Tunisia - Review of development plan 1965-1968 (Vol. 4 of 7) : Industry

RESTRICTED FILE COPY Report No. AF-39a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REVIEW OF 1965 - 1968 DEVELOPMENT PLAN TUNISIA VOLUME IV Industry November 22, 1965 Africa Department  CURRENCY EQUIVALENTS Prior to September 1964 U.S. $ a .420 Dinars Since September 1965 U. S. $ a . 525 Dinars  INDUSTRY Table of Contents Page As RECENT GROWTH TRENDS AND STRUCTURAL CHARAlCTERISTICS 1 B. THE THREE-YEAR PLAN, 1962-1964 8 C. THE FOUR-YEAR PAN, 1965-1968 10 General 10 Mining 12 Petroleui 15 Chemicals 16 Construction materials 17 Paper and printing 18 lVoodworking, furniture 20 Food industries and tobacco 20 Textiles and clothing 22 Itiechanical and electrical industries 26 Tourism 29 Conclusions 32 Appendix I - Incentives for Private Investment in Tunisia 34 - Organization of Private Foreign Investment - Preliminary Approval 34 - Incentive for Foreign Private Investments 35 - The Guarantee of Foreign Private Investments 40 Appendix II - Fertilizer Project - "Industries Chimiques Maghrebines" 43  Table of Contents (continued) ANNEX: I. Value Added in Manufacturing and Ivlining II. Industrial Activity Index III. Output and Export of Industrial Products IV. Industrial Employment V. Estimated Net Industrial Profits After Tax VI. Sample of Industrial Companies Controlled by the Government of Tunisia VII. Three-Year Plan (1962-1964) - Industrial Investments VIII. Investments in Tourism (1962-1964) IX. Industrial Product by Branch - Tentative Comparison of the Plan Targets with Actual Results (1960-1964) X. Incremental Capital-Output Ratios by Branch (1960-196)4) XI. Value Added and Growth Rate by Industrial Sector XII. Mining Sector XIII. Chemical Industries XIV. Construction Materials XV. Agricultural Industries and Food Processing XVI. Textiles, Clothing and Leather XVII. IMechanical Industries XVIII. Investments in Tourism (1965-1968) XIXo Net Capital Formation in Industry (1965-1968) XXe Estimated Industrial Employment by Sector  INDUSTRY 1. Tunisia does not have a large domestic market, nor - broadly speaking - rich raw material resources lending themselves to a major industrial transformation. Tunisians have a long standing tradition of trade and prefer investment in commerce. Finally, the technical and managerial skills essential for the successful running of industrial undertakings are still very limited, On the other hand, Tunisia has some compensating advantages. There is a substantial reservoir of unemployed labor and labor costs are still low. And, small as the market is, the potential for import substitution has not yet been entirely tapped. Finally, and probably more important, for the long run industrial pros- pects, Tunisia is favorably located near Western Europe, in the center of the growing Mediterranean market and,if the Maghreb becomes an economic entity, Tunisia is in a good position to profit from its larger markets. The possibilities of attracting European management and capital and the opportunities to produce and sell labor intensive manufactures abroad should be quite favorable in the long term, especially if Tunisia has free access to Western European markets. 2. Since independence, in 1956, the bulk of investment in the indus- trial sector has been carried out through public enterprises, either fully owned by the State or with capital participation by private investors, but in both cases with management directly responsible through various ways to the Administration. The rationale for the State's direct capital and managemient participation in commodity producing activities was the belief that the private sector, at the initial stage of industrialization, could not be adequately relied upon to introduce modern enterprises in a traditionally-oriented society because Tunisian entrepreneur expertise, wvhen independence came, was available only in the traditional sectors of the economy: agriculture, commerce and artisanat. All activities in the modern sectors of the economy at that time were directed by non-Tunisians. In addition, it was obvious that, if rapid industrial expansion were to be achieved, the Government would anyhow have to assist financially due to the scarcity of capital in the private sector. A. Recent growth trends and structural characteristics 3. At independence, in 1956, Tunisia had a much smaller industrial base than Algeria or Morocco, as a result chiefly of its more meager natural resources and smaller market. Processing of raw materials for export (phosphates, olives) and manufacture of building materials (cement, plaster, bricks and tiles) were the main industrial activities. A few consumer goods (soap, shoes) were produced on an industrial scale. Almost all large scale industry was French owned. There was also a very extensive handicraft sector, turning out art goods such as carpets, clothing, fur- niture, ceramics and jewelry. Industry grew only by 3.5 percent per year  - 2 - from 1950 to 1956 and did practically not grow at all from 1957 to 1959. However, in recent years, manufacturing and mining production has increased rapidly. The value added by manufacturing and mining output,which had only increased from Dinars 26.0 million in 1950 to Dinars 32.9 million in 1957, reached about Dinars 53.0 million in 1964. i In 1964, industry contributed 14 percent of gross domestic product at factor cost. 4. Changes in the industrial structure between 1960 and 1964 are shown below in percentages of value added: 1960 1964 Food processing 41.6 % 40.0 IlMining 16.2 14. 