital, because of generally underestimated financial requirements; (ii) operated with an unfavorable cost structure, because of low capacity utilization and high financial and amortization charges; and (iii) were generally unable to compete with producers abroad, and thus were unable to earn the foreign exchange required to pay for raw materials and impotted intermediate products. Although BDET's financial situation is mostly affected by the arrears of large projects, the adverse conditions in the last two years have had particularly negative effects on the smaller projects ohich have found themselves cut off from the necessary inputs of materials, spare parts and equipment essential for continuing their production in an efficient manner. 4.50 The most important actions taken so far to rectify the deteriorating situation concern the policy reforms undertaken by the Government under ITPAL and ASAL (paras 2.16 and 2.17). Macro-economic reforms will not rehabilitate ill-conceived investments, but they provide the necessary environment for - 41 - restructuring and complementary actions at the firm's level will be needed. Some of the policy measures, however, have had and will continue to have an initially negative effect on BDET's portfolio. 2he tightening of monetary policy (which is necessary to contain aggregate demand and relieve the pressure on the balance of payments) has created liquidity problems at the firm's level, and companies have delayed repayment of loans as it had become too difficult or too expensive to obtain working capital to finance operations. 4.51 BDET itself has initiated a number of actions designed primarily to provide a good knowledge of the problems affecting its clients and to develop action plans to solve these problems on a case by case basis. For this purpose, BDET has increased its supervision actIvity and the number of staff assigned to it. It has also designated senior staff to work closely with the management of some larger companies, and work out restructuring plans; it has also obligated companies to hire consultants to assess existing problems and recommend actions to overcome them. Some of the completed restructurings have involved the sale of part of the assets to bring companies back to a manageable size; other companies, that had too many products, have been broken up in several specialized companies; still others had to be restructured financially by bringing in new shareholders, providing fresh capital or granting working capital credits, often through the commercial banks. BDET has also taken legal actions against 117 of its borrowers in arrears to protect its own interest and to ensure that borrowers make sufficient efforts to repay. Another action taken by BDET concerns the rescheduling of loans, which in 1986 concerned 29 companies. This action has been used mainly in the context of restructuring plans, and primarily for tourism projects that had suffered considerably from tensions in the Middle East. After the August 1986 devaluation of the dinar, the tourism sector enjoyed an exceptionally good winter season and prospects continue to be good. Improvements in the tourism portfolio have continued in 1987. With regards to public sector companies, BDET is looking to the Government and the Bank to formulate overall solutions and actions in the context of the public enterprises restructuring loan (PERL). At the plant level, BDET will assist the promoters in formulating restructuring plans to enable the companies to improve their operations. The overall arrears problem of the Government and the public enterprises, however, is beyond BDET's authority. 4.52 Some specific organizational weaknesses in BDET have been identified by the Bank with the help of a senior consultant, and actions to overcome them have been designed and are being implemented. In particular, since the financing of large public enterprise projects should decrease in the future, the role of the Promotion Department would change significantly and part of its staff could be integrated in BDET's Appraisal and Supervision Department. This should strengthen the latter's engineering capacity. The disappearance of the Promotion Department does not mean that BDET will abandon its promotional activities. These activities will now be part of the regular appraisal and supervision functions and BDET's promotional role will be oriented toward smaller projects (below TD 15 million total investments), in close collaboration with private sponsors and directed towards export markets. 4.53 In the past, the quality of appraisal and -- more particularly - supervision functions had declined, essentially because BDET did rot allocate sufficient staff resources to these functions. The transfer of qualified engineers from the Promotion Department will strengthen the supervision - 42 - and restructuring of projects. Also, this function has now been reorganized so that staff have a more continuous relation with clients. Better client relations are needed not only for responding to client problems but also as a means to develop future business. BDET's supervision staff are now encouraged to develop new projects with the clients, besides carrying out essential control functions. 4.54 In the light of the serious deterioration of its portfolio, BDET has increased and is prepared to increase further its supervision functions. In order to avoid administrative cost increases and to assure an arms-length approach to solving its clients' problems, BDET has decided to make an increased use of consultants. The hiring of consultants, the strengthening of its staff, the incorporation of the Promotion Department in the regular Appraisal/Supervision Department and the changes in procedures for supervision was reviewed during negotiations and an agreement was reached on a plan of action for each sector with significant arrears (public sector, tourism, large projects, etc.); this may eventually evolve into an arrears reduction program. The agreement reached is reflected in a letter addressed to the Bank by BDET's management, which summarizes BDET's intentions for 1988-89 in terms of supervision policy and work program, use of consultants, and staffing for supervision. 4.55 The actions agreed under ITPAL to strengthen the economic environment, along with the other actions to be taken for strengthening the management and operations in SMI (through API and UTICA, paras 3.15 to 3.30) should gradually contribute to significant improvements in operations as well as in the investment climate in which BDET's clients operate. Overall, however, and as reflected in the projection in Annex 7 Tables 10-13, the improvement of BDET's portfolio will require several years of sustained efforts. Regular supervision by the Bank should continue for monitoring closely the solution of BDET's portfolio-related problems and assisting BDET as necessary. 4.56 The Low Returns on Equity Investments. In the last three years, income from equity investments has decreased from TD 560,000 in 1984, to TD 500,000 in 1985 and TD 410,000 in 1986, equivalent to average returns on average investment of 2.3%, 1.8% and 1.4%, respectively. Because equity investments are an important part of BDET's total assets (10%) and own equity (85%), the low return on its equity portfolio has a significantly negative effect on its profitability. Combined with the TD 22.8 million of its foreign exchange losses outstanding and the TD 24 million of arrears on its loan portfolio, BDET's total non- or low-performing assets are over 27% of total assets. 4.57 The low return on BDET's equity portfolio is a sign of the generally low attractiveness of share capital and the underdeveloped state of the capital market in Tunisia. The main causes for this situation, as identified in the Financial Sector Report (Chapter X), are of a fiscal, organizational, institutional and financial nature. Some of the policy measures agreed under ITPAL, which should improve the overall profitability of industry, should indirectly help the equity market. Other measures should also be envisaged under the planned Public Enterprises Restructuring Loan (PERL), particularly in the context of the sale of minority Government interests and the eventual privatization of public enterprises. Improvements in the fiscal environment, that would make investment in shares more attractive, are also being sought under the upcoming SAL operation. - 43 - Financial Situation 4.58 An analysis of BDET's income statements (attached in Annex 7, Table 8) shows that continuing problems exist in BDET's interest spread. The table below shova how interest margins have evolved in the last five years. Table 4.5: INTEREST MARGIN ON LENDING (1982-1986) 1982 1983 1984 1985 1986 Average rate of lending (Z) /1 8.65 8.89 9.59 9.76 9.83 Average rate of borrowing (%) /2 7.77 8.47 10.18 8.12 7.97 Interest rate margin () 0.88 0.42 (0.59) 1.64 1.86 1/ Interest income: average outstanding loan portfolio. 2/ Interest paid: average outstanding borrowings. It shows that in the 1982-1986 period, BDET's margin has been very sensitive to the cost of borrowing, and that the latter was not compensated by a commensurate increase in lending rates; this was particularly striking in 1984. Since 1984, the margin has improved but it is still below the minimum satisfactory level, estimated at about 2%. 4.59 While interest rate margins improved, overall profitability remained low, amounting to TD 2.5 million in 1984, TD 2.7 million in 1985 and TD 2.7 million in 1986, equivalent to returns on equity of 9%, 8.6% and 7.5 %, respectively. The reason for this decrease is the increasing share of non- performing assets (para. 4.56) and the insufficient Government payments to cover BDET's losses on foreign borrowings. The table below which presents revenues and costs as percentages of average assets, clearly shows the stagnating, low loan income. Table 4.6: ANALYSIS OF FINANCIAL MARGIN (1982-1986) 1982 1983 1984 1985 1986 - --As Percentages of Average Assets----- Interest income from loans 7.06 7.02 7.07 7.02 6.87 Interest paid on borrowings (5.92) (6.53) (7.81) (6.44) (6.33) Margin on loan operations 1.14 0.49 (0.74) 0.58 0.54 Other Income 1.04 0.73 0.82 0.75 0.61 Gross Spread 2.18 1.22 0.08 1.34 1.15 Administrative Charges (1.21) (0.97) (0.89) (0.95) (0.97) Provisions (0.26) (0.20) (0.42) (0.34) (0.31) Net spread before Government Payment -' 0.71 0.05 (1.23) 0.05 (0.13) Government payment -' 0.30 1.51 2.46 1.09 1.19 Net spread before taxes L" WA 1/ Essentially to cover part of the foreign exchange losses. - 44 - This stagnation in income, in a period when financial costs increased, has kept BDET's overall profitability low. In the future, the main emphasis should be placed, therefore, on increasing income, because administrative costs have been reasonably stable and can be considered satisfactory when compared with other development banks. The repayment over time by the Government of the foreign exchange losses, which will decrease borrowing cost (para. 4.46), along with the action program to improve the portfolio (para. 4.55), should lead to considerable improvements in profitability in the next years as will be shown in the projections below. 4.60 BDET's financial structure as reflected in the balance sheets of the last three years (Annex 7, Table 9) shows a satisfactory debt:equity ratio of about 5:1, which is well below the maximum of 8:1 permitted under existing Loan Agreements. The current ratio as of December 31, 1986, while negatively affected by short-term borrowings to finance the arrears of the Government, stood at an acceptable 1.0. The debt service ratio has remained at 1.0 despite the Government's failure to pay interest on its arrears. Overall, these ratios are satisfactory; particulary, when considering that a large part of BDET's debts are related to the Government. Operational and Financial Projections 4.61 BDET expects its lending operations (Annex 7, Table 10) to increase slowly from about TD 32 million in 1986 to TD 37.5 million in 1990; its equity investments approvals are projected to amount to TD 2 million per year. Outstanding equity investments are projected to increase by about 1 million per year, taking into account the sales of shares and the time lag between approval and disbursement of equity participations. SMI loans are expected to continue to amount to about TD 8 to 10 million per year on average, equivalent to 25%-30% of total lending operations. In mid-1987, BDET had seven requests for financing SMI projects amounting to TD 1.5 million. (SMI projects are proressed relatively quickly once they have been accepted by BDET for study). In the 4th quarter of 1986, BDET approved 17 SMI projects for a total of TD 2.6 million (in a total of 39 projects and TD 7.3 million for the year as a whole). The proposed loan of US$6.5 million for BDET takes into account that SMI projects in the export and EMI sectors will be financed under loans 2522-TUN and 2554-TUN, respectively; thus, most SMI projects to be financed by BDET from the proposed loan will essentially cater to the local market. 4.62 Financial projections are attached in Annex 7, table, I o 13. In the cash-flow, a provision has been made for the reimbursement by the Government of TD 15 million in 1988 and TD 13.6 million in 1989 for foreign exchange losses. The income statement also takes into account receipt of interest on the unpaid balance due by the Government, which amounts to TD 3.45 million in 1987, TD 2.43 million in 1988 and TD 780,000 in 1989. The cash-flow also makes provisions for rescheduling of outstanding loans in arrears; these are estimated at TD 11.5 million in 1987 and 1988, and TD 10.0 million thereafter. Because of these expected reschedulings, the portfolio in arrears is conservatively projected not to improve till 1990, stabilizing at about TD 40 million, but decreasing as a percentage of total outstanding portfolio. It is also projected that TD 37.3 million in short-term debt will be retired as and when the Government repays its arrears. This will improve the current situation of BDET. The profitability of BDET is projected to - 45 - improve as a result of the above actions and of a gradual improvement in lending and borrowing rates which will bring the financial margin to 2%. This increase in profitability permits a slight increase in personnel and administrative costs as well as the cost of the consultants referred to in para. 4.54. 