Tunisia - Towards the 21st century (Vol. 2 of 2) : Annexes

Report No. 14375-TUN Republic of Tunisia Towards the 21 st Century Country Economic Memorandum (In Two Volumes) Volume II Annexes October 1995 Country Operations Division Country Department I Middle East and North Africa Department h-'I', '', ''<,i' WCk '' 7.'.~~~~~~~~~~-'~ ;. ~ ~~~ ..F _ 1i 9et ' '-- X, - _ , - ' ~W V 7,~ ~ ~ ~ ~~~- %~ ' --;- .-~~~* _- "N x 7~f * -.-, -,-~~~~~~~~~~~~~~~~~~~~~. "e7 4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  Currency and Exchange Rates Currency Unit: Tunisian Dinar (TD) TD per US$ Period Averages 1980=0.4050 1981 =0.4938 1982=0.5907 1983 =0.6788 1984=0.7768 1985 =0.8345 1986 =0.7940 1987 =0.8287 1988 =0.8578 1989=0.9493 1990=0.8783 1991 =0.9246 1992 =0.8844 1993 = 1.0037 1994=1.0126 (est.) Fiscal Year January 1st - December 31st Weights and Measures Metric System  ABBREVIATIONS AND ACRONYMS ANPE Agence Nationale de Protection de l'Environnement (Environment National Agency) BCT/CBT Banque Centrale de Tunisie (Central Bank of Tunisia) BNA Banque Nationale Agricole (Agricultural National Bank) CDs Certificates of Deposits (Certificats de Dep6t) CNSS Caisse Nationale de Securite Sociale (National Social Security Fund) CPI Consumer Price Index (Index des Prix a la Consommation) CTN Compagnie Tunisienne de Navigation (Tunisian shipping company) EPA Etablissement Public Administratif (administrative entity) EPIC Etablissement Public Industriel et Commercial (quasi-commercial entity) EU European Union (Union Europeenne) FDI Foreign Direct Investment (Investissement Direct Etranger) FODEP Fonds de Depollution (Anti-Pollution Fund) FTA Free Trade Agreement (Accord de Libre Echange) FTZ Free Trade Zone (Zone de Libre Echange) GATT General Agreement on Tariffs and Trade (Accord General sur les Tarifs Douaniers et le Commerce) GDI Gross Domestic Investment (Investissement Interieur Brut) GOT Government of Tunisia (Gouvernement de Tunisie) IDF Institutional Development Fund (Fonds de Developpement Institutionnel) INNORPI Institut National pour la Normalisation des Produits Industriels (National Institute for Industrial Products Normalization) INS Institut National de Statistiques (National Institute of Statistics) MEAT Ministere de l'Environnement et de l'Amenagement du Territoire (Ministry of Environment and Regional Planning) MMR Money Market Rate (Taux du Marche Monetaire) MOA Ministry of Agriculture (Ministere de l'Agriculture) MOH Ministry of Health (Ministere de la Sante) NIE Newly Industrializing Economies (Economies Nouvellement Industrialisees) OC Office des Cereales (National Agency for Cereal Marketing) OECD Organization for Economic and Cooperation Development (Organisation de Cooperation et de Developpement Economiques - OCDE) ONAS Societe Nationale d'Assainissement (National Sewerage Company) ONH Office National de l'Huile (National Agency for Edible Oil) O&M Operation and Maintenance (Exploitation et Entretien) QRs Quantitative Restrictions (restrictions quantitatives) SICAF Societe d'Investissement a Capital Fixe (closed-end mutual fund) SICAV Societe d'Investissement a Capital Variable (open-end mutual fund) SME Small-Medium Sized Enterprises (Petites et Moyennes Entreprises) SONEDE Societe Nationale d'Exploitation et de Distribution des Eaux (National Water Supply Utility Company) STAM Societe Tunisienne d'Affretement Maritime (Tunisian cargo-handling company) STIL Societe Tunisienne d'Industrialisation Laitiere (National Company for Milk Marketing) VAT Value-Added Tax (taxe a la valeur ajoutee) WTO World Trade Organization (Organisation Mondiale du Commerce)  List of Definitions Accord de place Informal agreement between commercial banks not to compete for deposits based on interest rates. Appel d 'oifres A weekly auction by the Central Bank of a fixed amount of seven-day funds provided to commercial banks. The appel d 'oifres operations are based on precisely defined collateral (loans to priority sectors, e.g. agriculture, micro-enterprises. Bon d'equipement Treasury bonds mandatorily placed by the Government. Bon du Tresor Treasury Bills at market-related interest rates. Bon du Tresor negociable Treasury Bills negotiable (NTB) on the bourse and set at maturities of five years or more. Contrat de liquidite ou Obligation for commercial banks to repurchase the securities sold to Accord de liquidite customers virtually on demand regardless of maturity. Enprunts nationaux "National loans", borrowing of the Government through bond issues. Prise en pension A seven-day repurchase facility at a higher interest rate than the appel d'offres, designed to provide banks with additional liquidity. The report is a product of a team consisting of Linda Likar (Task Manager), Norman Loayza (Macroeconomic Policy and Policies for Higher Growth), Aziz Bouzaher and Sarah Forster (Environmental Issues), Mohamed Lahouel (Competition Policies) and Guillermo Hakim (Labor Policies), Laura Burakreis and Richard Brun (Banking and Financial Sector Reforms), Faycal Lakhoua (Role of the State in the Economy) and Juan Lopez (Comparator Country Analysis and Macroeconomic support). The main report was prepared by Linda Likar and Norman Loayza. Several working papers (listed in the bibliography) were prepared by staff from the sector divisions and by Tunisian consultants. Valuable inputs and comments were received by Laurie Effron and David Tarr. Fataneh Semsarzadeh provided research assistance. The cooperation of the Government of Tunisia, particularly the Ministry of Plan and the Institut d 'Economie Quantitative, is gratefully acknowledged. Local consultants, Professors Mohamed Lahouel and Faygal Lakhoua of the University of Tunis and the SIDES consulting firm, made significant contributions to the report.  