2 Textiles, clothing 16.2 15.4 Construction materials 8.7 8.7 Others 17.3 21.7 Total 100.0 % 100.0 % 5. The enlarged share of 'others" in total added value between 1960 and 1964 is due to the increase in petroleum products and in pulp and wood products, reflecting a tendency to growing diversification of Tunisian large scale industries. But food industriew rei-vrin tie larDjest singlc industrial branch in Tunisia. 6. From 1960 to 1964, industrial activity grew at the average rate of about 6 percent Fer year. For food processing, groTwth has been about 5 percent per year. The main products which contributed to that expansion were wine, olive oil, fruit and vegetable canning, and sugar. Processed cereals and semolina have declined somewhat. Among the other manufacturing industries, building materials, ceramics and glass grew at the average annual rate of 6.1 percent, due to increases in output of cement, lime and bricks. Mechanical and electrical industries developed at the high rate of 9.1 percent per year (the largest increase of output was in metal goods); wood products and furniture grew by 9.7 percent per year and paper and miscellaneous by 8.0 percent per year. In the other sectors growth has been smaller, inferior to the growth rate of GNP. ChenCica.S gre-T onl: by 2., -percent ner In. -4-:icl cr.r -e explainec I lol incre!se in swerphosnhatcs outm T. ?zxtilez outnUt incre--sod by 4.0 percent pernnnur. In ni-din-, pcrformance has not been i; ?ressive due to n~ decline in lead and iron ore out'mt. Tlhis decline -as coupen8ated b-- -n increase in p1osp'-te outtiit ut the sector, as a - .cle, grew only o-. 2.7 ?ercent 'ierarnuui froii 1960 to 1964. ./ 7. Tunisian industry has been established both through the processing of domestic materials and the use of imported inputs. Alanufacturing industries produce largely for the local Tunisia market (Annex III). 1/ Data are in 1957 Dinars. The figure for 1964 is estimated. 2/ See Annex II for indent of ind-udriTl output'- 4 r-.nc/i 1960-1960.  -3 - Export industries are mainly thosein which very little if no processing at all is involved, such as for wine, olive oil and mining products. The only exception is superphosphates, which is an industry largely built for export. The ratio of' manufactured exports to manufacturing output stood at 21.2 in 1963D 1/ 8. The Mission tried to obtain some rough indications of the degree of baclkvard linkage to the import sector and to the domestic economy of various manufacturing industries. About 20 to 25 percent of the value of domestically produced manufactured goods in 1961 are heavily dependent on imports. On the other hand, important industries such as food products, chemicals and cement, to name a few, make substantial use of local raw materials. Forward linka-,es are, in most cases, small since the bulk of manufacturing output goes directly to final demand. There are excep- tions - cement, chemicals and oil products provide important inputs into construction and other domestic manufacturing sectors. 9. A substantial part of recent increases in production of manufactured goods has substituted for imports (petroleum products, sugar, textiles, vehicle assembly, etc.); indeed, in certain cases this is already clearly notice able in terms of reductions in import volumes in recent years. The import substitution is likely to be relatively less important in the future with the foreseen expansion of fertilizers, oil and rock phosphate which are mostly for export. 10. Tunisian industry has not yet everywhere reached a high standard of productivity and economic efficiency. There is much variation as between different sectors in their degree of international competitiveness, as is illustrated by the following examples: (a) Superphosphates: Tunisian fertilizers are exported to the world market at competitive prices. At present prices, the largest ferti- lizer company in Tunisia breaks even at 60 percent of capacity. For phosphate fertilizers sold in the Tunisian market, the selling price is fixed by Government below cost. (b) Esparto pulp: Local output is too small to be sold at com- petitive prices. World competition is stiff. However, if the present capacity can be increased, as expected, to 80-90 tons per day, Tunisia should be able to eyxport its production at competitive prices. (c) Hardware: The small scale of output, with equipment costs spread over a small number of units, renders specialization of workers scarcely possible, and results in high production costs. (d) Textiles: Spinning and weaving in large scale factories are now competitive with European prices. Serious efforts have been made to improve productivity; labor wages are low. 1/ See Annex III  - 4 - (e) Assembly lines (vehicles, tractors, household equipment) and metal products: In general, production of these goods is not competitive due to the small degree of integration and the lack of coordination between contractors. A decision to start producticn locally is often followed by a rise in domestic selling prices. (f) Processed fruits and vegetables: It is doubtful that most Tunisian food industries are competitive. There is considerable evidence of underutilization even of present modern equipment based in part on insufficient organization of the assembly of raw materials and on lack of adequate grading and quality standards. This industry should be modern- ized if it wishes to obtain a share of the European market. (g) Cement: Local prices are higher than c.i.f. prices. 