4.63 On the basis of the projected level of operations, total borrowing will increase by about TD 35 million, to almost TD 280 million by December 31, 1990. This amount includes the replacement of the US$60 million floating rate notes (FRW, which matures in 1990), by an equivalent amount to be raised in the international market. Durir-g the projected period, the total outstanding debt will remain well below the maximum level of eight times the equity. The projected return on equity, 10% over the five year period, will permit BDET to continue to pay dividends of about 8% per year. If BDET develops according to the assumptions used by the projections, its financial condition and profitability will be satisfactory. c. Banque de Tunisie et de Emirats d'Investissement (BTEI) Ownership and policy statement 4.64 BTEI is a development bank created in 1983, with a share capital of TD 50 million held equally by the Government of Tunisia (32.5% by the Ministry of Finance and 17.5% by the Central Bank) and the Abu Dhabi Fund, to develop the financial cooperation and economic complementarity between Tunisia and the Emirates. For this purpose, BTEI finances as well as promotes creation and extension projects, in the industry, services and agriculture sectors. BTEI extends lo-ns and takes equity participations. For projects identified and promoted by BTEI itself, BTEI never contributes more than 60% of the total project cost and systematically seeks reliable, active partners, technical as well financial. For other projects, BTEI does not take participations larger than that of the promoter (who is expected to contribute at least 30% of the total project cost), nor larger than 15% of the enterprise equity. The ratio between its participation in and the loan extended to any enterprise has to remain below 1/2 and, preferably, in the vicinity of 1/3. BTEI participation in, and loan to any enterprise cannot represent more than 10% of BTEI's capital plus reserves. 4.65 BTEI loans have maturities between 2 and 15 years with grace periods equal to the period of construction plus 6 months. Interest rates charged by BTEI reflect the cost of its resources as well as market rates. BTEI charges its clients (i) a fee of 1% of the loan amount to cover the cost of processing the dossier, and (ii) a commitment fee of 1% on the undisbursed loan balance. BTEI loans can be disbursed only after the promoter's contribution has been fully mobilized. BTEI's collateral requirements bear on the project land, construction and equipement, as well as on other properties of the promoter. Staffing and organization 4.66 BTEI has a total staff of 78, of which 11 unit managers, 24 professionals and 43 administrative and support staff. BTEI has two Directorates: Technical and Operations, each headed by a Director. Each Directorate has four Departments as follows: the Technical Directorate comprises the Development, Restructuring and Supervision, Studies (market and - 46 - sector) and Documentation, and Appraisal Departments. The Operations Directorate comprises the Commitment and Treasury, Accounting and Audit, Computing Services and Administration Departments. BTEI management is concerned with building up and keeping quality staff, firming up operational techniques and procedures, and maintaining an effective team spirit; for this purpose, BTEI management has been expanding its staff at a slow and carefull pace, consistent with the growth of activities. Operations 4.67 Annexe 8, tables 1-3 provides details about BTEI's operations since its creation. The amount of BTEI's approval peaked in 1985, reaching TD 25.7 million, and decreased to TD 18.7 in 1986; this was the result of the country's general economic slump. (The decline of commitments started in 1985, when a number of approvals were not promptly followed by the promoter's formal engagement). The larger share of BTEI's total approvals since its creation, is in industry (about 77%); next come services (about 10%), then tourism (10.). Agriculture is the sector where BTEI is the least active; it accounts for only 3% of total approvals. The largest loans extended by BTEI for industry have been to public projects. More than two-thirds of BTEI loans to private industrialists have been of a medium (to small) magnitude, ranging from below TD 0.9 million to TD 2.2 million. Since 1985, BTEI has been putting an increasing emphasis on SMI projects. Consistent with this orientation, BTEI has gradually developed its staff capability to process such projects and has evolved a specific approach where foreign parternership is systematically sought with a planned buy-back of foreign participations by local shareholders. Financial situation and profitability 4.68 Income statements for the last three years are presented in Annexe 8, Table 4. Since it used up its capital in mid-1987 and will resort to borrowing in 1988 only, BTEI has no problem arising from its interest spread or foreign exchange losses. Because BTEI has been in operation for a few years only, indicators pertaining to its operations and profitability are still evolving considerably. Its equity portfolio represented 4.3%, 6.1% and 10.8% of its total assets in 1984, 1985 and 1986, respectively (and 9.8%, 9.9% and 15.6% of its own equity in the same years). The return on this portfolio was 2.0% and 1.4% in 1985 and 1986. BTEI's returns on equity investments are, therefore, very similar to BDET's (para 4.56) and the reason for such low returns are the same as for BDET (para 4.57). BTEI's performance in this respect, however, should improve significantly in the future as poorly profitable participations in public projects are expected to represent a rapidly decreasing fraction of BTEI's total equity portfolio. Financial situation 4.69 BTEI's financial structure reflects its early stage of development; its has just mobilized its capital and has barely started borrowing. While its equity went from TD39.1 million in 1985 to TD 53.3 million in 1986, its debt went from TD 3.0 million to TD 3.4 million in the same period (with, correspondingly, a very low debt service), resulting in debt: equity ratios of about 0.1:1 only. Overall, BTEI's ratios are still very satisfactory. - 47 - Operations and Financial Projections 4.70 BTEI expects its lending operations as well as equity investments to increase significantly in 1988, and thereafter, at a more steady pace (Annex 8, Table 7); this pace is rather ambitious, as it would imply approvals in 1990 of TD 42.5 million of lending and TD 7.5 million of equity participations. BTEI management is aware of this, but argas that, after their first few years, they should be able to expand their operationF significantly and that the increase in the number of requests that they have received in late 1986 and early 1987 would imply -- if sustained in the future - an important growth of BTEI's operations. Taking into account the Bank's reservations, however, BTEI has applied for a relatively modest fraction of the proposed line of credit: US$ 4 million, the smallest allocation among the participating banks. 4.71 Financial projections appear in Annex 8, Tables 8-10. BTEI expects the return on its equity portfolio to improve soon and stay in the vicinity of 2.4% (with a peak of 3.1% in 1989), which might be somewhat optimistic. Administrative expenses would increase but at a pace lower than that of the income from participations. !Ii. significant changes are expected either as regards arrears or foreign exchange losses. Provisions would increase in a manner consistent with the loan portfolio; also, financial charges would start being significant, but would remain much lower than interest income. Thus, BTEI's situation would evolve toward that of a mature institution, and BTEI should be able to maintain its profitability in a satisfactory manner. 4.72 BTEI's projected level of operations (para 4.70) would imply total borrowings of about TD 50 million by 1990, which remains most reasonable vis-b-vis BTEI's equity. The return on equity would be satisfactory which would permit BTEI to pay dividends of the magnitude (4) expected by the shareholders. If BTEI develops accirding to its assumptions (or even below these, as would appear more realistic), its financial and profitability would remain satisfactory. V. THE PROJECT A. Project Objectives and CoMponents 5.01 The proposed project builds on the successful completion of the two earlier projects in the sector. By furthering the development of SMI in Tunisia, the project will continue to pursue the objectives set in the SSI project as well as new objectives which have been ident.ified during supervision and project preparation. These objectives are : (i) to increase the financial resources available to the commercial banks, to make the financing of SMI operations more attractive to them, and to strengthen term lending departments in commercial banks so that they can develop and improve medium- and long-term instruments for SMI financing; (ii) to finance through commercial banks, BDET and BTEI economically justifiable, financially sound and technically riable projects in the sector; - 48 - (iii) to foster the development of a new class of industrial entrepreneurs in Tunisia, as SMI are the training ground for industrial managers and technicians; and (iv) to create employment at an invebtment cost per job lower than the national average in the industrial sector. 5.02 To achieve these objectives, the proposed project includes improvements in the delivery mechanism for industrial finance as well as important design changes in the financial products available to SMI. To support these actions, further institutional improvements are proposed in the support structures (API and UTICA) for SMI, essentially in the areas of project promotion and design, and management and operation of small industrial units. For each of these areas, specific technical assistance and action programs are included in the proposed project. Besides the specific financial and institutional support provided under the project, the improvements in the overall macro-economic and sector specific framework (as agreed under ITPAL) should also be mentioned as important factors to impact favorably on the development of SMI. The project would also bring about changes in the FOPRODI and the financial incentive system for SMI (paras 4.11 -4.15), which would decrease government budg, t subsidies and improve the allocation of resources to the economy, including to SMI. 5.03 The proposed loan would consist of two components: (i) a credit line of US$27.5 million to three commercial banks, BDET and BTEI for financing eligible SMI projects; and (ii) US$0.5 million for technical assistance. The Bank loan would be made to the Government on the usual terms and conditions applicable to Tunisia (standard variable interest rate and repayment over 17 years including a four-year grace period). The Government would onlend the proceeds to the participating banks, in local currency, through subsidiary loan agreements. a. Credit Line 5.04 Participating Banks. Credit would be channelled through BDET, BTEI and three commercial banks: BS, BT and STB. The participation of BDET is justified by its experience in financing small and medium size industrial projects. BTEI plans to expand significantly its operations with SMIs; it has also developed a promising approach for such operations (seeking systematically foreign, technical and financial partners) and is developing its staff accordingly. The three commercial banks' involvement is justified by their active participation in the SSI project, their sound financial situation and structure, their extensive branch networks and business contacts, and their interest in developing their medium-term SMI operations in the industrial sector. The onlending arrangement reflects the Government's desire to give greater responsibility and independence to the commercial banks. 5.05 The credit line would be allocated as follows: BDET, US $6.5 million; STB and BS, US $6 million each; BT, US $5 million; and BTEI, US $4 million. This allocation is based on each of the participating banks project pipeline, past volume of activity, and a reasonable estimate of future growth as described in paras. 4.36 to 4.38. The use made of the allocated funds will be reviewed 18 months after the loan comes into effect, but no later than December 31, 1989. In case a bank has not utilized at that time at least $2,000,000 of its allocation, the unutilized balance could be reallocated to the other participating banks who have utilized at least this amount. Subsequent revisions would take place on the basis of yearly reviews, or more frequently if needed. - 49 - 5.06 Specific actions to make term-lending to SMI more attractive to commercial banks and to equip and organize them in order to improve the quality of service and assistance to SMI have been described in paras. 3.21-3.27. They include: (i) better financial margins on term-lending, i.e. nearly 4%; (ii) inclusion of the subloans financed from Bank funds in the "priority activities ratio"; (iii) more independence in decision making (i.e. no prior API or Central Bank approval); (iv) better staffing of credit departments; and (v) fiscal incentives to provide funds for training, studies and promotion. During negotiations, confirmations of these actions were obtained (see para. 6.03). 