REPUBLIC OF TUNISIA TOWARDS THE 21ST CENTURY COUNTRY ECONOMIC MEMORANDUM VOLUME 11 - ANNEXES Contents ANNEX I - ECONOMIC GROWTH AND ENVIRONMENTAL SUSTAINABILITY IN TUNISIA: LINKAGES AND IMPLICATIONS I - Overview II - The Government's Environmental Strategy & Institutional Framework A. Environmental Priorities and Strategy B. Government Programs C. Institutional Framework III - Sectoral Environmental Issues and Economic Linkages A. Agriculture B. Industry and Energy C. Tourism IV - The Social Cost of Environmental Pollution and Natural Resource Degradation A. Public Health and the Environment B. The Costs of Natural Resource Degradation V - Conclusions: Macroeconomic Linkages and Sustainable Development ANNEX II - COMPETITION POLICIES I - Trade Liberalization Quantitative Restrictions Tariff Barriers II - Competition Policies and Differentiated Support Measures The Old Investment Incentive System The New Incentive System Specific Incentives and Distortions  Contents (cont'd) The Removal of Capacity Licensing Industrial Support Measures Absorption of Technology and Support Services Public Procurement Policies Transparency of Rules Tendering Procedures Differentiated Treatment of Firms III - Pricing and Deregulation Policies Price and Distribution Controls Major Shifts in 1991 Procedure and Pace of Price Liberalization Price Control at the Producer Stage Price Control at the Distribution Stage Deregulation: The Transport Sector ANNEX III - FINANCIAL SECTOR IN TUNISIA CHAPTER I - THE BANKING SYSTEM A - Overview B - Banking Regulations C - Sources of Funding and Composition of Assets D - Intermediation and Efficiency of the Banking System E - Concluding Recommendations CHAPTER 11 - FINANCING OF THE TREASURY, MONETARY POLICY AND FINANCIAL MARKETS A - The Financing of the Treasury and the Management of the Monetary Policy I - The Financing of the Treasury (Primary Market) and the Management of Domestic Public Debt (Secondary Market) 11 - The Management of the Monetary Policy B - The Modernization of the Stock and Bond Markets I - The Legal Environment and the Market Organization II - Evolution of Market Activity and Present Issues C - Recommendations  ANNEX 1 ECONOMIC GROWTH AND ENVIRONMENTAL SUSTAINABILITY IN TUNISIA: LINKAGES AND IMPLICATIONS I. OVERVIEW 1. For the last ten years, Tunisia has experienced relatively steady economic growth based on a development strategy focussed on three principal sectors: irrigated agriculture, manufacturing industry and tourism (Table 1). GDP growth has averaged around 5 percent for the last five years. Growth has not been steady, however, but rather reflects the economy's dependancy on the agricultural sector, the output of which varies dramatically depending on rainfall. Table 1. Sectoral Share of GDP and Growth Rates (in percentages) 1987 1988 1989 1990 1991 1992 1993 1994 GDP growth rate 6.7 0.1 3.7 7.6 3.8 8.0 2.6 6.1 Agriculture GDP share 15.3 11.7 12.1 14.4 15.7 15.5 14.1 14.1 Growth rate 20.5 -25.8 5.7 27.7 14.3 6.6 -7.0 5.1 Industry GDP share 27.8 28.1 29.0 28.2 28.0 27.1 26.5 26.4 Growth rate 0.4 2.3 5.4 6.2 5.1 5.6 1.8 7.2 (Manufacturing) GDP share 13.1 13.9 14.4 15.0 15.1 15.0 15.0 15.3 Growth rate 4.4 6.5 6.0 11.3 4.0 8.1 3.0 7.4 Services GDP share 32.5 35.8 35.3 34.0 32.0 33.1 34.4 34.6 Growth rate 8.6 9.0 2.2 3.3 -1.3 11.9 5.9 6.1 (Tourism) GDP share 3.8 4.3 4.2 3.9 2.9 3.8 4.0 4.0 Growth rate 37.2 11.6 -2.8 -0.8 -25.0 44.8 7.0 6.5 Source: World Bank data 2. In recent years increasing concerns have emerged about the environmental costs of this development strategy. Pursuit of development objectives in these priority sectors, combined with a growing shift of the population to the coastal areas (where over 77 percent of the population are concentrated in less than 25 percent of the total land area), has placed increasing pressures on the natural resource base, particularly coastal land and water resources which are relatively limited. This is leading to environmental degradation which is manifested in three main ways: * land degradation -- over 60 percent of the country's usable land resources are estimated to be affected by degradation. This is leading to the permanent loss of the equivalent of 24,000 hectares of agricultural land (about 0.5 percent of cultivated land) a year putting even more pressures on rangeland resources, whose productivity continues to decline at an average of 2 percent per year.  Annex 1 Page 2 * water scarcity -- almost all Tunisia's available water resources will be fully developed by the year 2000. Continued growth of agriculture, industry and tourism at current rates is likely to put increasing pressures on existing water resources, leading to a deterioration of water quality due to domestic, industrial and agricultural pollution, increasing intersectoral competition for scarce supply and potentially constraints to long-term economic growth. * coastal degradation -- industrial and oil pollution problems, coastal erosion and overdevelopment are worsening long the coast as urban, industrial and tourism areas continue to grow rapidly. In the next 10 years, Tunisia's population will grow by an estimated 3.15 million, the vast majority of which will live along the coast, if current trends continue, further increasing pressures on marine and coastal resources. 