11L The general level of tariff protection is low. There is a tendency to resort more to quantitative restrictions or even prohibition of com- peting imports in order to provide a sheltered market for local industries. This can, of course, be very dangerous; complete lack of competition may lead to the establishment of industries without due regard to the limits of the domestic market and, once established, to inefficiency and waste of resources. 12. Industrial climate. Prior to Tunisian independence, French policy liked to leave to private initiative the installation of new factories or the expansion of existing ones. official intervention was not favored. Since independence, for reasons explained earlier, key industries were placed under direct or indirect control of the State, with the government in many cases owning a majority of the stock. 1/ 13. The degree of State control is probably not much less in the case of partial State participation than in the case of majority State ownership. Mloreover, it must be remiembered that foreign exchange controls 2/ and the quasi monopoly that the State has in providing credit, especially of a medium or long-term character, constitute further powerful instruments of State intervention in the industrial sector. 14) Although exact figures are lacking, probably 90 percent of new industrial investments since 1960 has been invested in companies in which the Gover ient or its agencies have a controlling interest. Private in- vestment - averaged not more than Dinars 1 million per year from 1960 to 1963. 15. Various "Offices" supervise, and directly or indirectly dictate policy in many industries (mining, fishing, textiles, etc.). In some cases they take the place of importers (for the stated purpose of replacing monopolies and tightening foreign exchange controls), which can create j See Annex VI. 2/ These controls provide virtually complete regulation of expansion plans since practically all machinery must be purchased abroad. / Excluding oil investments.  - 5. - problems if the purchasing office concerned has insufficient knowledge of the needs of the industries they are supplying or if centralized government purchasing greatly increases the time required for obtaining supplies needed, thereby adding to the time necessary for completing a project. 160 The Tunisian Government has stated its intention to favor the further development of industry by private enterprises, and as wishing to confine itself to the establishment and operation of industrial projects only when it regards the investment to be of major national importance and when private capital is not available to undertake it. 17. In fact, a climate in which private investors have sufficient con- fidence does not yet exist. There are several reasons for this. Foreign investors may still be hesitant to commit new capital because of nationali- zation measures taken in the past under the decolonization program. And, generally, the mission obtained the impression that there still are impor- tant "psychological" impediments to private investment in industry due to the leading role the Government has played thus far in industry and cormerce, to apprehension about the many controls, including price and investment controls which seem to hamper free expansion. 18, The number of potential industrial entrepreneurs in Tunisia is not likely to be very large. However, the Mission saw evidence that there are more potential industrial investors and entrepreneurs than is commonly thought, and that a positive effort to encourage them might well result in a considerably greater volume of private Tunisian investment than is some- times expected by the authorities concerned. This is evidenced also by the substantial private investments which are now taking place in the tourist field, which the Government is leaving mostly to private initiative. 19. The handing over of the Societe Nationale d'Investissement (SNI) to the private sector and the soliciting of support from IFC and foreign banks for this reconstruction, can be seen as a positive indication of the CGovernmentTs desire to increase private participation in industrial development. 20. Industry conditions. The major problems have been in the field of labor, financial profitability, utilization of capacity and supply of raw materials and spare parts. 21. Labor. Employment in manufacturing is currently estimated at about 72,000 and in mining at 15,000. Total industrial employment in 1964 was only 7.1 percent of total estimated employment in Tunisia. The percentage grows to 13.3 perc,ent if one includes 76,000 workers employed in the handi- craft industry. 1 It is now expected that employment in large scale industry could reach a maximum of 10 percent of total employment in Tunisia by 1968. 22. The major problem in industries, public and private, has been the shortage of qualified manpower, particularly of managers, technicians and accountants. This is realized by the Government and reflected in the 1/ See :,nnex IV.  educational program. After independence, highly trained (as well as highly priced) foreign technicians have often to be replaced at all levels of management by inexperienced men with only superficial training. This has inevitably led to inefficient operations and thus to a poor competitive position. Some industries like textiles have realized the importance of the problem and engaged in technical cooperation agreements with foreign partners. 