5.07 The Onlending Terms. The Government will onlend loan proceeds to participating banks at the Bank lending rate in force at the time of signing of the Loan Agreement. The onlending rate to the participating banks may be adjusted by mutual agreement between the Government, the participating banks and the Bank, in the light of changes in the latter's own lending rate, the overall level and structure of interest rates prevailing in Tunisia, the competitiveness of the local interest rate on long-term funds, the demand for medium and long-term credit, and the utilization of loan proceeds. However, at no time will the onlending rate between the Government and the banks be less than the Bank's rate. The parties will consult together at least once a year on the subject of the onlending rate and its possible adjustment. Any adjustment will only affect the uncommitted part of the loan. 5.08 Loan proceeds will be onlent to participating banks in Dinars. To cover -- or at least contribute to the coverage of (para. 5.09) -- the foreign exchange risk, the Government will charge a 1% flat fee which the participating banks will pass on to the subborrowers. Participating banks will reimburse the Government for the amounts onlent to them according to the consolidated schedule of the individual subloan repayment schedules agreed with their SMI clients and recorded in the subloan agreements. The banks will also undertake to pay the standard commitment fee (0.75% per annum) on amounts committed but not yet disbursed. The participating banks will be allowed a sufficient margin, but not exceeding four percentage points, which should permit them to (a) cover their operating costs (estimated at about 2.1%); (b) fund reserves for bad debts (about 1.1%); and (c) make a reasonable profit (about 0.8%). At today's Bank lending rate (about 8%), the onlending rate to final beneficiaries would be about 12%; additionally, beneficiaries would pay a 1% flat fee for the foreign exchange risk. The onlending rate to subborrowers will be reconsidered, if need be, at the time of the review mentioned in para. 5.07. The banks may also recover the commitment fee from their clients. The maximum period for repayment of subloan principal will be eleven years including a maximum grace period of three years. Up to US$600,000 of the amounts allocated to each participating bank would be available for equity investments in eligible SMI projects; proceeds of the proposed loan used for such investments will be reimbursed to the Government in eleven years including three years grace. The onlending arrangements were confirmed during negotiations and reflected in the Loan Agreement and will be recorded in the Subsidiary Loan Agreements to be concluded between the Government and the participating banks. - 50 - 5.09 It is in the context of the exchange rate and interest rate policies (reviewed by the IMF and the Bank) that solutions for dealing with the foreign exchange problem are being sought. During negotiations of ITPAL, the Government and the Bank have agreed on terms of reference for two studies. First, a study of ways to improve the system of prntection against exchange risk on foreign borrowings, abiding inter alia by the following three principles: (i) the end-user of the loan will himself bear the exchange risk when his operation is of a sufficient scale to enable him to do so; (ii) specific criteria will govern access to exchange risk guarantees, these being resirved solely to qualified smaller enterprises; and (iii) irrespective of the type of system eventually adopted, it should be viable without government subsidies. Second, a study to be conducted by the Central Bank to identify ways for improving the system of forward coverage of exchange risk in the context of the country's foreign borrowing policy so as to minimize its impact on the balance of payments. For the proposed project, which deals with entrepreneurs that are the least capable of insuring or covering the risk, participating banks will collect a flat 1% fee - in addition to the interest rate on medium and long-term loans -- to be paid into the existing Exchange Risk Equalization Fund. As and when a new foreign exchange risk coverage scheme becomes operative (which is a condition for second tranche release of ITPAL), subborrowers financed from the uncommitted balance of the loan will become subject to the new scheme. This was confirmed at negotiations. 5.10 Subproiect Eligibility Criteria. Proceeds of the line of credit would finance: (a) new enterprises with total investments not exceeding TD 1.5 million in December 1987 value, including working capital funds; and (b) existing enterprises with total investments for expansion, modernization, diversification/integration or rehabilitation/restructuring not exceeding TD 2.5 million in December 1987 value, including working capital and existing net investments. The maximum amount of the proceeds from the Bank loan to be utilized in the form of subloans and investments for financing a single subproject would be US$800,000. Eligible projects should meet the following requirements which were agreed during negotiations with the participating banks and reflected in the Project Agreement concluded between the Bank and the participating banks (para 6.03): (a) to be, financially sound and profitable, and be able to repay the proposed subloan (see para. 5.11); (b) to be considered economically viable, and have an economic rate of return of at least 10% per annum; and (c) to have a cost per job normally not exceeding TD 30,000 (at constant December 1987 value). Projects which show a cost per job higher than TD 30,000 will have to satisfy one of the following conditions: (i) export at least 25% of their output after completion of the investment; - 51 - (ii) be expansion, modernization or integration projects in which investment per job (existing and new) is less than TD 30,000 -- in December 1987 terms -- when net existing investment is taken into account; and (iii) satisfy the Government's priority objectives formulated in the new investment law (of August 1987), i.e. the developement of disadvantaged areas, the transfer of new technology, and industrial integration. 5.11 Appraisal Standards and Format. Each application for financing will be the subject of a detailed appraisal, prepared by the participating bank, consisting of a financial, an economic, a technical and a market analysis. These reports would cover inter alia: (i) the production process, the equipment and technology selected, the production capacity and expected output, and the description of the goods to be produced; (ii) the ownership structure of the firm, and - when applicable -- a commentary on why the bank has decided to take an equity participation; (iii) the investments costs (total and foreign exchange) by component, details on working capital needs, and project's financing plan; (iv) a detailed market analysis (local demand, domestic production and imports, export potential), and marketing arrangements; (v) a description of the protection on the goods to be manufactured (in terms of duties and taxes) as well as quantitative restrictions and import licensing, when applicable; (vi) an estimate of the number of jobs created, their estimated average cost, and a special review of the merits of the project when this average cost is larger than TD 30,000 (para. 5.10 (c)); (vii) an analysis of the future financial position, profitability and cash generation for debt service, as well as a demonstration of the financial and economic viability of the project, including the computation of the ERR-'; and (viii) An analysis of the quality of the firm's management, administration and partners. API will be available to assist the participating banks in making a satisfactory economic analysis. The content of appraisal reports were discussed and agreed during negotiations and reflected in the Project 1/ For the latter, all outputs and tradeable inputs (including capital equipment) will be valued at border prices, whereas appropriate conversion factors will be applied to non-tradeable imports (e.g., land, building and labor). Justification will be provided for both border prices and conversion factors. - 52 - Agreement (para 6.03). When a subproject pertains to the restructuring of an enterprise, the report will address specifically questions related inter alia to re-capitalization, enterprise management, technology selected, technical assistance, marketing arrangement, debt rescheduling/consolidation, etc.. 5.12 Subloan Approval. For subloans under US$400,000 in December 1987 value, the participating bank will request authorization from the Bank in a simplified form showing that the project satisfies the eligibility criteria. For subloans of a larger amount, the participating institution will forward to the Bank, for its review and approval, the appraisal report together with an amortization schedule of the subloan and a list of the goods to be financed from the loan. However, for the first US$1,000,000 to be utilized by each bank, all subloans -- irrespective of size -- will require Bank approval on the basis of satisfactory appraisal reports. After utilization of US$1.0 million, appraisal reports, amortization schedules and lists of goods for subprojects requiring less than US$400,000 in December 1987 value will be send to the Bank for information only. 5.13 Role of the Central Bank in the Project. Under the project, the Central Bank will have three functions: first, it would maintain the "Special Account" from which disbursements will be made for subprojects financed by the participating banks; agreement to this effect were reached during negotiations (para. 6.03). Second, it would administer, bank by bank, the overall utilization of the loan account. Third, it would assure that subprojects below the free limit of US$400,000 satisfy the eligibility criteria. 5.14 The Central Bank is reviewing its reporting requirements and procedures with the commeicial banks, and improvements in monitoring systems are being studied. To fa-.ilitate the supervision of the project execution and to streamline reporting requirements with the participating banks, the Central Bank will consult with Bank missions on these requirements and related procedures. Annual reporting of the financial position, profitability, operations and other performance indicators of the participating banks will be established in close coordination with the Central Bank. 5.15 Procurement and Disbursement. The participating banks will ensure that the goods and services procured under the project are suitable to the investment project considered and are reasonably priced. For this purpose, the banks will require borrowers to submit documentation showing that comparative shopping has taken place. The participating bank's appraisal reports will review the justification for the equipment to be purchased and provide details on its technical characteristics and the prices quoted. Procurement for equipment under the API project component (para 3.31 and Annex 3) will follow established Government local shopping procedures which are satisfactory for the goods and services included in the TA component of the proposed loan and conform to IBRD procurement procedures. Consultants will be hired according to Bank guidelines (para. 3.31). 5.16 Disbursements under the credit line for projects receiving Bank funds through subloans, would be made against 60% of civil works, 70% of goods and services procured locally, and 100% of the CIF cost of imported goods and - 53 - services.-' Disbursements for technical assistance to API would be made against 100% of foreign expenditures and 75% of local expenditures. In order to expedite project execution and the disbursement for subloans, the arrangements under the line of credit for SSIs (Loan 1969-TUN) , which called for a "Special Account" to be opened and maintained with the Central Bank (that allowed disbursement to participating banks on their presenting pro-forma documentation), will be used again. The Special Account which will have an authorized allocation of US$2.5 million (subdivided in five special sub-accounts proportionately to each participating bank's loan allocation 1"), would be replenished whenever about one-half to one-third of the sub-special account provision has been utilized. Replenishment would be on the basis of statements of expenditures (SOEs). The participating banks could also submit to the Bank direct payment or special commitment requests for amounts of no less than US$150,000. These arrangements are very similar to those used under the SSI project. The estimated disbursement schedule of the loan, based on standard disbursement profiles for the EMENA/DFC sector, is given in Annex 9. The final date for submission of subprojects to the Bank would be December 1, 1991 and the Closing Date would be June 30, 1995. 5.17 Reporting, Accounts and Auditing. At least once a year, participating banks would prepare progress reports on the subprojects being implemented and the projects in their first three years of operation. These reports would be made available for review by the Bank's supervision missions. Annual reports on the financial position, profitability, operation and portfolio, in a form that was agreed upon during negotiations, will be sent to the Bank through the Central Bank. The participating banks would maintain separate accounts for subloans extended by them under the project. Separate project files would be maintained for each subproject, which would give information on the amount of individual subloans, amount of payments, purpose of loans, name and address of machinery suppliers and the country and origin of machinery. The banks' financial accounts will be audited by independent external auditors acceptable to the Bank and furnished to the Bank within six months of the end of each fiscal year. Similar to the existing agreement for the SSI project, auditors acceptable to the Bank would prepare the audit report of the Statement of Expenditures (SOE) and the Special Account in the Central Bank, and make it available to the Bank within nine months after the end of each fiscal year. These auditing arrangements were confirmed during negotiations. At least once a year, API will submit reports on the progress in the implementation of the various components of its TA program. 