3. The Government is well aware of these problems and has made significant progress in developing institutions, policies and programs to deal with them.' To date their approach to environmental management has been investment-based, with significant resources going to sanitation infrastructure and soil and water conservation, in particular. Less attention has been paid to developing incentives to reduce waste and encourage conservation, though progress is now being made on key pricing policy reforms to encourage more sustainable use of natural resources -- water pricing, energy pricing and reduction of agrochemical subsidies. A more integrated approach to land and water use management, however, is yet to be developed. 4. The purpose of this report is to examine the nature and extent of these environmental problems and their economic implications. The report first discusses the evolution and current status of the Government's overall environmental strategy and institutional framework for environmental management. Second, it provides an analysis of the environmental issues related to Tunisia's three main sectors: agriculture, industry and tourism. Third, to the extent possible, given the time and data constraints of this report, a rough estimate is made of the costs, both social and economic, to the economy of these environmental problems, particularly the cost of natural resource degradation, air pollution and lack of safe water and sanitation. Finally, the report provides initial conclusions and recommendations as to how to reconcile the objectives of economic development and environmental protection. 5. This paper will be followed-up by further analysis of the potential natural resource constraints to economic development in Tunisia. A more detailed study is to be carried out in close collaboration with the Tunisian Government which will provide a more extensive and systematic economic analysis of the issues related to the competing demands on water and coastal land and their environmental and economic implications. 'See Annex 2 and 3 for selected economic and environmental indicators for Tunisia and comparable countries.  Annex 1 Page 3 II. THE GOVERNMENT'S ENVIRONMENTAL STRATEGY AND INSTITUTIONAL FRAMEWORK A. ENVIRONMENTAL PRIORITIES AND STRATEGY 6. Environmental protection has long been a concern of the Government of Tunisia, however, it is only in the last few years that the understanding of environmental issues, their relation to development and their translation into action have been approached in a systematic and effective fashion. In 1990, with the support of the World Bank, the Government developed a National Environmental Action Plan which represented the first step in an ongoing process of environmental policy-making. Environmental management was a central objective of the Eighth Plan for Social and Economic Development (1992-96) which devoted a chapter specifically to environmental protection, the first plan to do so, and set out the following environmental priorities2: * ensure the rational and sustainable use of the country's natural resources * keep pollution within acceptable limits * clean-up polluted areas * involve citizens in the effort to protect the environment 7. To achieve these objectives the Government has a three-part strategy, implementation of which is under the overall responsibility of the Ministry of Environment and Regional Planning (MEAT): a Prevention - this is based on the Government's realization that a strategy of grow now and clean-up later is no longer acceptable and is unnecessarily expensive. It is therefore placing emphasis on designing and implementing policies and mechanisms to prevent pollution and the wasteful use of natural resources. A key tool is the use of environmental 3 impact assessments. Inspection and monitoring of environmental conditions - monitoring of environmental conditions is essential to control compliance with pollution control regulations. The strategy aims to increase the capacity of research and analytical laboratories, monitoring stations and technical and scientific staff. * Curative actions - though the main thrust of the Government's strategy is prevention of pollution and natural resource degradation, in certain areas serious damage has already been done. According to the Government's strategy, this damage will be rectified. Attention should be paid to the costs and benefits of such clean-up programs, and priority given to cleaning-up areas where environmental degradation is causing a serious risk to human health or economic activity and the greatest benefits can be achieved. In the long- term, it is hoped that a preventative approach will reduce the need for costly clean-up programs. 2Ministry of Environment and Regional Planning (MEAT), 1994. Environment and Sustainable Development: A Review of the Tunisian Strategy, report of Tunisia to the Tunis Conference on Sustainable Development in the Mediterranean. 