23. The problem involves not only the present lack of adequate managerial talent but it also fosters sometimes a training obstacle in the form of inadequate awareness of both how much there is to learn to become an effec- tive manager and how much skill is necessary to avoid the many pitfalls of starting new enterprises, especially large integrated ones. Too often there is the feeling that a couple of years on-the-job training provides "experienced" department and company heads. 24. Basic wages and salaries are officially controlled. However, in many cases, incentive systems tend to increase labor cost very substantially. In Tunisia, the present average minimum hourly wage for semiskilled workers is 110 millimes, i.e. about 22 US cents. Premiums can go up to 60 percent above the basic rate. On the whole, labor cost remains low but skilled labor wages have tended to increase, due to scarcity of good, qualified workers. A skilled worker can earn from Lo to 60 US cents an hour. Engineers are not very well paid in relation to their scarcity; young engineers would earn only US$200 equivalent a month in Government-controlled jobs; in private industry, engineers are paid substantially more. 25. The statistical evidence compiled by the Mission indicates that absenteeism and turnover in Tunisia are not high. The turnover in most industries is 3 to h percent or less for workers and lower for foremen. Typical gross turnover in the United States is estimated to range between 2 and L percent. 26. Utilization of capacity. Large-scale factories visited by the Mission had an average utilization of caDacity of 80 percent. Utilization factor was 100 percent in cotton textiles and superphosphate fertilizers. A sugar mill worked at 70 percent of capacity. The esparto pulp factory worked only at 25 percent capacity due to technical troubles, which occurred since the plant came into production in 1963. Other factories had low utilization of capacity as well, especially metal working and mining (except phosphates and some large mines) due to lack of demand and sometimes inefficiency in running the plant. There is also under-utilization of capacity in many small handicraft industries where competition is severe. On balance, the average utilization of capacity is rather high in Tunisia, but the small capacity of many units still remains an obstacle in reducing costs. 27. Supply of raw materials and spare parts. Because of slow and irregu- lar deliveries and of difficulties in clearing imports through customs, the producer in Tunisia must invest capital into relatively large stocks of raw materials and spare parts. The efficiency of the customs procedures in  - 7 - clearing imports is being questioned by many producers and difficulties in obtaining regular supplies of equipment and spare parts are cited by most industrialists interviewed by the Mission as a major eource of trouble. The situation has deteriorated even more with the tightening of foreign exchange controls. 28. Rates of return. An overoptimistic assessment of local conditions (labor, supplies, cost of plant) and sometimes bad management have resulted in losses in several cases. A financial analysis of companies visited and/or studied by the Mission shows that, on the average, the net return on sales is about 1 to 6 percent in large-scale manufacturing 2/. This reflects the difficulty to operate efficient industries in present local conditions. 29. Incentives. The Government is officially committed to assist indus- trial growth by several means. In approved cases, new industries may be granted important income tax concessions, exemption from import duties, freedom to employ foreign managerial and technical Fersonnel. Incentives are given in the form of Letters of Establishment, - Letters of Guarantee,2/ and Letters of Agreement./ Such incentives are not automatic but must be applied for in each case (since it is desired to make thern available only to those activities deemed beneficial to the economy). Only approximately two to three percent of the applications qualifying for new ventures have been rejected. Approved foreign investors may obtain advance permission to remit both profits and initially invested capital abroad./ p The Govern- ment's policy with respect to protection against foreign competition has already been discussed earlier in this Report. 30, There is rio corporation tax system. Corporations pay income taxes. Capital gains (realized profits) are treated as ordinary income, as are dividends and interest. In addition to the advantages granted to new approved enterprises under Letters of Establishment, tax payers are encouraged to invest up to 30 percent of their income in approved companies with a minimum capital of at least Dinars 50,000 by being allowed to deduct such investments from their taxable income. 31. The Mission recommends consideration of several possible measures to increase the efficiency of present incentives and thereby to improve the present industrial climate. 1/ See Annex V. v/ Necessary for obtaining tax incentives and Government contracts. 