1/ As under Loans 2522-TUN and 2554-TUN. 2 BDET, US $0.59 million; STB and BS, US $0.55 million each; BT, US$0.45 million; and BTEI, US $0.36 million. - 54 - b. Technical Assistance 5.18 Under the project, technical assistance will be provided to: - API, for strengthening its promotional activities and its capability to help new entrepreneurs in the formulation of their project (paras 3.28 - 3.31); - UTICA, for strengthening its SMI Assistance Center and its ability to help existing entrepreneurs in their management production and financial planning (paras 3.15 - 3.20); and - the commercial banks, for strengthening their institutional capacities; particularly, in the area of term-lending and project appraisal techniques (paras 3.21 - 3.27). 5.19 The API component, financed from US$500,000 of the loan amount, would be for expert services ($220,000), training ($30,000), equipment ($150,000) and studies ($65,000); a $35,000 price and quantity contingency is also provided for.(Annex 3). Procurement and disbursement would follow the procedures described in paras 5.15 - 5.16. API will prepare annual reports detailing the activities, expenditures and results as they relate to the annual targets under the program. API will maintain separate accounts for expenditures under the technical assistance component. API will assist Bank supervision missions assess the extent to which extension services have been provided properly. During negotiations, agreements were reached on the T.A. program described in para 3.31 and Annex 3, and the terms of reference of the expert. Signature of the API grant agreement between the Government and API related to the TA program is a condition for effectiveness. 5.20 With regards to the financing of the technical assistance component to UTICA, Belgian authorities have agreed to provide US $730,000 while US$530,000 (equivalent to TD 450,000) would be covered by the UNDP. UTICA would provide the necessary resources to cover local costs. The recruitment would be done accotding to terms of reference acceptable to the Bank -L, and the monitoring andievaluation of the program components according to UNDP and ILO procedures. ILO would be the executive agency for the UNDP. The funding of the program as well as the assurance that the program will conform with the description provided in paras 3.16 to 3.20, were confirmed during negotiations and reflected in the Loan Agreement. Signature of the UTICA grant agreement between the Government and UTICA related to the TA program is a condition for effectiveness. 1/ These were drafted during appraisal, in collaboration with UTICA. - 55 - 5.21 Although the Bank would not directly finance the technical assistance to UTICA, its provisions (i.e. amounts, main components, objectives, duration, etc. as specified in paras 3.15 - 3.20) will be an integral part of the Loan Agreement. During negotiations, the Government confirmed to the Bank bilateral donors' commitments to finance the technical assistance. 5.22 Technical assistance to the commercial banks will be financed from their own resources (see paras 3.21 - 3.27). Each bank has developed an action program for strengthening their term-lending organization and for training their staff. Progress in executing the action program will be monitored during supervision. 5.23 The proposed technical assistance programs to API, UTICA and the participating banks should ensure the efficient and effective utilization of the Bank loan for financing viable SMI projects. The respective roles of each institution are complementary, and together should help new and existing SMI in the proper formulation and execution of their projects. B. Project Benefits and Risks 5.24 The project will provide financial support and technical assistance, at a critical time of adjustment, to a segment of the manufacturing sector which makes a major contribution to industrial growth, employment, exports and industrial diversification. The project is expected to create about 4,000 direct jobs, which represent about 5% of total projected employment creation in the manufacturing sector-L". The project would also help the commercial banks develop the capabilities and expertise required to improve their services to SMI. Technical assistance to API would strengthen its promotional role and institutional capacity for providing extension services to SMI. The technical assistance to UTICA would foster the creation of an organization to provide direct advice and assistance to SMI entrepreneurs; this would result in improved productivity and efficiency of SMI. Upon the completion of the TA program, UTICA would employ 20 Tunisian nationals as full-time advisers, and be able to provide assistance and guidance to about 300 enterprises. The project would also help BDET strengthen its financial situation as a result of: (M) the scheduled repayment by the Government of its debt to cover BDET's foreign exchange losses, and (ii) actions aimed at improving BDET's portfolio management, through the strengthening of BDET's supervision activities. 1/ The Ministry of Planning and Finance, in its preparation for the Seventh Plan, expects the creation of new 85,000 jobs in manufacturing industries. - 56 - 5.25 The project risks relate mainly to three areas: (i) participating banks might not meet the investment targets; (ii) the technical assistance component may not reach the intended level of quality; and (iii) BDET portfolio may not recover as early as expected. Concerning investment levels, economic policies have been clarified and measures taken under ITPAL. These reforms should ensure better investments and make existing and new operations more efficient and profitable. There are reasonable expectations that a substantial pipeline of expansion, modernization and new subprojects would materialize as a result of the macro and sector reform package agreed with the Bank and the IMF. Concerning the technical assistance component, the project builds on seven years of experience with API, the commercial banks and BDET. The institutional strengthening of API (by incorporating CNEI and AFI) will bring together all aspects of industrial promotion, while the decrease in its regulatory authority should re-orient the institution toward assisting entrepreneurs. API's management is determined to strengthen its assistance to new entrepreneurs through a more active promotional role. The support by bilateral sources for strengthening UTICA's organization to assist SMI management and operations, will contribute to the improved operation of SMI enterprises. The participating banks have in the last decade trained a substantial number of staff in appraisal and supervision techniques, and this knowledge will now be applied in an environment which provides more autonomy to the banks. With less distortion coming from the macro framework, with better institutional support for entrepreneurs as provided under the project (through API and UTICA) and increased responsibility of commercial banks to make investment decisions on their technical financial and economic merits, investment quality should improve. Considering the past and expected future dynamism of the sector and the project specific features (which should make investment by, and lending to SMI attractive), project risks are acceptable. Finally, the improvements expected in BDET's portfolio may not be achieved as rapidly as expected. While BDET will do all it.can to implement the organizational and managerial reforms required to improve its role in the rehabilitation of its clients, economic policies would here again play a major role and results would be contingent on the performance of ITPAL. VL AGREEMENTS 6.01 During negotiations, the following agreements were reached for the proposed loan. A- Incorporated in the Legal Documents I. Loan Agreement (a) The loan will be made to the Government on the standard conditions applicable to Tunisia, i.e. repayment schedule of 17 years including a grace period of 4 years (para 5.03); (b) The loan will be onlent, through subsidiary loan agreements acceptable to the Bank, to the participating banks at the Bank lending rate in effect at the time that the Loan Agreement - 57 - becomes effective. Each participating Bank would receive a fraction of the loan as indicated in para. 5.05; however, the amount allocated to each bank may be revised on the basis of an annual review, the first to be held 18 months after effectiveness but not later than December 31, 1989 (para. 5.05). The onlending rate will be reviewed at least once a year and may be adjusted by mutual agreement between the Government, the participating banks and the Bank (para. 5.07). Bank funds will be onlent to the participating banks in dinars (at the exchange rate in effect on the date of disbursement by the Bank). Participating banks will pay a 1% flat fee to cover the foreign exchange risk, which will be passed on to the ultimate borrower, until a new scheme is in place; the amounts onlent to the participating banks will be reimbursed to the Government according to the aggregate amortization schedules of individual sub-loans (para 5.08); (c) Participating banks will be allowed to charge an adequate margin -- yet no larger than 4% -- on their lending to SMI beneficiaries (para 5.08), resulting in an initial interest rate of about 12% to be charged to subborrowers. This rate will also be reviewed at the time of the review of the onlending rate mentioned in (b) above; (d) The Central Bank shall administer the loan, open a Special Account (paras 5.13 and 5.16), and account for loans financed under the project when enforcing the ratio of priority financing (paras. 3.22 and 5.06). The Special Account will be audited annually by independent auditors (para. 5.17); (e) API will carry out the assistance program, including (i) the hiring of a foreign ergineer in accordance with Bank guidelines (paras 3.31 and 5.15), and (ii) reporting periodically to the Bank on its promotion activities (para 5.17); (f) the Government will fund the Technical Assistance Program to UTICA from bilateral sources and meet eventual shortfalls from its own funds (para 3.19); (g) The Government will seek the Bank's comment on the draft report concerning the future of FOPRODI (para. 4.15); and (h) The Government will settle its arrears to BDET with respect to the foreign exchange losses according to the arrangement presented in para. 4.46. - 58 - II. Proiect Agreement (a) The eligibility criteria for subprojects (para. 5.10); (b) The format of appraisal reports of subprojects (para 5.11); (c) The free limit of US$400,000 for Bank authorization of subprojects (para 5.12); (d) The procurement and disbursement procedures for subprojects (paras. 5.15 and 5.16); (e) Auditing and reporting requirements (para. 5.17); and (f) The last date for submission of sub-loans will be December 31, 1991, and the Closing Date will be June 30, 1995 (para 5.16); B. Conditions of Loan Effectiveness and Disburseme it 6.02 These will be: I. For Effectiveness (a) Signature of Subsidiary Loan Agreements between the Government and the participating banks (5.08) acceptable to the Bank; signature of the UTICA and API grant agreements (paras. 5.19 and 5.20); (b) Payment by the Government of at least TD 15 million of its arrears to BDET with respect to foreign exchange losses incurred by BDET (para. 4.46); and (c) Effectiveness of the Belgian grant agreement or confirmation of availability of alternative financing from other sources (para. 5.20). II. For Disbursement Hiring of the expert engineer by API (para. 3.31). 6.03 Subject to these agreements, the proposed project will be suitable for a Bank loan of US$28.0 million. - 59 - LIST OF ANNEXES ANNEX 1: Industrial Sector Supporting Institutions ANNEX 2: Commitments and Bank Participation in SSI Credit Line as of December 31, 1986 ANNEX 3: Technical Assistance Program for API ANNEX 4 Technical Assistance Program for UTICA ANNEX 5: Participating Commercial Banks Table 1: Summarized Profit and Loss Statement (December 31, 1985) Table 2: Summary Balance Sheets Table 3: Financial Ratios Table 4: Profitability ANNEX 6: Employment by and Branch Network of Participating Commercial Banks Ownership of Participating Commercial Banks ANNEX 7: BDET Table 1: List of Shareholders (as of December 31, 1986) Table 2: Organization Chart Table 3: Analysis of Approved Operations (1980-1986) Table 4: Loan Approvals by size of Project Cost Table 5: Summary of Operations (1982-1986) Table 6: Foreign Exchange Losses Table 7: Arrears Over Three Months (as of December 31, 1986) Table 8: Audited Income Statement (1984-1986) Table 9: Audited Balance Sheets (1984-1986) Table 10: Forecast of Operations (1986-1990) Table 11: Projected Income Statements (986-1990) Table 12: Projected Balance Sheets (1986-1990) Table 13: Projected Cash Flow Statements (1987-1990) ANNEX 8: BTEI - Tables 1-10: Operations and Financial Statements ANNEX 9: Disbursement Schedule MAP: Noo IBRD 18707 of May 1987 (Tunisia - General Features) - 60 -ANNEX 1 - 60 - Page 1 of 8 TUNISIA SECOND SMI DEVELOPMENT PROJECT INDUSTRIAL SECTOR SUPPORTING INSTITUTIONS I. THE INVESTMENT PROMOTION AGENCY (API)1' 1. Established in 1973, API is an autonomous public organization under the aegis of the Ministry of Industry and Commerce. At creation, the agency's objectives were as follows: (i) to assist industrial investors in preparing and filling licensing applications within the framework of existing legislations; (ii) to review and approve all investments; (iii) to initiate research and studies on its own or in collaboration with the National Center for Industrial Studies (CNRI) or any other public or private agency, domestic or foreign, with a view to promote investments in Tunisia; and (iv) to disseminate information, both inside and outside Tunisia, regarding investment opportunities. 