3Environmental assessments have formed the centerpiece of environmental policy in many countries, particularly the U.S.  Annex I Page 4 B. GOVERNMENT PROGRAMS 8. To implement the strategy, MEAT has launched seven programs: (i) Urban and rural sanitation. The objective of this program is to extend the sewage network and disposal system in order to increase the percentage of households connected to the collection system, to increase the treatmnent capacity by putting new treatment plants into operation, and to increase the reuse of treated effluents, especially in the agricultural sector. (ii) Protection of the coastal zone (program "Main Bleue"). This program consists of activities to ensure that the beaches along Tunisia's coastline are fit for swimming; to protect the marine environment from oil spills and pollution; to reduce the impacts of urbanization along the coast -- both in terms of aesthetics as well as liquid and solid wastes; and to implement the necessary land use planning measures to achieve these objectives. (iii) Solid waste management, the "PRONAGDES" program, aims to improve the worsening situation of the collection, treatment and ultimate use of household waste, industrial waste and special waste (from hospitals, slaughterhouses etc.). In the short-term, the program is geared towards improving waste disposal; in the longer term, the goal is to reduce the overall volume of waste generated and maximize recycling of solid waste. (iv) Industrial pollution control. This program has two components: prevention and pollution reduction. Prevention is put into effect primarily through (a) environmental impact assessments, which are now mandatory for all new projects; (b) creation of a depollution fund (FODEP) to finance pollution control (para. 11); (c) encouraging non-polluting industrial processes; and (d) the creation of industrial zones which allow easier pre-treatment of industrial effluent. Polluhon reduction involves identifying sectors and regions with particularly severe pollution problems and designing and implementing action plans to reduce or eliminate the pollution based on consideration of pollution reduction options. (v) Desertification control (program "Main Jaune") consists of a broad range of activities implemented by different ministries and coordinated by MEAT, including family planning in rural zones, integrated rural development, forestry, soil and water conservation programs and research activities carried out by the Institute for Arid Regions. (vi) Natural resource management and biodiversity conservation ("Main Verte"). The objectives of this program are to conserve biological resources, rare and endangered species and their ecosystems; to sensitize the public to the need for nature conservation; and to promote ecological tourism. (vii) Environmental awareness and education. This program involves environmental education and an awareness-building effort aimed primarily at children and young people. The program is implemented in collaboration with other ministries and NGOs. 9. Financing. The Government budget allocated to environmental protection has increased over the last ten years, from 260 million dinars in the Seventh Development Plan (1987-1991), roughly 0.3 percent of GDP, to 600 million dinars in the Eighth Plan (1992-1996), around 0.4 percent of GDP. This figure rises to 1,400 million dinars, or about 1 percent of GDP if financing for environmental protection at the municipal level and for safeguarding natural resources, such as water, forests and soils are added. This is comparable to the expenditure of industrial nations on environmental management, which is between 0.8 and 2 percent of GDP, though the budgetary allocation for environmental programs is still below the  Annex 1 Page 5 4 investment needs proposed by MEAT which amount to 3 percent of GDP. Much of the budget for environmental protection is financed by external aid which is not yet assured for the total investment program. Table 2 presents budget allocations for the above mentioned environmental programs and other environmentally-related investments. Table 2. Government Budget Allocations for Environmentally-related Investments. Planned Enviroinmental Investments Eighth Plan for Economic and SocW Development (1992-1996) Environmental Investments Dinars % of budget % (millions) disbursed Environmental Protection Programs 259 25 35 - industrial pollution control 157 - solid waste management 53 - oil pollution prevention 20 - protection of natural and cultural heritage 16 - institutional support 8 - public awareness and research 5 Sanitation 299 28 55 Flood control 40 4 35 Soil and Water Conservation 196 19 94 Forestry 259 25 71 TOTAL 1,053 Source: Ministry of Environment and Regional Planning (MEAT), 1994. Environment and Sustainable Development: A Review of the Tunisian Strategy, report of Tunisia to the Tunis Conference on Sustainable Development in the Mediterranean. 