Tunisia - Second Education Project

RESTRICTED FILE C PW Y Report No. P-50 5 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 The report may not be published nor moy it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF TUNISIA FOR AN EDUCATION PROJECT September 2, 1966  INTERMATIONAL DEVELOP1IENT ASSOCIATION REPORT AID RECOiviMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPi;ENT CREDIT TO THE REPUBLIC OF TUNISIA FOR AN EDUCATION PROJECT 1. I submit the following report and recommendation on a proposed develonment credit in various currencies equivalent to US$13.0 million to the Republic of Tunisia to help finance an education project. PART I - HISTORICAL 2. In 1962, the Association signed a credit of $5.0 million for a secondary school project in Tunisia, the first such project to be financed by the Association. This project was in the nature of an interim program designed to help Tunisia cope with its most urgent requirement for second- ary schools under the balance of 1956-66 education program. At the same time the Association had concluded that there was scope for considerable economies in school building costs in Tunisia combined with improvements in design. The Bank accordingly made a technical assistance grant of $375,000 to Tunisia to carry out studies directed to this end. 3. In August 1965, the Tunisian Government asked the International Development Association for further help to finance the construction and equipment of secondary schools. Later, 3 agricultural centers were added to the application. An appraisal mission visited Tunisia in February and 'larch 1966. Upon its recommendation, the project will comprise construction and equipment for 15 secondary schools and 3 agricultural training centers, and equipment for a further 16 secondary schools. The project, in its final shape, takes full advantage of the technical assist- ance studies of construction and design. 4. The proposed credit, if approved, would be the second IDA credit to Tunisia. In addition to the 1962 credit of US$5.o million, the Bank has lent US$12.0 million, of which US$7.0 million for the Tunis-La Goulette port project and Us$5.o million to the Societ6 lNationale dtInvestissement, a private development finance company. As of July 31, 1966, the status of the credit and the loans was as follows: (US $ millions) Year Borrower Purpose Amount Undisbursed Balance IDA Credit 1962 Republic of Tunisia Education 5.o 1.0 Total 5.0 1.0  -2- Bank Loans 1964 Republic of Tunisia Port 7.0 4.7 1966 Soci6t6 Nationale Development d'Investissement Finance Company 5.0 5.0 Total 12.0 9.7 of which has been repaid Total now outstanding 12.0 Amount sold o.4 of which has been repaid 0.4 Net amount held by Bank 11.6 5. The six schools financed by the 1962 credit have been completed. The credit is expected to be fully withdraw.n by the end of 1966. PART II - DESCRIPTION OF TiE PROPOSED CREDIT 6. Borrower: Republic of Tunisia. Amount: The equivalent in various currencies of US$13.0 million. Purpose: To help finance the construction of, and equipment for, 15 secondary schools and 3 agricultural training centers, and equipment for a further 16 secondary schools. Amortization: Term 50 years. By semi-annual payments commencing November 15, 1976 and ending May 15, 2016, Each installment to and including the installment payable on Ilay 15, 1986 to be one half of one per- cent (1/2 of 1%) of the principal amount and each installment thereafter to be one and one-half (1-1/2%) of the principal amount. Service Charge: 3/4 of 1 per annum for the principal amount of the credit disbursed and outstanding.  - 3 - PART III - THE PROJECT 7. A report on the project, "Appraisal of an Education Project - Tunisia", (To 552b) is attached. 8. Following indenendence in 1956, the Tunisian Government drew up a Ten-Year Education Plan to expand primary and secondary education. The Plan was well conceived and executed with only minor revisions. With the increased primary enrollment, the further expansion of secondary schools would make possible an increased output of trained manpower at the middle level and a larger flow of qualified applicants for entry into the university. Furthermore, the number of expatriate teachers is still high and it is the Government's intention to replace them as soon as is practicable by qualified Tunisians. The proposed project, which forms part of Tunisia's current Four-Year Plan, is directed to help meet these needs. 9. The project is expected to be completed by mid-1969. It will provide 19,700 (13,500 boys and 6,200 girls) school places in 9 new secondary schools, by the extension of 6 other existing schools and in 3 new agricultural training centers. The new Places to be financed under the proposed credit would account for some 43% of the total secondary school places to be provided for in the Four-Year Plan. Further, equip- ment will be provided for 16 other schools to give better education and training for another 27,000 students. Boarding accomodation will be provided in the project for 6,200 students of whom 4,300 will be boys and 1,900 girls. 