2. Since then, other objectives have been added (when the Government decided to promote SMI) such as: (i) to assist small and medium-scale promoters in improving their management and productivity; (ii) to inform promoters about investment advantages in different sectors; and (iii) to help develop subcontracting opportunities and decentralization. Because API used to spend most of its resources on reviewing and approving investments, it was not providing sufficient technical and managerial assistance to SMI. In 1978, API created an Assistance Unit which was very helpful in solving problems of new promoters; particularly, in obtaining authorizations to import capital goods and raw materials, and building permits, utility connections, etc... 3. Staffing and Organization. As of late 1987, API is organized into five main operational departments: Promotion Department, Training Department, Identification and Studies Department, Administrative and Financial Department (for FOPRODI fiscal advantages and Immigrant workers), and Legal -d Follow-up Department. The Promotion Department has a staff of 5 professionais. The Promotion Department is in charge of bringing investors together, carrying out public relations activities to foster investments, organizing international gathering, assisting promoters of export-oriented companies (Law 72-38), and following up activities of API's offices abroad. The Training Department, which is operational since April 1986, has a staff of 3 professionals. It plans to train API's professionals and organize seminars and training for new promoters. Seminars (with durations between 3 to 4 weeks) would be conducted by API professionals or students from the University. The concept is in a preliminary stage and has not yet been tested. In any case, API is organizing itself to be able to respond to new promoters' needs. 1/ Agence de Promotion des Investissements; now being reformed as indicated in the body of the report (paras. 3.06-3.09). - 61ANN 1 Prge 2 of 8 4. The Identification and Studies Department, which is subdivided into sectoral branches, has a staff of 20 professionals. It reviews investment proposals and prepares reports and recommendations to API's management for approving or rejecting -investment applications (on average 1,800 applications per year). The Departdent is also responsible for research and studies for the identification of new projects, but spends only 5% of its time on this function because investment approvals and rejections are a time-consuming function. Nonetheless, API's management has decided to devote time to the identification of new projects as it is considered one of API's main goals. 5. The Administrative and Financial Department (DFA) for FOPRODI, 1/ Fiscal Advantages and Immigrant workers has a staff of 17 professionals. DFA is subdivided into administrative divisions (Personnel, Administration, Accounting, and Supplies) and 3 operational divisions (FOPRODI, Fiscal Advantages and Immigrant workers). The FOPRODI Division, which was created in 1975, prepares demand applications to be reviewed by API's Board. API's Board is responsible for giving Government funds to investors lacking personal assets. (FOPRODI's approvals have decreased from 141 in 1982 to 76 in 1985 which shows that there are less opportunities for creation). The Fiscal Advantages Division reviews demands for fiscal advantages submitted by service companies such as hospitals, grocery stores, export companies, etc... This is an administrative function which has been relegated to API by the Ministry of Finance. The immigrant Workers Division is in charge of assistance to returning Tunisian workers; it is an informative and administrative assistance. 6. The Legal and Follow up Department (DJAS), which is subdivided into four divisions (Legal, Assistance, Statistics and Follow up, and Computer Services), is in charge of the 23 regional offices. DJAS has a staff of 23 professionals (excluding the regional offices). The Legal Division is responsible for all legal work af API (minutes of Board negotiations, approval of letters, etc..). The Assistance Unit which was created in 1979, is in charge of assisting SMI promotion in cooperation with the regional offices. The Unit provides assistance at four levels: (a) informing promoters of available advantages; (b) helping prepare appraisal reports, requests for FOPRODI financing and investment authorization; (c) assisting in overcoming administrative procedures; and (d) facilitating relations with financial intermediaries. The Bank is using this Unit to provide technical assistance to promoters under the SMI line of credit (Loan 1969-TUN). The Statistics and Follow-up Department oversees the implementation of all relevant industrial projects. In principle, a project should be visited once a year during 4 years. The regional offices have responsibility for all investments below TD 200,000 (evaluation, review, approvals, etc...). In addition they are in charge of follow up on all approved projects, and they handle public relations with representatives of the government bodies. 1/ Fonds de Promotion et Dcentralisation Industrielles. - 62 - ANNEX 1 Page 3 of 8 7. API's staff has been growing since creation of the agency; from 37 in 1973, to 360 in 1986. Out of the 360 people, one-third are professionals, and half are working in the regional offices. API's staff is less paid than in the private sector, but API is perceived as a good training ground for young graduates. As a result, API attracts only inexperienced people, and is loosing its experienced staff to private sector and para-statal enterprises. 8. Procedures. API gives one approval for projects with investments below TD 200,000 and two approvals for others. A first approval is given before a bank evaluates a project; a second approval comes after a bank decides to finance the project. API's second approval authorizes a promoter to import his equipment (import license); it also sanctions the overall investment which is usually the amount approved by a bank. API has 3 approval bodies. In principle, investment authorizations should be given by the National Council for Investments (Le Conseil National de l'Investissement) headed by the Prime Minister and composed of representatives of various ministries. In practice, investment authorizations are given by API's Board, headed by API's President. 9. The Board is composed of representatives of the Prime Ministry, Ministries of Finance, Planning, Commerce and Industries, and the Director of the Central Bank. The representatives of the three technical centers (CETIME, CMTCCV, CNCC), UTICA and CNEI sit on the Board of API as observers and cannot vote; however, a rejection from an observer is detrimental to a project. In case of rejection by the Board, the promoter can appeal to the National Council for Investments; since API creation, only 2 cases went to the Council. The Board meets once a month to give: (i) approvals (first and second) to projects with investments above TD 500,000; (ii) first approvals to projects with investments between TD 200,000 and TD 500,000.; (iii) approvals of FOPRODI requests; (iv) approvals of fiscal advantages requests from service enterprises; and, finally (v) to analyze appeals for projects rejected by "La Commission Centrale d'Approbation". 10. Institutions represented in API's Board are those which sit on "La Commission Centrale d'Approbation" (Central Approval Committee), but the repre.entatives in the Committee have lower positions than the ones sitting on the Board of API. "La Commission Centrale d'Approbation" meets once a week to give final approvals to projects with investments under TD 500,000 and to projects already approved which need an increase in investment size. "Les Commissions d'Approbation R6gionales" (Regional approval committees) operate like "La Commission Centrale d'Approbation", but at the regional level. 11. Since its creation, API has played an important and valuable role as a Governments regulatory agency (about 18,000 projects were approved). However, API has to reassess its objectives and reduce its regulatory role to respond to the Government new economic policy orientations which are: reduction of production cost, export orientation, more local competition and progressive liberalization (see ITPAL and ASAL). Under the new investment Law, put in place in mid 1987, API would only approve projects which will request government support. In this regard, the present managing director of API is in the process of reemphasizing the assistance role of API, especially with regards to new promoters. -63- ANNEX 1 Page 4 of 8 II. UNION TUNISIENNE DE L'INDUSTRIE, DU COMMERCE ET DE L'ARTISANAT (UTICA) 12. Created in 1946, UTICA is the federation of Tunisian employers, as well as the major organization promoting the interests of private business. UTICA main functions is to promote the interest of the private sector; in doing so, it improves contacts of the business community with the Government and gives its views on questions of industrial policy and reglementations. It is divided into subqectoral groupings for each economic activity and includes a permanent executive office which is in charge of managing the association. UTICA is composed of 120 sectoral chambers (of which half are related to the industrial sector); the employers are grouped on the basis of their activities. UTICA has a network all over the country. In each of the 23 governorates, there is a regional branch of UTICA which is the grouping of regional sectoral chambers. In Tunis, the headquarters, the federations which group at the national level all the chambers, are the following: textiles, electrical and mechanical, construction, leather and shoes, paper, food processing and export (created in July 1985). 13. Every five years, there is a general assembly, at which employers review the statutes of the association and elect the twenty members of the executive office. The association's expenses are financed by dues (TD 5 to 200) determined by the chambers which have annual budgets between TD 10,000 to TD 30,000. UTICA's operating cost is about TD 1 million per year. UTICA's budget is covered through a para fiscal tax of 0.5% on salaries. The total tax collected is put in a special account managed by the Prime minister who, in turn, allocates a certain amount to UTICA to cover its operating cost. As a result, UTICA is a federation of employers, but appears as an extension of the Central Administration. 14. UTICA has a permanent staff of 150 people (of which 2/3 are working at headquarters). The permanent staff is organized into seven departments: Industry and Handicrafts, Prices and Commerce, Labor Relations, External Relations, Internal Relations Department, Training and Promotion, and Publication. 15. The Departments of Industry and Handicrafts, Prices and Commerce, and Labor Relations are responsible for dealing with the Government on questions related to price controls, investment promotion, credit policy, labor laws etc... They also initiate sectorial studies (upon request of members) and provide assistance to promoters in administrative procedures. The Department of External Relations organizes regional and international gatherings. 16. The Training and Promotion Department, the most recent, is in charge of disseminating information, and providing training and managerial assistance. It provides promoters with updated information about all enterprises in Tunisia. (It has a data base of nearly 5,000 firms, of which most are SMI). It produces articles and magazines to keep firms informed about new developments and laws. It provides training through its training center created in 1977 with a grant from the Konrad Adenauer foundation. The center organizes 20 to 30 seminars each year (of 1 day duration on average). - 64 - ANNEX 1 Page 5 of 8 Seminars provide training through teaching on various management subjects such as production, inventory, personnel and marketing. Seminars are conducted by university professors, professionals from banking and specialized institutions. Promoters pay a small price: TD 10 per day. The training program has been well received by entrepreneurs, specially medium-size firms. 17. Although UTICA does not have the resources to handle technical and other extension services to SMI, it has done it successfully through an experimental program financed by USAID and assisted by CRS (Catholic Relief Services). Since 1984, UTICA created an Assistance Unit for SMI (Centre d'Assistance i la PME) under the Training and Promotion Department. With the assistance of CRS, the Unit has developed a two-year program to help 60 hand- picked, very small (less than 20 employees) enterprises in three sectors (Textiles and Garments, Electrical and Mechanical Industries, and Construction). The program consists of 3 phases: diagnosis of the firm; proposed solutions; and implementation of proposed solutions. Three full-time consultants and four specialized short-term advisors from UTICA provide the desirable expertise; whenever necessary, technical centers and/or consultants are called upon. UTICA has agreed with USAID and CRS to extend the program for 2 more years. 18. UTICA focuses an important part of its efforts on medium and small scale Tunisian businesses. Through its regular contacts (at the regional level) with firms, UTICA knows their needs and promotes their interests. UTICA strongly wishes to expand further its assistance to SMI; this, in view especially of the changing economic environment (reduction of oil revenues, reduced Government protection, saturation of local market etc...) and the success of the Assistance Unit. UTICA's Congress which met in November 1985 has decided to develop assistance services to SMI in order to help them modeenize and expand, the objective being to assist 300 enterprises per year on average III. THE TECHNICAL CENTRE FOR ELECTRICAL AND MECHANICAL INDUSTRIES(CETIME) 1/ 19. CETIME is an autonomous public institution under the aegis of the Ministry of Industry and Commerce; it was created with the assistance of the Bank in late 1982. Its role was to address the needs of two priority subsectors, steel structure/plateworks and mechanical works, where the potential for efficient projects were high and needs for technical assistance were the most urgent. The range of services offered to entexprises were mainly: a. In-plant guidance and trouble-shooting to resolve production problems (e.g., reorganize plant layout and work flows; remove bottlenecks; improve product quality; demonstrate to workers and technicians appropriate and more efficient practices with regards to machinery and tools utilization as well as their maintenance); 1/ Centre Technique des Industries M6caniques et Electriques. - 65 -. ANNEX 1 Page 6 of 8 b. Assistance to firms in their efforts to rationalize existing product mix, to adapt/adopt new and appropriate products and technologies, to plan and prepare new or expansion investments; and c. On-the-job training of technicians, in-plant demonstration of tools and techniques, and advice on design/improvement of cutting tools and die-metals. 