10. Though budget allocations remain below proposed investment needs, operational problems are a major constraint to disbursing existing funds. A Bank analysis on the implementation of the Tunisian NEAP found that only 17 percent of the proposed projects had been completed on target.5 The quality of project design and institutional factors appear to be key determinants of disbursement rates and project completion. Many projects are selected and included in the investment program before pre-feasibility studies had been done. Institutional arrangements are another important factor determining the success rate of projects. Overall, for example, there is very little delay of municipal sewerage and wastewater treatment projects which are handled by a very competent institution (ONAS), whereas programs to address mounting solid waste problems have been seriously delayed. These are handled by municipalities which have limited institutional capacity. 4 Ministry of Environment and Regional Planning, 1993. Rapport National: L 'Etat de I 'Environnement, 1993. 5World Bank, 1994. 1990 National Environmental Action Plan Update Sector Note (draft), prepared by MNlIN.  Annex 1 Page 6 11. Depollution Fund (FODEP). The Government is developing new mechanisms to finance environmental investments in the form of environmental funds. The most important fund is the depollution fund (FODEP) established under the 1993 investment law to finance investments in pollution control. Any industrial enterprise, public or private, can receive up to 20 percent of the investment cost of depollution activities. At least 30 percent of the financing must be covered by the enterprise itself and the remaining 50 percent can benefit from bank financing obtained through lines of credit earmarked for environmental protection. FODEP is a very new creation and several outstanding issues need further clarification during implementation including (i) the treatment of public and private firms; (ii) how the Government will deal with polluting firms that are financially non-viable, and (iii) the treatment of old versus new firms. Box 1: Policy Tools for Environmental Management - Lessons from OECD Experience In most OECD countries a combination of command and control (CAC) and economic incentives are used to manage environmental problems. The experience with economic incentives, though in theory the most efficient mechanism by which to ensure the costs of environmental degradation are internalized into development activities, is fairly limited and it is too early to draw very concrete lessons. Pollution fees are the most commonly used economic instrument and are part of environmental management systems in many European countries and the U.S. Most of these programs are in the areas of water protection, waste disposal and noise abatement. However, the majority of fees are set too low to function as economic. incentives, due for the most part to resistance by industry and fears of the adimiinistrative complexity of such systems. Use of marketable permits has been limited and has been mostly confined to the U.S. All permit programs exist within a larger CAC framework and their experience has been mixed. A number of countries: have used outright subsidies to induce polluters to make the investments required to bring them into environmental compliance, despite it being contrary to the polluter pays principle. In Gennany, in particular, credit guarantees and subsidies drawn from revolving funds are used to speed the implementation of stricter environmental standards, especially among small and medium size firmns, which could experience cash flow ,problems because of the sudden capital investments required to comply with mandatory enviromnental standards. Tax incentives have proven successful for. encouraging the use of "clean" cars and unleaded fuels In the U.K., for example, a 10% differential in fuel prices resulted in a doubling of the use of lead free fuel in 12 months. All incentive systems to date are add-ons to pre-existing CAC regulations. A pure economic incentive system is unlikely to ever exist, so the basic challenge is to determnine the most appropriate mix taking into account economic and political realities. Whatever the instrument selected, the regulator must Xmonitor and enforce the : environmental management system. If agencies lack necessary. equipment or trained manpower to ensure compliance, CAC regulations and monitoring of initial compliance may be the best interim approach until better resources are available. Source: Patterns of Environmental Management, paper prepared for the World Bank, 1994. 12. Many similar funds have been established in OECD countries and Eastern Europe (see Box 1). Some of these are financed utilizing revenues raised from pollution charges, which is more in line with the polluter pays principle (PPP). Tunisia has yet to introduce a system of pollution taxes. FODEP subsidizes depollution activities, essentially violating the PPP and arguably providing a disincentive to polluters to internalize the cost of pollution. In the short term, however, FODEP may prove a useful mechanism during the transitional stage of environmental policy implementation to ease the financial pressures on enterprises associated with complying with stricter pollution standards. FODEP can also help speed up the replacement of old plants by cleaner technologies. In the medium to long-term, the role of more efficient policy instruments, such as pollution taxes, should be strengthened and the need for subsidies reduced.  