10. Nihen the project is fully implemented, there will be over 1,000 students pursuing their training in the 3 agricultural centers, and about 4,600 in the "College M'loyen" courses of whom about 1,000 will be in the general, 2,300 in the industrial and 1,300 in the commercial course. In the first cycle of secondary education the project provides for 8,000 students of whom about 6,000 will be in the general course with a high percentage in their first year on their way to specialization later in other fields of study. There will also be about 800 students in the technical and 1,200 in the economic courses. The second secondary cycle will have about 6,000 students of whom a little less than 1,h00 students will be in the technical course and 1,700 in the commercial with the remaining 2,900 pursuing courses in sciences, languages and social studies. On completion of the second cycle some graduates will follow an additional one-year teacher training course and others will proceed to university studies. 11. The total estimated cost of the project, which includes con- struction, furniture and equipment is equivalent to US$19.76 million. This includes $10.79 million for construction and $5.85 million for furniture and equipment. Of the remainirg $3.12 million, about $535,000 will cover professional fees and $2,585,000 remains for contingencies, in- cluding possible rise in prices during the project execution. The cost of  - h - sites, not included in the total cost, is estimated at about $420,000 and will be borne by the Tunisian Government. As they now stand, the costs are reasonable. A considerable economy (about 25% of the original cost) has been achieved in construction costs by adopting the standards arrived at through the studies made by the London Group of Project Consultants which the Bank has helped to finance. 12. The proposed IDA development credit of US$13 million, or about two-thirds of the estimated total cost, will cover all of the foreign exchange component (3h%) and approximately half of the local currency costs. All procurement will be on the basis of international competitive bidding. A 15% preference for local suppliers has been included. 13. The expansion of secondary education under the Four-Year Plan includes adequate provision for staffing the schools constituting the project. The time has not yet come when qualified Tunisian teachers to staff all secondary schools are available. Expatriate teachers, particularly French and French speaking, will continue to be required for some years but a recent decision taken by the Tunisian Ministry of Education to increase enrollment in the secondary teachers training college will shortly have its effect in making more Tunisian teachers available. 14. It can be estimated roughly that by 1968, the end of the Four- Year Plan, total recurrent expenditure on secondary education will be in the neighborhood of $19.5 million, of which the increase due to the project will be about $3 million. The total recurrent education budget totalling $46.7 million in 1966 (representing 27% of the total recurrent budget) is presently projected by the 2linistry of Education to rise to slightly over $57 million by 1968, which is likely to represent an increase in the share of education in total recurrent expenditures to about 30%. It is clear that if continued for long, this rate of increase would seriously increase Tunisia's budgetary problems, and would make it impossible for the Government to achieve its stated objective of bringing down the growth rate in total current government expenditures to the growth rate of GNP. Some economies in other sectors could probably help offset the rapid increase in education planned for the next two years, but it appears probable that measures to limit the growth of education expenditures themselves cannot be long postponed. During negotiations, the rate of growth of the education recurrent budget was discussed and the Tunisian government has recognized the need to undertake a review directed at exploring possible economies which should bring results by the beginning of the fiscal year 1970.  - 5 - PART IV - LEGAL INSTRUMEIJS AND AIJTHORITY 15. The draft Development Credit Agreement between the Republic of Tunisia and the Association and the Report of the Committee provided for in Article V, Section l(d) of the Articles of Agreement are being distrib- uted to the Executive Directors separately. 