20. CETIME's Board is composed of 9 members, of which 3 are from small and medium-scale industries. CETIME is organized in 4 operational departments: Machining, Welding, Electricity and Electronics, and Quality Control and Development. CETIME is well managed and most companies surveyed are satisfied with the services provided to them. CETIME has a core staff of 30 Tunisians (21 engineers and 9 technicians) assisted by 4 foreign experts: 1 electrical engineer, 1 mechanical engineer, and 2 technicians experienced in steel structure/plateworks, welding, tooling and dies. 21. In 1985, CETIME carried out about 50 technical assistance interventions, provided advice to 350 enterprises and trained 20 technicians. CETIME charges firms for part of its services (essentially the time of staff on assignment and a small fraction of overheads). This way, it covered 53% of its operating cost (TD 760,000) in 1985. SMI have been receiving most of the technical assistance from CETIME (especially through its regional workshop in Sousse). Out of the 400 enterprises identified in the EMI sector by CETIME, 200 are SMI. This is a good coverage because 65% of all EMI enterprises have less than 50 workers. CETIME has been providing technical assistance to SMI through API. In 1985, CETIME spent 40% of its technical assistance budget reviewing requests for investment authorization submitted to API. CETIME sits on the,Board of API as an adviser and gives its opinion about EMI projects. 22. CETIME decided to extent its activities into two new branches (foundries and electronics), and to improve and expand further its services in the mechanics branch. For this, CETIME received from the Bank US$2.1 million under the EMI II Loan in 1985. IV. THE NATIONAL CENTER FOR LEATHER AND FOOTWEAR (CNCC) 1/ 23. Created in January 1969, CNCC is an autonomous public institution under the aegis of the Ministry of Industry and Commerce. The Center's main objectives are the following: - to develop, promote and regulate the subsector; - to help promoters improve vroduction, product quality and productivity; - to assist firms in their efforts to adopt new and appropriate techniques, and to plan and prepare new and expansion investments; 1/ Centre National du Cuir et de la Chaussure. - 66- ANNEX 1 Page 7 of 8 - to initiate research and studies for better use leather and prevent deterioration of hides; - to provide training, on-the-job and abroad ; and - take participations in enterprises or groups of enterprises public or private with a view toward achieving the above objectives. 24. The Center's Board is composed of 11 members f which 6 are from the private sector. CNCC has a core staff of 20 engineert ind technicians with no foreign experts; since the UNDP financed technical assistance in 1977-1981, the Center has not received any technical assistance. Specialists are hired when needed. CNCC's budget is covered by a 1.5% parafiscal tax on sales of enterprises which are in the shoes and leather subsectors; in 1985, the Center received TD 350,000 for operating cost and TD 350,000 for equipment. Recently, CNCC has started charging its clients small amounts (staff time, essentially) for its services . 25. The Center provides direct assistance and indirect assistance through API. In 1985, CNCC carried out 33 technical assistance interventions (of which 26 were in the shoes subsector and 8 in the leather subsector), and visited and advised 18 enterprises subcontracting to the sector. The Center provided training for 9 engineers (in France and Italy); it also created (in-house) new shoe design for enterprises. The center assists about one-third of the sector (CNCC has identified 100 industrial enterprises of which 90% are SMI and 4,500 handicrafts). CNCC is a member of API's Board, and helps promoters prepare their requests for investment authorization and gives its opinions about investment decisions. 26. CNCC delivers limited assistance to SMI partly because CNCC is seen as an extension of the fiscal body which SMI avoid at all costs. CNCC is the Government watchdog of the subsector. It proposes prices which are benchmark for price controls, determines standards, gives its opinion about new, modernization/rationalization investments, and proposes any changes that (in its opinion) would contribute to the development of the sector. V. THE TECHNICAL CENTER FOR BUILDING MATERIALS, CERAMICS AND GLASS (CTMCCV) 1/ 27. CTMCCV is an autonomous public institution under the aegis of the Ministry of Industry and Commerce. The Center's main objectives are the following: (i) to provide technical assistance to enterprises; (ii) to initiate research and studies; (iii) to disseminate information inside and outside the subsector; and (iv) to do testing of minerals. 1/ Centre Technique des Mat6riaux de Construction, de la C6ramique et du Verre. -67- ANNEX 1 Page 8 of 8 28. Created in May 1982, CTMCCV started its operations a year later. It is not fuily operational and rely on CETIME for most of its work (mechanical and electrical). CTMCC is governed by a Board of Directors which includes representatives of the Ministry of Industry and Commerce, commercial banks, the Government training school (Office National de la Formation) as well as members of the private sector. CTMCCV has a staff of 21 people, of which 10 are engineers and technicians. The Center's budget is financed by a 0.5% parafiscal taxes on sales of all enterprises operating in the subsector. The amount should have been TD 900,000 in 1985 (based on CTMCCV's records), but the Center received only TD 150,000. CTMCCV plans to bill its clients (who are not paying their 0.5% taxes) for services. 29. CTMCCV has provided little technical assistance to SMI but it plans to do so in the coming years. Its technical assistance work program includes: (i) direct technical assistance interventions; (ii) training of technicians; and (iii) visits to enterprises. During its two year activities, the Center has already gained the reputation of a controller; mainly because CTMCCV is on the Board of API and, in 1985, rejected about one-third of all requests for investment authorization (concerning the subsector) presented to API's Board. EM2IE July 1987 - 68 -AN 2 Table 1 TUNISIA SECOND SMI DEVELOPMENT PROJECT Commitments of the SMI Credit Line (Loan 1969-TUN) As of December 31, 1986 (in US$ '000) Category 1/ 1983 1984 1985 1986 Total A 4,590.8 2,844.9 1,400.9 727.0 9,563.6 B 383.4 610.3 545.8 713.6 2,253.1 D 2,061.9 3,367.3 2,677.5 420.8 8,527.5 E 978.7 978.1 3,071.9 2,777.7 7,806.4 Total 8,014.8 7,800.6 7,696.1 4,639.1 28,150.6 Technical Assistance 650.0 Total 28,800.6* Notes: 1/ Category: A = Investment cost of or less than TD 250,000, with equity financed out of FOPRODI credit facility. B = Investment cost of or less than TD 250,000, with promoters not recipient of FOPRODI. D - Investment cost between TD 250,000 and TD 500,000, with equity financed out of FOPRODI credit facility. E - Investment cost between TD 250,000 and TD 500,000, with promoters not recipient of FOPRODI. * All figures are net; i.e. cancellations are deducted in the period they were requested. This explains the relatively low commitment figure in 1986, when cancellations amounted to US$3,984,290. EM2IE July 1987 ANNEX 2 -69 - Table 2 TUNISIA SECOND SMI DEVELOPMENT PROJECT Banks' Participations in the SSI Credit Line (Loan 1969-TUN) as of December 31, 1986 Commitments Share Bank No. of Projects (US$000) M BS 30 5,231 19 STB 24 4,721 17 BNT 23 4,832 17 UIB 18 3,741 13 BDET 16 3,375 12 BT 12 1,836 7 BIAT 10 2,177 7 CFCT 6 1,238 4 UBCI 3 11000 4 TOTAL 142 28,151 100 EM2IE July 1987 - 70 - ANNEX 3 Page 1 of 2 TUNISIA SECOND SMI DEVELOPMENT PROJECT The Technical Assistance Program for API This program will have the following components: 1. Information Services. There are in Tunisia no recent data available pertaining to existing SMI, and old data have not been collected in a systematic manner. To effectively assess the needs of the SMI subsector, an accurate information data base should be available. Therefore, under this project, API will collect information dealing with legislation, regulation, assistance and taxation affecting SMI. It will collect, process and analyze data on SMI using an inter-firm comparison technique. It will also disseminate information and data whether obtained in the course of its own activities or from foreign publications. To accomplish this task, API will need 6 microcomputers, with 27 terminals and related software. The microcomputers will expedite the collection, storage and retrieval of inform.tion, as well as the transmission of data, messages and reports, and provide better management control on information processes and extension services. This package will also include one photocopier and desk-top printer. 2. Extension Services. API will provide two kinds of extension services:(i) assistance to commercial banks; and (ii) assistance to promoters. Under the credit line, commercial banks will have full responsibility for appraising and financing SMI projects. Although each bank will set up its own organizational structure to appraise subloan applications from SMI, they believe that they will need (especially, at the beginning of the loan) assistance in economic aspects of project appraisals. Consequently, at the request of the commercial banks, API will help them assess the economic feasibility of projects (market and product studies, economic rates of return, etc.) and analyse the macroeconomic soundness of projects to be financed under the credit line. Some SMI promoters are not yet able to prepare feasibility studies/reports on new or expansion projects for submission to commercial banks for financing; at the request of such promoters, API will help them formulate their projects. Under the loan, the Bank will finance an expert and consultant services necessary to carry out the above described extension services. 3. Overseas training of staff. An essential prerequisite of development of an effective technical assistance program is the building up of a core group of competent and dedicated staff in the SMI Unit. The program provides resources for staff training and development. Training tours for API professional staff responsible for SMI will be provided to visit (mainly, in developing countries) industrial extension organizations to observe administrative policies, procedures and programs; this will assist in creating and maintaining in API a better understanding of SMI extension services. Training tours would include working assignments and short tours of export oriented industries, as well as training in management information systems for extension services. The training tours would be made in the 1988-1990 period. -71 - ANMEX3 Page 2 of 2 4. Studies and Proiect promotional work. Under the new investment law, API will devote most of its resources to promotional work. The SMI subsector, more than any other manufacturing subsector, needs a significant promotional effort. Under this project, API will have an important promotional role to play. It is certain that API cannot and should not expect to assume the role of the entrepreneurs in identifying new market opportunities or potentially successful new products or processes. But it could facilitate the entrepreneurs' task by carrying out technical, economic and market studies for products where opportunities exist either for export or technological innovation. API would be able to provide this service since it will be merged with CNEI -'. It would obtain knowledge of the production capacity of SMI and of its informational and promotional needs. Under its promotional role, API will assess the potential for establishment of a close and beneficial link between large industrial enterprises and SMI through subcontracting and marketing arrangements. 1/ National Center for Industrial Studies. EM2IE July 1987 - 72 - ANNEX 3 TUNISIA SECOND SMI DEVELOPMENT PROJECT API - Technical Assistance Program for SMI Program Budget (Us$) Foreign Exchange Cost (US $ Equivalent) I. Information, Extension Services, and Training A. Personnel One expert (three years) 200,000 Short term consult. 20,000 Subtotal 220,000 B. Training of Staff Fellowships 10,000 Study tours 20,000 Subtotal 30,000 C. Equipment Six personal computers (with software), places of terminals 130,000 Photocopier, and Desk-top printer 20,000 Subtotal 150,000 II. Studies and Promotional Works Materials for promoting projects amd cooperation 20,000 Travel 45,000 Subtotal 65,000 III. Contingencies 35,000 Grand Total 500,000 EM21E July 1987 ANEX4 IUNISIA SECOND SMI DEVELOPMENT PROJECT UTICA - Technisal Assistance Proaram for SMI. (March 1988 - February 19911 To be financed by Bilateral donors Domestic Sources (UTICA)1z Staff Amount Staff Amount TOTAL months (USt Eaul.) months consult. 1986 TO (USI Eguiv.) A. Personnel International Experts 72 682,700 682,700 International Short-Term Consultants 24 267,700 267,700 National Consultants 90 110,000 138,100 National Advisors 540 292,500 367.100 Support Staff _ _ 292 111,70l .70 Subtotal 96 950,400 882 491.500 1,567.300 B. Trainina Fellowships 40 83,700 83,700 Training Tours n.a 8,400 8.400 Foreign Trainers 1 a.AA 8,400 Subtotal 100,500 100.500 C. Proaram Administration Admin. Support Cost 19,600 69,000 106,200 Office Equipment 100,400 10.000 113,000 Vehicles 33,500 70,000 121.400 Field Expenses of Experts 21,000 30,000 58,600 Field Expenses of Advisors 8,400 11,000 22,200 Field Expenses of Superv. Evaluat. 