Annex 1 Page 7 13. Policy Reform. In addition to the above programs, the Governnent is undertaking a number of policy reforms, including water and energy pricing, that will encourage the conservation of natural resources and reduce waste and pollution (summarized in Table 3). Many of these policy reforms were made for economic reasons -- primarily to increase govemment revenue by improving cost recovery of public services -- however, they represent so-called "win-win" policies that will also bring environmental improvements Table 3. Key Policy Reforms Policy Objective Progress to date Expected Environmental Impact Macroeconomic and Sectoral Policies Land Water Air Water degradation scarcity pollution Pollution Water Improve Despite regular price increases, water pricing water use is still being subsidized particularly for efficiency agriculture and domestic use by an + ++ ++ and cost estimated 83 MD6 Tariffs charged are (once recovery based on the volume of water tariffs are consumed. 1994 tariffs range from D brought in 0.095-0.585 per i3. The consolidated aIe withr national average revenue is D co)l 0.326/m3 ($1.46/1,000 gallons). l Energy Improve After several delays in increasing pricing economic electricity and petroleum prices, in and energy 1990 the Government started to + ++ use efficiency implement tariff adjustments. Prices are now in line with LRMC. Agrochemic To encourage Subsidies for fertilizer have been al subsidies use of substantially reduced over the last ten fertilizer and years'. The gross amount of subsidy + ++ pesticides. peaked in 1989 at 20 MD but had been reduced to 0.9 MD by 1993. Data on agrochemical subsidies is lacking. Livestock To assist Animal feed continues to be feed livestock subsidized2, particularly during subsidies owners drought years. Subsidies for animal maintain feed peaked in the drought year of 3 herd sizes 1989 at 50 MD (plus a further 20 MD_ during subsidy for fertilizer, some of it for drought years feed production) before falling to 4 so stabilizing MD in 1993. Overall levels of subsidy incomes. were higher in the 80s than in the 70s. Legend: + +: positive, direct impact; - -: negative, direct impact + positive, indirect impact; - negative, indirect impact. ' Subsidies have been eliminated for 3 of the 4 main types of fertilizers used. 2 Maize and soybean meal subsidies have been eliminated; subsidies remain mostly for barley. 3Maintaining herd sizes during drought years can put unsustainable pressures on grazing lands. 6This figure represents an implicit subsidy based on the difference between cost and price of water. Table 14 presents the issue from a public expenditure point of view.  Annex I Page 8 14. Legal Framework There are over 350 existing legal texts related to environmental issues in Tunisia which are often overlapping, provide a sectoral approach to the environment and fall within no overall guiding framework. The most important laws are the Forestry Code (1988), the Water Code (1975), the Urban Planning Code (1979) and the Labour Code (1966), which currently regulates pollution. A new soils code is awaiting legislative approval. MEAT aims to consolidate all environmentally-related texts within a coherent framework based on an integrated cross-sectoral, cross-media environmental policy. To this end, ANPE has inventoried and classified all existing legal texts concerning the environment. Based on this, the legal framework for environmental protection is being thoroughly revised. C. INSTITUTIONAL FRAMEWORK 15. After a series of institutional reforms, the Tunisian government now has three well-established institutions to take the lead on designing and implementing environmental policy: The National Sanitation Board (ONAS) which was created in 1974 to control water pollution and protect the country's water resources. ONAS manages the entire sanitation system being responsible for the design, construction, operation and maintenance of all sanitation works from collection to treatmnent. There are plans under discussion, however, to privatize certain aspects of ONAS' operations. The institution has accomplished a remarkable amount in its twenty years of existence. Over 80 percent of Tunisia's urban population is now connected to the sanitation system, though rural sanitation is still lacking. Over 100 million m3 of water are treated each year, and the quality of treated water meets international standards. Increased reutilization of treated water has also provided savings in the use of fresh water. The National Environmental Protection Agency (ANPE), created in 1988, has a two-fold mandate: to analyze and monitor the state of the country's environment and to combat all sources of damage to and degradation of the natural environment. ANPE carries out a number of preventative measures: (i) evaluating and approving environmental impact assessments which are now compulsory for all new investments; (ii) drawing up environmental standards; (iii) promoting public awareness; and (iv) training and environmental education. It also undertakes curative measures including (i) inspection of industrial plants and their pollution treatment facilities and (ii) enforcing legislation. ANPE is legally empowered to bring court action against any entity found to be in contravention of the law and it can conclude agreements with offending enterprises regarding measures