3/ Free transfer abroad of profits and initially-invested capital. 2J Necessary to obtain Government approval before starting a new business or enlarging a going concern. See Appendix I describing incentives for industry.  - 8 - (1) Creation of a comprehensive investment code assembling legis- lation on various incentives now scattered among miscellaneous texts. (2) Elimination of taxes on dividends originated from earnings on which corporations pay a tax. This could be justified as removing double taxation. It would be a big step in the direction of making equity shares competitive with other forms of investment. (3) Dividend income to aliens having funds invested in Tunisia to be made convertible immediately into foreign exchange. This should be done as a rule and there should be no need for negotiating repatriation of dividends on a case by case basis with the Government. (4) The initial capital invested by aliens in approved enterprises to be made convertible automatically as well. (5) Elimination of the need to obtain Government approval before starting a new business or enlarging a going concern. Prior approval might remain coDmpulsory for large size investments that the Government would consider as essential for the economy. The free limit for invest- ing without Government approval could be fixed once and for all by agree- ment between business and Government representatives. (6) Effective implementation of the Government's declared intention of selling successfully-launched public enterprises, belonging to sectors in which the state considers its permanent direct presence not required. 32. The long run delvelopment needs of Tunisia, rather than the wish to establish a maximum number of factories as rapidly as possible in the short run, warrants, in the l4ission's view, serious consideration of bolder and more imaginative policies of inducement of the private entre- preneur and investor such as indicated above. Tunisia in the present step of its development will have to tap all available administrative, organiza- tional and managerial talents, as well as a maximum amount of private savings if the envisaged development targets are to be realized and maintained in the future. B. The Three-Year Plan, i962-1964 33. In the Three-Year Plan, agriculture was given 43 percent of total projected investment to industry's 18 percent, but in actual investments industry outpaced agriculture 23 percent to 21 percent, making it rank first in total expenditures. The level of investrent in industry was roughly the same as assumed in the Three-Year Plan, allowing for price increases; in other words, industry's share of total investments was larger than foreseen only because of the shortfall in other sectors. 34. On the basis of domestic fixed capital formation, industry performed as follows in 1962-1964:  Pre-Plan Projection Actual (milLions of l957 dinars) (millions of current dinars) total total 1962 1963 196L 1962-61, 1962 1963 196L 1962-64 Net fixed capital formation 15.1 17.0 17.0 L9.1 11.9 16.3 27.2 55. Gross capital formation 16.8 18.9 18.9 54.6 1302 18.1 30.2 61.5 35. The distribution of investment by branch was heavily influenced by large projects, making for large fluctuations from year to year in expen- diture by branch. Petroleum products absorbed the largest slice of investment, largely accounted for by the construction of the refinery at Bizerte, oil exploration; and investments in gas distribution facilities. Investments in food processing, although higher than foreseen in the Plan, were much below previous years. In 1962, paper was the second largest branch, after petroleum, due to the completion of the Kasserine pulp plant. In 1963, mining (phosphates) and chemicals (superphosphates) moved up rapidly. In 1964, textiles increased substantially (investments in cotton spinning and weaving and in wool clothing), but the metal working and mechanical industry (iron and steel plant) was by far the leading branch in capital formation that year.2/ 36. When comparing actual investments with plan target;s, the only sub- stantial shortfall was in chemicals, due to the Dinars 4 million allotted for a fertilizer plant at Gabes not being utilized - the project is still being studied and construction is not expected to start before 1966. The shortfall in chemicals was compensated by higher investments than anticipated for the iron and steel plant near Bizerte: Dinars 1103 million instead of Dinars 5.6 million due to speeding up of plant construction; the plant is expected to start production early in 1966. 37. Given the pre-existing industrial structure, which met a considerable share of domestic needs in food, tobacco and cement, the composition of investment appears on the whole reasonable. There was considerable diversity, with investments in spinning, weaving, and finishing plants; in food pro- cessing plants; a petroleum refinery; manufacture of paper pulp; iron and steel foundries; a small integrated steel mill; hardware; truck and bus assembly; a cement plant; superphosphate plants; fabrication or preparation of pharmaceutical specialties; the assembly of diesel motors, tractors and household equipment. j Estimated, assuming depreciation equal to 11 percent of net fixed capital formation (10 percent of gross). See Annlcx VII.  - Do - 38. The development program can hardly be criticizcC2e because of the prominent role of a few