1.400 A4000 68.600 Subtotal 196.300 234,000 490,000 0. Office Accommodation Headquarters (TUNIS) 45,000 56.500 Branch (SFAX ) ,000 1MO Subtotal 51,000 64,000 Total Cost 1,247.200 ZZ6,S0 2.221.800 1/ of which TO 75.000 expected from fees charged to beneficiaries. EN2IE July 1987 2376L/26 74i - ANNEX 5 Table 1 TUNISIA SECOND SMI DEVELOPMENT PROJECT Summarized Profit and Loss Statements of Participating Commercial Banks (December 31, 1985) (TD Million) BS BT STB Total Interest Income 27.2 24.4 58.8 110.4 Interest Expense 15.2 11.7 32.1 59.0 Net Interest Income 12.0 12.7 26.7 51.4 Other Income 0.7 1.1 8.8 10.6 Net Operating Income 12.7 13.8 35.5 62.0 Expenses Personnel 5.6 3.9 10.5 20.0 Depreciation 0.6 0.5 1.5 2.6 Other 2.9 4.0 7.6 14.5 Total Expenses 9.1 8.4 19.6 37.1 Net Operating Profits 3.6 5.4 15.9 24.9 Loan Loss Provision 2.0 2.8 5.6 10.4 Net Income before tax 1.6 2.6 10.3 14.5 Tax - 0.9 2.6 3.5 Net Income after tax 1.6 1.7 7.7 11.0 EM2IE July 1987 - 7Table 2 SECOND SHI DEVELOPMENT PROJECT SumnarX Balance Sheets of Participating Comnrcial Banks (December 31. 1985) (TD Million) Total BS ST STB 3 Banks All Banks A/B Liquid Assets 16.2 44.7 67.2 128,1 279.6 45.8 Loans 341.4 178.2 836.0 1.355.6 2,727.5 49.7 (of which medium-term to enterprises) (61.5) (38.2) (158.1) (257.8) ( 3.8) (44.9) Share Participations 4.3 5.1 14.3 23.7 70.8 33.5 Other Assets i K 2A4 24A .571.4 22 Total Assets MAJ JJAA .L.A .L A L.2 Liabilities Demand Depsosit. 1/ 25.7 175.1 602.6 1,037.4 1.948.9 53.2 Term & Savings 75.6 59.3 299.3 434.2 967.5 44.9 Other Liabs. 25.1 50.2 59.8 135.1 683.2 1t.8 Provisions 9.5 12.6 24.6 46.7 Equity 18.1 iZ. "A 2fi 222.7,1 Total Liabilities 8an p11A A...SAAJ .14ASA 2.3 (Guarantees) (139.6) (69.1) (360.8) (762.8) N.A. N.A. Share Capital (10.0) (10.0) (20.0) (40.0) (101.5) 39.4 1/ Includes local and foreign correspondents. EH2IE July 1987 76 - ANNEX 5 Table 3 TUNISIA SECOND SMI DEVELOPMENT PROJECT Financial Ratios of Participating Commercial Banks (December 31, 1985) (In Percentage) Total BS BT STB 3 Banks All Banks (A) (B) Liquid Assets Total Assets 4.1 14.2 6.4 7.3 7.3 Liquid Assets Demand Deposits 6.2 25.6 11.2 12.3 14.3 Provisions Loans Outstanding 2.8 7.0 2.9 3.4 n.a. Debt 1/ 20:1 17:1 16:1 17:1 16:1 Equity Medium-term Portfolio Loan Portfolio 18.0 21.4 18.9 19.0 21.0 Medium-term Portfolio Sight & Term Deposits 19.8 18.5 18.5 19.6 20.5 1/ Excluding provisions Including provisions 16:1 13:1 9:1 11:1 12:1 N.A. EM2IE July 1987 - 77 - ANNEX 5 Table 4 TUNISIA SECOND SMI DEVELOPMENT PROJECT Profitability of Participating Commercial Banks (December 31, 1985) In Percentages of Total Assets BS BT STB Averaze Net Interest Income 3.1 4.0 2.6 2.9 Net Operating Income 3.2 4.4 3.4 3.5 Total Expenses 2.3 2.7 1.9 2.1 Net Operating Profit 0.9 1.7 1.5 1.4 Provisions 0.5 0.9 0.5 0.6 Net Income before taxes 0.4 0.8 1.0 0.8 Net Income after taxes 0.4 0.5 0.7 0.6 Return on equity 8.8% 9.6% 12.7% 11.3% Return on Share Capital 16.0% 17.0% 38.5% 26.5% EM21E July 1987 ANHE.A Table 1 - I1MUZA SECOND SSI DEVELOPMENT PROJECT I. Emoloyment in Participatina Commercial Banks ST1 as ST TOTAL JQ S. IIAL No o IIAL J.0- O. IAL NO sr.. IDIAL Management 4 -- 4 3 -- 3 6 -- 6 13 - 13 Sjpervisory Staff 65 25 90 43 16 59 12 10 22 120 51 171 Staff 220 99 319 128 91 219 45 23 68 393 213 606 Other Personnel 1022 22 1.ZA 21 2 2 1u III 2 J.A 1,A6Z L4 TOTAL 1.311 876 2,187 410 664 1,074 389 186 575 2.110 1,726 3,836 In Percentaces STS as ST TOTAL BELQ.. J& OrIA ..Tk..T AL ..ML s.rL. ..TOIAL ..r.. TOTAL Management 0.3 -- 0.2 0.7 -- 0.3 1.5 -- 1.0 0.6 - 0.3 Supervisory Staff 5.0 2.8 4.1 10.5 2.4 5.5 3.1 5.4 3.8 5.7 3.0 4.5 co 8 Staff 16.8 11.3 14.6 31.2 13.7 20.4 11.6 12.4 11.8 18.6 12.3 15.8 Other Personnel 77.9 85.9 81.1 57.6 83.9 73.8 83.8 82.2 83.3 75.1 84.7 79.4 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 II. Branch Network of Partici2atina Banks STS as BT TOTAL Tunis Region 16 17 19 13 13 13 15 is 15 44 45 47 Other Regions 1a Ii Ii 2 &1 i 2 2 !H 1.l 111 II Total Branches 68 73 78 50 56 57 42 47 48 160 176 183 HQ = Headqu.-rters Br. = Branches July 1987 - 79 - ANNEX 6 Table 2 TUNISIA SECOND SMI DEVELOPMENT PROJECT Ownership of Participating Commercial Banks (as of December 31, 1986) BANQUE DU SUD Local Tunisian Government ) and State Enterprises ) 56% Private Companies 9.5% Private Individuals 19.9% TOTAL LOCAL 85.4% Foreign Monte Dei Paschi Di Siena 13.3% Other 1.3% TOTAL FOREIGN 14.6% BANQUE DE TUNISIE Local Private Individuals 50.3% Private Companies 10.9% TOTAL LOCAL 61.2% Foreign Banca Nazionale de Lavoro 1.8% Banque Transatlantique (Groupe C/I/C.) 12.5% Cr6dit Industriel et Commercial de Paris 11.3% Societe G6n6rale 10.0% Credit Suisse 1.8% Other Foreigners 1.4% TOTAL FOREIGN 38.8% SOCIETE TUNISIENNE DE BANQUE Local Tunisian Government 41.7% ) Stato Enterprises 12.2% ) 53.9% Other Companies (private) 7.5% Private Individuals 38.6% TOTAL LOCAL 100% EM2IE July 1987 - 80 - ANNEX 7 Table 1 TUNISIA SECOND SMI DEVELOPMENT PROJECT BDET - List of Sharehol rs as of December 31, 1986 Amount Percentage I. Tunisian Shareholders A. Public Sector Tunisian Government 7,247,310 24.16 Central Bank 5,031,100 16.77 Government Commercial Banks - Banque Nationale de Tunisie 855,555 2.85 - Soci6t6 Tunisienne de Banque 700,705 2.34 Government Enterprises 439,590 1.46 Total Public Sector Shareholders 14,274,260 47.58 B. Private Sector Private Banks - Union Bancaire pour le Commerce 770,825 2.57 et 1'Industrie - Union Internationale de Banque 68,735 0.23 - Banque de Tunisie 894,720 2.98 - Banque Internationale Arabe de Tunisie 311,970 1.04 - Banque du Sud 49,545 0.16 - Cr6dit Foncier et Commercial de Tunisie 17,550 0.06 Tunisian Individuals Shareholders 1,949,665 6.50 Total Private Sector Shareholders 4,063,010 13.54 Total Tunisian Shareholders 18,337,270 61.12 II. Foreign Shareholders Sultanate of Oman 2,250,000 7.50 Lybian Arab Foreign Bank 2,100,000 7.00 International Finance Corporation (IFC) 1,250,000 4.17 Caisse Centrale de Coop6ration Economique 2,240,000 7.47 Deutsche Entwicklungsgesellschaft 1,500,000 5.00 Kuwait Investment Company (SAK) 850,000 2.83 Banque Arabe et Internationale d'Investissement (B.A.I.I.) 353,695 1.18 Caisse de D6p^ts et Consignations 372,075 1.24 Banque Nationale de Paris 372,415 1.24 Frab Bank International 112,500 0.38 Banca Commerciale Italiana Holding 75,000 0.25 Bank Fur Gemeinwirtschaft 60,000 0.20 Skand'naviska Enskilda Banken 56,590 0.19 Worms & Company 14,600 0.05 Private Foreign Shareholders 28,390 0.09 Total Foreign Shareholders 11t636,175 38.79 Bearer Shares 26,555 0.09 grand Toa Source: BDET EM21E July 1987 TUNISA SECOND ShM DEVELOPMENT PROJECT BDET - Ognzkon Char (JuV1987) PRESIDENT GENERAL MANAGER COMPUTER SERVICES PERSONNEL Mr. Habib Sourgulba Jr. a INTERNAL P*2 8-2 PROCUREMENT AUDITING DEPARTMENT DEPARTMENT Mr. Jarraya Teoufik Mr. A. Abdelhak P*4 S-67 - DEPUTY GENERAL MANAGER P-1 S-I ADVISORS Mr. ChekIb Nowift P- S-2 ADVISOR TO MANAGEMENT Mr. F. Belkahia P-3 S-2 RESOURCE MOBILIZATION PROJECT APPRAISAL ADMINISTRATION COMMITMENTS & PARTICIPATION PROJECT PROMOTION Mr. H. San Soed Mr. So- "2s:t-phe Mr. Nejib Toani Mr. Brahim Riabi Vacant P-t S-1 P-2 3-1 P*1 8-1 P-2 SI1 PROJECTS APPRAISAL TREASURY DEPARTMENT OtSURSEMENTS RESOURCES & STATISTIC PROMOTION DEPARTMENT P-5 S-13 DEPARTMENT DEPARTMENT DEPARTMENT P-17 S*4 P-9 S*13 P-4 S*2 P-9 S1 ACCOUNTING & PARTICIPATION SUPERVISION DEPARTMENT REPAYMENTS DEPARTMENT LEGAL DEPARTMENT L DEPARTMENT . DOCUMENTATION P*1 SP I P-4 S-7 P-7 S9 P-10 S-9 P-2 S-1 1ff 1883 1128 111 19 Management: 003 003 003 002 002 Professionals (P) 089 076 078 080 073 SorceD aE Support Staff (S) 139 125 128 120 120 A21E Total 2 254 20 20 li9s A l987 World Bank-31172 &&’斤〕〕〕〕！〕〕〕〔‘〕〕！! AUIDLI Tahl e 4 SM= ma DEmöp~T ~ECT WET - Löan A=rovalc by S12o of Proläet (11) ThomaiwS) 1981 1992 1982 1984 igas 19M (21.181 Si» of project/1 U, å~ JL är, åffiftint ic. =101 j- nu JL åK 8~ 3- w... -IL 13 to 49.9 1 32.5 -- -- -- -- -- -- 1 3.3 -- - -- -- -- 50 to 199.9 22 1.072.9 1.8 16 710.8 1.1 10 527.0 1.3 10 541.5 1.1 6 354.5 0.8 11 71.0 8.3 288 to 499.9 42 5,315.2 8.8 35 4,194.5 6.7 33 3.683.9 9.1 25 3.032.0 6.3 18 2.952.9 6.6 a 1.070.5 4.9 sno to M.9 ta 3,689.0 6.1 15 2,785.6 4.3 8 1.362.0 3.4 15 4.198.5 8.8 19 5,01.8 11.4 8 2.772.8 12.6 ION to 2000 -U 7~ .8 UJ 11 8,07U.1 -J.L2 14 6.09a,6 J1LI u 42.290,8 M 31 2.644,1 Lj Z 2.367,8 im Subtotal < 2080 102 17.703.6 29.2 82 15,683.6 25.0 65 11,671.5 28.8 68 12,114.5 25.2 57 12,042.9 27.0 21 6.288.5 28.5 > to 2800 -M 42.921,5 2" If 47.088,3 2M l& 29.799,8 ZU U 15.903,1 1" ff 22.596,1 ZLA 11 15.778,7 TOTAL 2M flata* 11 Total investnmts of the projeets finamed by loans WW partjejpatioM. CD EN21E July 1987 - 84 - Table 5 TUNISIA SECOND SMI DEVELOPMENT PROJECT BDET - Summary of Operations (1982-1986) (TD Million) 1982 1983 1984 1985 1986 Loans Approvals 56.51 35.99 46.29 40.37 32.21 Commitments 50.08 40.34 41.95 31.15 25.10 Disbursements 27.83 43.21 41.85 37.57 29.54 Equity Participations Approvals 6.25 4.47 1.73 4.27 1.90 Commitments 7.41 4.70 3.14 2.36 1.86 Disbursements 5.10 5.13 4.05 3.41 1.28 Loans and Equity Approvals 62.76 40.46 48.02 44.64 34.11 Commitments 57.49 45.04 45.09 33.51 26.96 Disbursements 32.93 48.34 45.90 40.98 30.82 EM2IE July 1987 - 85 - ANX_z Table 6 IUNIIA SECOND SSI DEVELOPMENT PROJECT SOET - Foreian Exchange Losses (TO thousand) Government Contribution Losses for the Year Balance due to interest Princi- Interezt Total Government for Cumula- rate diffe- Dal _ Payment; the Year tiXe rential 1/ 1981 2,480.3 1.010.0 3.490.3 1.082.9 2,407.4 2,407.4 1.030.0 1982 1,828.7 1.SS2.9 3.381.6 1,552.9 1,828.7 4,236.1 460.0 1983 8.477.8 2.220.7 10.698.5 2.220.7 8.477.8 12,713.9 2.950.0 1984 5,631.7 2,746.1 3.377.8 2.100.2 6.277.6 18,991.5 3.101.9 1985 9,S12.0 2.243.2 11.7SS.2 - 11.756.2 30,746.7 ' 2.978.4 1986 6,186.7 S,125.7 11,312.4 10,650.0 662.4 31,409.1 - 1987(.Ian.) - - 2.850.0 (2.850.0) 28,559.1 - TOTAL 34,117.2 14,898.6 49,015.8 20,456.7 28,559.1 28.559.1 10.520.3 1/ These amounts are received about 6 months after the end of the fiscal year in which BDET has accounted for them. These are essentially to compensate BDET for: (1) low interest rate loans granted to its clients, particularly FOPRODI. and (ii) interest paid by 8OET on its loans from the Central Bank to finance its foreign exchange losses in arrears by the Government. Soura: BET EM21E July 1987 - 86 - ANXd Table 1UISIA SECOND SMI DEVELOPMENT PROJEC, 8OET: ARREARS OVER THREE MONTHS (Dec. 31, 1986. 1000 TO) A. Loan Size OUTSTANDING OVERDUE Not Yet B Disbursed DMe Qvrdue !AA1 InLerit Princinal I19 Loans Below TO 300,000 127 14.809.2 5,004.8 S.443.9 10.448.7 1.358.5 5,443.9 6.8( Loans TO 300,000 - TO 1 million 46 20.467.0 12.645.9 4.115.9 16,761.8 2.145.0 4,115.9 6.24 Loans over TO 1 million .1 SL22.0 91J4.0LA L2IA. 45.3S.f LZ.A ,.3A3.6 ILL Total Loans 198 88.204.2 56.797.7 15,798.4 72,S96.1 8.375.3 15,798.4 24,1 8. QSe..Ator OUTSTANDING. OVERDUE Not Yet MR Disbursed _QWL_ Ovrdue IAnA1 PnkEr Principal Iak Public Sector 14 17.942.8 12,909.1 2,548.0 15,457.1 1.552.9 2,548.0 4.1 Private Sector 1 Z fil.. 4ALA388.A 1.A 5Z...139.ft LA.4 1220.4 U0A 198 88.204.2 56.797.7 15.798.4 72,596.1 8.375.3 15.798.4 24,1 -------- in percentages -- C. By Loan Size OUTSTANDING OVERDUE Not Yet NB Disbursed D_M_e Ovrdue I2ii Intrst Principal lA Loans below 300,000 64 16.8 8.8 34.5 14.4 16.2 34.5 28. TO 300.000 - TO 1 million 23 23.2 22.3 26.0 23.1 25.6 26.1 25. Loans over TO I million .11 .fLI .29S ..l S-26.1 .4 AL Total loans 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.: 0. By Sector OUTSTANDING OVERDUE Not Yet 8 Disbursed DueL OvArdue lAw 8Inerest Principal 121Ln Public Sector 7.1 20.3 22.7 16.1 21.3 18.5 16.1 17.2 Private Sector .iLj 7.7 7.3, -AL.2 .Z A13 _.9L _31a Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 EM21 July 1987 87 - ANNEX 7 Table 8 TUNISIA SECOND SMI DEVELOPMENT PROJECT BDET - Audited Balance Sheets, 1984-1986 (TD million) 1984 1985 19864A ASSETS Cash 3.64 3.63 3.59 Short-term investments 1.22 1.88 2.57 Receivables: - Foreign exchange losses 16.23 25.01 25.67 Other 17.78 24.55 29.82 Total Current Assets 38.87 55.07 61.65 Long-term loans 194.23 210.63 227.64 (Of which less than a year) (30.57) (39.90) (49.50) Equity participations 25.77 28.55 28.65 Total portfolio (gross) 220.00 239.18 256.29 Less: Provisions (6.78) _(7.74) (8.67) Total Portfolio (net) 213.22 231.44 247.62 Net Fixed Assets 3.25 4.09 4.51 TOTAL ASSETS LIABILITIES Payables 14.70 18.79 16.68 Short-term borrowings 48.10 21.65 37.25 Other short-term liabilities 9.55 8.25 6.27 Total Current Liabilities 72.35 48.69 60.20 Overdraft facility at Central Bank 8.60 8.60 8.60 Long-term borrowings 146.41 199.35 205.73 (Of which less than a year) (16.16) (11.61) (15.73) Share capital 20.00 25.00 30.00 Government contribution 0.50 0.50 0.50 Reserves 7.48 8.46 8.75 Total Net Worth 27.98 33.96 39.25 TOTAL LIABILITIES 255.3 _ - Provisional and non-audited. Source: BDET Audit Report EM2IE Jiuly 1QR7 -88- ANNEX 7 Table 9 TUNISIA SECOND SMI DEVELOPMENT PROJECT BDET - Audited Balance Sheets, 1984-1986 (TD million) 1984 1985 1986 ASSETS Cash 3.64 3.63 3.59 Short-term investments 1.22 1.88 2.57 Receivables: - Foreign exchange losses 16.23 28.00 31.41 Other 17.78 21.56 24.53 Total Current Assets 38.87 55.07 62.10 Long-term loans 194.23 210.63 227.64 (Of which less than a year) (30.57) (39.90) (46.31) Equity participations 25.77 28.55 28.65 Total portfolio (gross) 220.00 239.18 256.29 Less: Provisions (6.78) (7.74) (8.67) Total Portfolio (net) 213.22 231.44 247.62 Net Fixed Assets 3.25 4.09 4.51 TOTAL ASSETS zua LIABILITIES Payables 14.70 18.79 16.68 Short-teria borrowings 48.10 21.65 37.25 Other short-term liabilities 9.55 8.25 6.27 Total Current Liabilities 72.35 48.69 60.20 Overdraft facility at Central Bank 8.60 8.60 8.60 Long-term borrowings 146.41 199.35 205.73 (Of which less than a year) (16.16) (11.61) (15.73) Share capital 20.00 25.00 30.00 Government contribution 0.50 0.50 0.50 Reserves 7.48 8.46 9.20 Total Net Worth 27.98 33.96 39.70 TOTAL LIABILIES _____ LA Provisional and non-audited. Source: BDET Audit Report EM2IE July 1987 -89 - ANNEX 7 Table 10 TUNISIA SECOND SMI DEVELOPMENT PROJECT BDET - Forecast of Operations, 1986-1990 (TD million) 19861/ 1987 1988 1989 1990 APPROVALS Loans 31.50 32.00 34.50 36.00 37.50 Equity 1.90 2.00 2.00 2.00 2.00 Total '3.40 34.00 36.50 38.00 39.50 COMMITMENTS Loans 25.10 32.22 31.53 27.80 29.10 Equity 1.86 1.46 1.60 1.60 1.60 Total 26.96 33.68 33.13 29.40 30.70 DISBURSEMENTS Loans 29.54 28.27 29.92 29.23 28.06 Equity 1.28 1.44 1.43 1.61 1.58 Total 30.82 29.71 31.35 30.84 29.64 1' Provisional Source: BDET EM2IE July 1987 -90 - ANNEX 7 Table 11 TUNISIA Second SMI Development Project BDET - Projected Income Statements, 1986-1990 (TD million) 1986 1/ 1987 1988 1989 1990 INCOME Interest income 20.78 22.20 24.10 25.88 27.15 Interest on Gov. arrears - 3.45 2.43 0.78 - Commissions and charges 0.76 0.76 0.77 0.72 0.74 Profits on sales of investments 0.15 0.23 0.24 0.26 0.29 Other income 0.34 0.40 0.65 0.50 0.50 Dividend receipts 0.27 0.36 0.45 0.52 0.57 Investment tax refund Q..