to remedy pollution problems. The Ministry of Environment and Regional Planning (MEAT), created in 1991, was established to complete the institutional structures dealing with environment and to lend greater political weight and importance to environmental policy. The Ministry, in collaboration with other ministries, is responsible for proposing policies regarding protection of the environment, improvement of living conditions and land planning. It is also responsible for legislation related to the environment. Structures with authority in the environmental domain continue to exist in other ministries, as for example the Department of Environmental Hygiene and Protection in the Ministry of Health, but MEAT is responsible for ensuring overall coordination among them. In addition, a National Coastal Zone Agency ("Agence Nationale du Littoral") has recently been created and will be another agency of MEAT. 16. Institutional Capacity. The Ministry of Environment and Regional Planning (MEAT) has a relatively high degree of political power and resources compared to many other environmental institutions  Annex 1 Page 9 elsewhere in the world. However, according to an assessment of environmental management systems in developing countries (see Table 4), though Tunisia's institutional framework is now integrated, the fact that line ministries still keep control over environmental management issues means that the envirommental management system itself defacto remains fragmented. This constrains the ability of MEAT to have a real impact on the various sector activities and on facilitating the integration of environmental policy into general development iniatives. Continued efforts will need to be made to strengthen MEAT and the environmental units in sectoral ministries, while improving coordination between them. Table 4: Nature of Environmental Management Systems in Selected Countries Country Institutional Framework Environmental Management Tunisia Integrated Fragmented Morocco Coordinated Fragmented Thailand Quasi-integrated Fragmented Indonesia Integrated Fragmented Argentina Coordinated Fragmented Chile Coordinated Fragmented Mexico Quasi-integrated Integrated Nigeria Integrated Integrated Germany Integrated Fragmented U.S.A. Integrated Integrated Definitions: Fragmented: enviromnental protection functions are carried out by sectoral and media agencies, based on laws and regulations primarily addressing the sectoral or media issues. Coordinated: environmental protection functions are still assigned to several sector ministries and agencies, however, environmental policy formulation is coordinated through an inter-ministerial body. Quasi-integrated: one of the line ministries is assigned responsibility for environmental protection issues. Potential conflicts of interest with the ministry's main function, however, are not eliminated. Integrated: a separate environmental protection agency or ministry is established and administrative functions and resources for environmental management are transferred to this agency. Source: Lovei M., 1994. Institutional Issues of Environmental Management and the Bank's Approach in Development Countries, ENVPE, World Bank. 17. Monitoring. Though Tunisia now has a well-organized institutional framework in place, monitoring and enforcement capacity still need considerable strengthening. Current staff numbers are inadequate to properly evaluate all environmental impact assessments and monitor pollution trends. To date, attention has been focused on financing and irnplementing environmental programs, such as soil conservation and pollution control programs, without paying adequate attention to the importance of monitoring natural resource degradation and pollution trends. As a result, information on ambient environmental conditions and trends is lacking. Several steps are being taken to address this, including the setting-up of an environmental monitoring observatory and the decentralization of MEAT -- MEAT plans  Annex 1 Page 10 to set up regional ANPE offices which will be responsible for monitoring and enforcement authority at the regional level (see Map 1). In addition, a monitoring capacity of inland surface waters has been put in place. These efforts should improve the quality and consistency of environmental data. The ability to monitor environmental progress is essential to keep track of the marginal costs and benefits of environmental investments with the associated implications for resource allocation at the national level. 18. Enforcement. Enforcement is constrained by the lack of realistic norms (though the Government is in the process of establishing new norms for air, water, toxic and noise pollution) and institutional capacity to enforce existing norms. The Government's commitment to enforcing environmental standards at all costs is questionable. Though ANPE officially has the legal mandate to take strict measures against polluters, such as temporary closure of polluting plants, there is still much reluctance to implement such measures, particularly against public enterprises. Worldwide the most successful approach to environmental management is an integrated, permit-based approach involving the polluters in setting realistic and achievable standards. III. SECTORAL ENVIRONMENTAL ISSUES AND ECONOMIC LINKAGES