-6_Q Total Income 22.63 27.70 29.30 29.30 29.95 EXPENSES Financial expenses 19.17 20.12 19.78 19.26 18.76 Salaries and wages 1.43 1.95 2/ 2.19 2/ 2.47 2/ 2.85 Administrative expenses 0.80 0.92 1.06 1.22 1.40 Indirect taxes 0.18 0.21 0.23 0.25 0.26 Provision: - Regular 0.60 0.60 0.60 0.60 0.60 - Investment tax refund 0.33 0.30 0.66 0.64 0.70 Depreciation 5 ,5 Total Expenses 23.04 24.82 25.25 24.99 25.14 Net Income before Govt, contri- bution -0.41 2.88 4.05 4.31 4.85 Government contribution 3.60 2.80 - - Net income before tax 3.19 5.68 4.05 4.31 4.81 Income tax 0.45 0.80 0.57 0.60 0.67 Net income after tax 2.74 4.88 3.48 3.71 4.14 Dividends 2.00 2.40 2.40 2.40 2.40 Reserves 0.74 2.48 1.08 1.31 1.74 1/ Provisional 2/ including TD 300,000 of consultant fees for restructuring of the portfolio Source: BDET EM2IE July 1987 -91 - ANNEX 7 Table 12 TUNISIA SECOND SMI DEVELOPMENT PROJECT BDET - Projected Balance Sheets, 1986-1990 (TD million) 1986 1/ 1987 1988 1989 1990 ASSETS Cash 3.59 4.70 5.64 3.69 4.40 Short-term investments 2.57 2.57 2.57 2.57 2.57 Receivables: -Foreign Exchange losses 31.41 28.61 13.61 - - -Unpaid interest 11.79 13.29 13.79 12.79 10.79 -Other receivables 12.74 12.74 12.74 12.74 12.74 Total Current Assets 62.10 61.91 48.35 31.79 30.50 Long-term l)ans 227.64 238.04 247.68 254.40 259.25 of which less than 1 year: -(Repayments) (29.37) (31.78) (31.51) (33.21) (35.18) -(Overdue principal) (21.26) (21.26) (21.26) (21.26) (21.26) Equity participations 28.65 29.52 30.34 31.29 32.17 Total portfolio (gross) 256.29 267.56 278.02 285.69 291.42 Less provision (8.67) (9.57) (10.83) (12.07) (13.37) £ Total Portfolio (net) 247.62 257.99 267.19 273.62 278.05 Net Fixed Assets 4.51 6.83 6.10 5.55 5.72 Total Assets LIABILITIES Payables 16.68 16.68 16.68 16.68 16.68 Short-term borrowings 37.25 - - - - Other short-term liabilities 6.27 6.27 6.27 6.27 6.27 Total Current Liabilities 60.20 22.95 22.95 22.95 22.95 Overdraft Facility at Central Bank 8.60 8.60 8.60 8.60 8.60 Long term borrowings 205.73 253.00 246.83 234.84 236.41 (of which less than 1 yr.) (15.73) (14.17) (17.99) (70.43) (21.96) Share Capital 30.00 30.00 30.00 30.00 30.00 Government contribution 0.50 0.50 0.50 0.50 0.50 Reserves 9.20 11.68 12.76 14.07 15.81 Total Net Worth 39.70 42.18 43.26 44.57 46.31 Total Liabilities g g1g2 Provisional EM2IE July 1987 ANNEk 7 - 92 Table 13 TUNISIA SECOND SMI DEVELOPMENT PROJECT BDET - Projected Cash Flow Statements, 1987 - 1990 1987 1988 1989 1990 SOURCES Cash from Operations 4.10 3.07 3.10 3.61 Long term borrowings 63.00 8.00 6.00 72.00 Loans repayments: Amount to be received 29.37 31.78 31.51 33.2t Reschedulings (11.50) (11.50) (9.00) (10.00) Decrease (Increase) in unpaid interest (1.50) (0.50) 1.00 2.00 Sales of equity participations 0.58 0.62 0.66 0.71 Decrease in foreign exchange losses 2.80 15.00 13.61 - Total Sources 86.85 46.47 46.88 101.53 USES Loan disbursements 28.27 29.92 29.23 28.06 Equity participations 1.45 1.44 1.61 1.59 Repayments: Short term borrowings 37.25 - - Long term borrwings 15.73 14.17 17.99 70.43 Increase in fixed Assets 3.04 - - 0.74 Total Uses 85.74 45.53 48.83 100.82 Increase (Decrease) in Cash 1.11 0.94 (1.95) 0.71 EM2IE July 1987 Table 1 IUNISIA SECOND SM1 DEVELOPMENT PROJECT BTEI - Loan ADDrovals: 1983-86 (Amounts in TD'000) 1983 1984 1985 1986 Hhe Aeount mr iount hmount Nbr h AlwunL S Sector.of Activitr 1-Industry 4 9,032 72.9 4 9,200 82.7 7 17,270 84.1 4 6,160 82.5 2-Tourism - - - 1 720 6.5 1 3,260 15.9 3 1.310 17.5 3-Services 1 3,361 27.1 - - - - - - - - - 4-Agriculture - - - 1 1,200 10.8 - - - - - - Total 5 12,393 100 6 11.120 100 8 20,530 100 . 7 7,470 100 BTEI - Approvals of Particinatins: 1983-86 (Amounts in TD'000) 1983 1944 1985 1986 Kbt Amount V Rhr Amount a Khr AFeunt N h haunt S Activity 1-Industry 1 500 21.0 1 144 9.3 4 4,450 85.6 3 565 45.8 2-Tourism 4 200 8.4 1 228 14.7 1 500 9.6 1 150 12.1 3-Services 4 1,680 70.6 2 780 50.2 1 250 4.8 2 520 42.1 4-Agriculture - - - 2 400 25.8 - - - - - - Total 9 2.380 100 6 1.552 100 6 5,200 100 6 1,235 100 Grand Total 14,773 12,672 25,731 8,70S EM2IE December 1987 Table 2 IHNISIA SECOND SMI DEVELOPMENT PROJECT STEI - Industrial Projects Financed. by Cost of ProJect: 1983-86 (Amounts in TDOOO) Proiect Cost 1983 1984 1985 - - fhr Ameount .... 1r...h Aoun br.h Amont h A Antuno A 1.0 - 4.9 1 1,521 2S 2 3,600 50 2 4,100 33.3 2 2,800 so 1.0 - 9.9 1 6,324 25 1 S,700 2S 1 6.940 16.7 - -- 10.0 - 50.0 2 68,100 50 - - - 3 54.223 50.8 2 60.800 so Larger than 50.0 - - - 1 110,500 25 - - - - - - TOTAL 4 75,945 100 4 119,800 100 6 65,263 100 4 63,600 100 BTEI - Loan ADprovals for Industry. by size of Loan: 1983-86 LD 1983 1984 1985 1986 Loan Amount r ult 2L h. Kbr Imunt A. b.n &Iul r. Kl Amount 300 - 999 - - - 1 400 25 1 940 16.7 2 960 50 1.000 - 1,99 3 4.032 66.7 1 1,600 25 - - - 1 1,200 25 2,000 - 3,000 - - - 1 2,200 25 3 8,000 50.0 - - - Larger than 3.000 1 5,000 33.3 1 5,000 25 2 8,330 33.3 1 4,000 25 TOTAL 4 9032 100 4 9.200 100 6 17,270 100 4 6.150 100 EM21E lecember 1987 -95 - ANNEX 8 Table 3 TUNISIA SECOND SMI DEVELOPMENT PROJECT BTEI - Summary of Industrial Operations; 1983-86 (TD' 000) 1983 1984 1985 1986 Loans Approvals 9,032 9,200 17,270 6,160 Commitments 9,079 8,419 5,940 4,000 Disbu:sements 7,466 6,517 5,940 2,427 Equity Participations Approvals 500 144 4,450 565 Commitments 500 107 3,177 400 Disbursements 500 107 695 100 Loans & Participations Apporovals 9,532 9,344 21,720 6,725 Commitments 9,579 8,526 9,117 4,400 Disbursements 7,966 6,624 6,135 2,527 EM2IE December 1987 - ANNEX 8 Table 4 TUNISIA SECOND SMI DEVELOPM"NT PROJECT BTEI - Audited Income Statjments, 1984-86 (TD' 000) 198t 1985 1986 INCOME Interest Income 1,759 3,597 5,513 Commissions and Charges 227 162 103 Profits on sales of investment 1 50 52 Other income - 7 13 Investment tax refund 83 219 412 Total Income 2,070 4,035 6,093 EXPENSES Financial Expenses 1 6 4 Salaries and Wages 276 315 382 Administrative Expenses 361 357 367 Indirect Taxes 83 219 412 Provisions 113 100 17 Depreciation 14 61 118 Total Expenses 848 1,058 1,300 Net Income before Tax 1,222 2,977 4,793 Income Tax 9 25 49 Net Income after Tax 1,213 2,952 4,744 EM2IE December 1987 ANNEX 8 97 - Table 5 TUNISIA SECOND SMI DEVELOPMENT PROJECT BTEI - Audited Balance Sheets; 1984-86 (TD'O0O) 1984 1985 1986 ASSETS Cash 15,336 17,299 29,811 Short-term investments 16 124 235 Receivables 660 868 1,178 Share capital, not yet mobilized 25,000 12,500 - Total Current Assets 41,012 30,791 31,224 Loans 1 13,059 24,862 31,362 Equity participations 2,459 3,720 7,794 Total portfolio 15,518 28,588 39,156 Net Fixed Assets 854 1,964 2,101 TOTAL ASSETS 57,334 61,343 72,481 LIABILITIES Payables 2,475 1,747 7,313 Short-term borrowings 15 1,600 2,106 Other short-term liabilities 372 370 6,375 Total Current Liabilities 2,862 3,717 15,794 Long-term Borrowings 3,480 3,028 3,361 Share capital 50,000 50,000 50,000 Reserves 1,042 1,598 3,326 Total Net Worth 51,042 54,598 53,326 TOTAL LIABILITIES 57,384 61,343 72,481 EM2IE December 1987 98 ANNEX 8 Table 6 TUNISIA SECOND SMI DEVELOPMENT PROJECT BTEI - Performance Indicators, 1984-86 1984 1985 1986 RATIOS Loans and participations Total Assets 27.0% 46.6% 54.0% Profits Share Capital 7.4% 10.7% 12.1% Net Income Share Capital 6.8% 10.4% 12.0% Dividends Share Capital 4.2% 4.1% 4.8% Debt Equity . 17.3:1 11.0:1 4.8:1 Income from Equity Participations TD1,058 TD50,000 TD51,750 Return on Average Investment 0.2% 5.2% 3.8% EM2IE December 1987 -99 - ANNEX 8 Table 7 TUNISIA SECOND SMI DEVELOPMENT PROJECT BTEI - Forecast of Operations, 1987-91 (TDOOO) 1987 1988 1989 1990 1991 APPROVALS Loans 6,955 25,500 34,000 42,500 51,000 Equity 1,232 4,500 6,000 7,500 9,000 Total 8,187 30,000 40,000 50,000 60,000 COMMITMENTS Loans 5,300 12,750 17,000 21,250 25,500 Equity 1,175 2.250 3,000 3,750 4,500 Total 6,475 15,000 20,000 25,000 30,000 DISBURSEMENTS Loans 5,031 10,200 13,600 17,000 20,400 Equity 2,095 1,300 2,400 3,000 3,600 Total 7,126 12,000 16,000 20,000 24,000 EM2IE December 1987 -100 - ANNEX 8 Table 8 TUNISIA SECOND SMI DEVELOPMENT PROJECT BTEI - Proiected Income Statements; 1987-1991 (TD'000) 1987 1988 1989 1990 1991 INCOME Inter. Income 3,691 4,344 5,697 7,252 9,141 Inter. on Stocks 2,905 3,192 3,102 2,333 903 Other Income 943 1,078 1,258 1,371 1,436 Dividend receipt 30 234 423 513 621 Total Income 7,569 8,847 10,480 11,469 12,102 EXPENSES Financial Exp. - 480 1,120 1,360 1,300 Salaries & Wages 426 447 470 493 518 Admin. Exp. 202 215 227 242 257 Indirect Taxes 1,532 1,745 2,028 2,210 2,324 Provisions 107 360 660 810 848 Depreciation 129 132 135 138 141 Total Expenses 2,396 3,379 4,640 5,253 5,388 Net Income before tax 5,173 5,458 5,840 6,216 6,714 Income tax - 547 584 622 671 Net Income after tax 5,173 4,921 5,256 5,595 6,043 Dividends 2,000 2,000 2,000 2,000 2,000 Reserves 3,173 2,921 3,256 3,595 4,043 EM2IE December 1987 - 101 " ANNEX 8 Table 9 TUNISIA SECOND SMI DEVELOPMENT PROJECT BTEI - Proiected Balance Sheets; 1987-1991 (TD's million) 1987 1988 1989 1990 1991 ASSETS Cash 29,049 31,917 31,016 23,334 9,034 Receivables 1,941' 2,337 2,805 3,365 4,039 Total Current Assets 30. 97 34,254 33,821 26,699 13,073 Long term loans 30,760 36,197 47,479 60,436 76,16 Participations 9,889 1,689 14,089 17,089 20,689 Total portfolio gross 40,649 47,886 61,568 77,525 96,865 Less Provisions 428 788 1,448 2,258 3,105 Total Portolio (Net) 40,221 49,098 60,120 75,267 93,760 Net Fixed Assets. 1,811 1,749 1,684 1,646 1,605 Total Assets 73,029 83,101 95,625 103,612 108,438 LIABILITIES Payables 11,515 12,666 13,933 15,326 16,859 Long term Borrowings - 6,000 14,000 17,000 16,250 Share Capital 50,000 50,000 50,000 50,000 50,000 Reserves 11,514 14,435 17,691 21,286 25,329 Total Net Worth 61,514 64,435 67,691 71,286 75,329 Total Liabilities 73,029 83,101 95,624 103,612 108,438 EM2IE December 1987 ANNEX 8 Table 10 I TUNISIA SECOND SMI DEVELOPMENT PROJECT BTEI - Projected Cash Flow Statements; 1987-1991 (in TD '000) 1987 1988 1989 1990 1991 SOURCES Share Capital Called - - - - - Cash from operations 5,409 5,413 6,051 6,543 7,031 Long-term borrowings - 6,000 8,000 3,000 - Loan repayments 2,271 4,763 2,318 4,043 4,660 Reduction of permanent working capital 722 762 799 832 860 Total Sources 8,402 16,938 17,168 14,418 12,551 USES Loan disbursements 5,031 10,200 13,600 17,000 20,400 Equity Participation 2,085 1,800 2,400 3,000 3,600 Repayments of long-term borrowings - - - - 750 Increase in fixed assets 50 70 70 100 100 Payment of dividends 2,000 2,000 21000 2,000 2,000 Total Uses 9,176 14,070 18,070 22,100 26,850 Increase(Decrease) in Cash 12,604 -774 2,868 -902 -7,682 14,299 EM21E December 1987 103 - ANNEX 8 Table 11 TUNISIA SECOND SMI DEVELOPMENT PROJECT BTEI - Projected Cash Flow Statements: 1986-90 (TD'000) 1987 1988 1989 1990 SOURCES Cash from Operations 61,545 77,905 94,815 111,875 Long-term Borrowings - 6,000 8,000 3,000 Loans Repayments 2,600 5,700 9,400 13,400 Other - - 5,000 10,000 Total Sources 64,145 89,605 117,215 138,275 USES Loan Dic'3ursv ents 6,740 12,000 15,000 25,000 Equity Participations 4,150 3,400 2,400 2,400 Repayment of Short-term Borrow. - - 3,000 6,000 Others 1,750 1,950 8,150 10,150 (o.v. foreign exch. losses) (915) (1,500) 1,650) Total Uses 12,640 17,350 28,550 43,550 Increase (in cash) 51,505 72,255 88,665 94,725 EM2IE December 1987 *104 - ANNEX 9 TUNISIA SECOND SMI DEVELOPMENT PROJECT Disbursement Schedule Fiscal Quarter Quarterly Cumulative Year Ending Disbursement Disbursement 1988 June 1988 700 700 1989 September 1988 300 1,000 December 1988 600 1,600 March 1989 400 2,000 June 1989 600 2,600 1990 September 1989 600 3,200 December 1989 700 3,900 March 1990 1,100 5,000 June 1990 1,300 6,300 1991 September 1990 1,600 7,900 December 1990 2,100 10,000 March 1991 2,000 12,000 June 19SL 1,800 13,800 1992 September 1991 1,600 15,400 December 1991 1,400 16,800 March 1992 1,500 18,300 June 1992 1,500 19,800 1993 September 1992 1,000 20,80c, December 1992 1,000 21,800 March 1993 1,000 22,800 June 1993 1,000 23,800 1994 September 1993 800 24,600 December 1993 800 25,400 March 1994 700 26,100 June 1994 500 26,600 1995 September 1994 400 27,000 December 1994 500 27,500 March 1995 200 27,700 June 1995 200 27,900 1996 September 1995 100 28,000 EMIE December 1987 NOTES MAP SECTION 37 T E AoNI,S 37' Ne.4 \ - ANA PBEN Tbourbo laK.bb:. BEJA ne Men....eI TeO~e E N O U BA-Z °""" E J A °M ' c .-' Korbo ZA UAN j JE A esuk1 ho nNABEL S,,kAk. P, d. F.h,zomoe -CJ LEKEF - Efd il 35' Oisbliona L E seC DC OUSSEsoussE K......tor n sJ K A l UA MAHDIA AHDI K A SSE R 11N De A In0- ch.bt. - KASSERINE -3s SIDI BOWZID D ..nin 35t 3.1y mOZEU 3c 7j~ SlDUBOZiSSOFAA MF2zn 7 M~ GAFSA eion aEtol EI GE E- s.kh,,. 4- TOZEUR TOZEUR AE Sa11 - Nefte GABEundSis SorotHou0ocoCopsouk.32 GABES Dro" KE1B LI l Mtr-th K E B l L l - Z i MEDENINE Kgidach. -33' Ghom~.se T UN l S l A 21 0 75ATAOUINE - 01 KIL02 0 ES ' National Capital1 * Governorate Capitalsnumptsb ~rdy - Poved Roads for1 ~e c ~wgnc r Railways Olk~, ®M-d a. Port$ C. ~eh 7Mrdn -Ftnc Aif por,s ~se ~ Omc bond5. ~ sow Sal t L.okes t hea ~P d. -t V Govefnorate Boundaries himb tF-.nc Coror~in 32t- [ALIB -International Boundaries & ^n t~ ör w 8 /NGE CHAD -