A. AGRICULTURE 19. Sector strategy. Tunisia's strategy for agricultural development is clearly spelled out at the beginning of the 8th Plan (1992-96). Agriculture was the first sector to undergo a structural adjustment process (1987) and is still considered the basis of the national economy ("le fondement de 1'economie nationale"). Although the sector's annual growth rate during the 7th Plan averaged 3.8 percent, the government has projected a 6 percent average annual growth for the period 1995-2001. The development strategy of the sector will cost close to 4 billion DT (in current prices), 50 percent of which will come from the state budget, and will include five major components under which key elements are summarized below: v Mobilization and efficient use of water resources. About 1.4 billion m3 of water (about 200 million m3 of which are treated water) are expected to be mobilized at a cost ofjust under 2 billion DT (corresponding to an average cost of 0.15-0.20 DT/m3), bringing the rate of mobilization of known water resources to 90 percent by 2001. * Land and natural resource conservation. An ambitious program of soil conservation and afforestation, projected to cost over 1.5 billion DT, will focus on watershed management (600,000 hectares), soil conservation practices on 400,000 hectares of land suitable for cereal production, maintenance of conservation work previously done on one million hectares, afforestation of 300,000 hectares, development of forage crops on 400,000 hectares, and rangeland management of 2.2 million hectares. * Improvement in agricultural productivity through investment in applied research and the development of high quality seed production, and fanming systems adapted to dryland and semi-arid climate conditions. In addtion, agricultural extension will be enhanced through more support for l"Agence de la Vulgansation et de la Formation Agricoles," which was created in 1990. * Intensification of production and development of agro-industries to achieve three main objectives: (i) self-sufficiency in hard wheat, barley, and meat production; (ii) reduction of imports of sugar, milk, and  Annex 1 Page 11 soft wheat; and (iii) increasing exports of olive oil, fruits, vegetables, and fish products. To achieve these objectives, an additional 100,000 hectares will be managed for intensive irrigation (at 5,000-6,000 m3/ha, this implies an additional 550 miilion m3) and 77,000 hectares of cereal crops will be managed for "irrigation d'appoint." Other key actions will be designed to increasing olive oil, livestock; sugar beet, fruits, vegetables, and fish production and associated agro-industries. Improvement in the institutional framework through reforms in land tenure, agriculural credit and tax systems, and development of subsidized crop insurance schemes (through "le Fonds National de Garantie"). Water conservation will be promoted through the continued gradual increase of water prices and the support of water user associations (700 new AIC for irrigation water will be created by 2001). Additional support to the sector will also come from continued subsidies for cereals, milk, and olive oil, deregulation of input and output markets, and continued development of rural infrastructure (electricity, water supply, and rwal roads). 20. Land distribution. Tunisia has a total land area of 15.6 million hectares, 62 percent of which is classified as suitable for agriculture and livestock production ("surface agricole utile"). The cultivated area is 5 mnillion hectares, of which 2.1 million hectares are used for annual crops, 1.9 million hectares for perennial crops (68 percent olives, the rest fruits and vignards), and 1.0 million hectares are fallowed (Figure 1). 21. Farm structure and land tenure. The Tunisian farm sector is characterized by an asymmetric farm size distribution with a large number of small operators (47% hold only 8% of the land) and a large concentration of land within the hands of a few (less than 2% hold over 28% of the land). The average farm size is less than 14 ha, with 85% of the farms having less than 20 ha (Figure 2). 22. The land tenure system is emerging as a major constraint to the further development of the agricultural sector. The major characteristics of the land tenure system are fragmentation, absenteeism, and lack of clear and secure property rights. In addition, there is a need for a cadastral system and necessary institutions to support the smooth functioning of land markets. With 1.2 million land parcels, the 380,000 farm operations average 3.2 parcels per average operation. This trend is amplified by inheritance and socio-cultural factors. Absenteeism, often associated with extensive agricultural practices, is an impediment to investment and intensification, partly because absentees are engaged in other economic activities. Out of the 5 million hectares of cultivated land, about 54 percent are privately owned, 30 percent are collectively owned and managed, and 16 percent are state held lands. Some key indicators of the land tenure system are shown in Table 5.  Annex 1 Page 12 Table 5: Land tenure characteristics ilOwnership ... 000Oha. Key characteristics PrivateC#, 2,700 54 Absenteeism (estimate to be completed) Collective* 1,500 30 1.2 million ha privatized; 300,000 ha await titling State@