16. The draft Development Credit Agreement is substantially in the form used by the Association for projects of this kind. PAPRT V - TI-, ECONOMY 17. Tunisia's economic situation and prospects were analyzed in a Bank report entitled "Review of 1965-68 Development Plan" (AF-39), dated November 22, 1965 which has been circulated to the Executive Directors. 18. Recent economic developments in Tunisia have been generally satisfactory. In 1965, the growith in real output continued at a rate of 6.5%, slightly higher than during the period 1960-64. Domestic credit expansion has remained within the limits agreed by the I11 under the stabilization program of late 1964, and the rise in prices following the 25% devaluation which occurred then has been quite moderate. 19. Nevertheless the present external situation is difficult and is likely to remain so for the next two years. Export earnings declined slightly in 1965 as the result of a sharp drop in wine sales, following the termination of the commercial agreement with France. At the same time, payments for import of goods and services rose sharply, with the result that foreign exchange reserves continued to decline, despite a large increase in foreign capital inflowi during the year. The decline in reserves continued through the first six months of 1966, and by June, gross official holdings amounted to only $31 million, or about one monthi's imports. After deducting drawings on the I;? and other liabil- ities, net reserves were negative. 20. This continuing pressure on the balance of payments is due in part to a rise in service on external debt. On the basis of a systematic compilation of Tunisia's external debt recently undertaken by the Tunisian Government with the assistance of the Bank staff, it is now estimated that total public and private external debt, at the end of 1965, amounted to about US$358 million, as compared with an estimate of around US$260 million for the end of 1964. Some of this increase is due to more complete statistical coverage, but the major part appears due to a real rise of new foreign loans, including a significant amount of medium-term credit. Service charges on this debt will amount to about $35 million in 1966 and will rise to a peak of $40 million in 1968. The 1966 figure is equal to about 251% of estimated merchandise export earnings and to 17% of total exports of goods and services. By 1968, these ratios should improve if export earnings from petroleum and tourism rise as expected, and if restraint is exercised in the contracting of new short and medium term debt.  - 6 - 21. Another important factor in the pressure on the balance of payments is the high rate of investment. Gross investment amounted to about 23% of GDP in 1965, and may be even higher in 1966 if present plans are carried out in full. The major increases of investment during the past tTwro years have been in the enterprise sector - mainly public and mixed enterprises. In the past several months, tlhe Government has taken steps to secure a greater measure of control over these enterprises, particularly as regards their use of domestic banlc credit, and external suppliers' credit. It is possible that these steps in themselves will succeed in holding total investment down to magnitudes that can be financed from available non-inflationary domestic sources and long-term external capital. If not, some further action may be necessary to ensure internal financial stability, and a reversal of the recent deterioration of the external reserve position. 22. A Bank economic mission will be visiting Tunisia in October to examine these problems furtlher in the context of Tunisia's longer run prospects and investment requirements. 23. Nevertheless, it remains evident that if Tunisia is to avoid an excessively sharp cut in its investment rate, substantial amounts of foreign capital twill continue to be needed at least for the next several years. Given the present high debt service ratio, it seems desir- able that an important part of this capital be provided on soft terms. Thus, a continued blend of Bank/IDA lending to Tunisia would appear appro- priate at this stage. PART VI - COM PLIANCE WITH ARTICIES OF A0flEE1'ENT 24. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VII - RECOI*3Ei!DATION 25. I recommnend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of a Development Credit to the Republic of Tunisia (Second Education Project) in an amount equivalent to US$13,000,000  -7- RESOLVED: THAT the Association shall grant a development credit to the Republic of Tunisia in an amount in various currencies equivalent to thirteen million dollars ($13,000,000), to mature on and prior to klay 15, 2016, to bear a service charge at the rate of three-fourths of one percent (3/4 of 1%) per annum, and to be upon other terms and conditions set forth in the form of Develor.ment Credit Agreement (Second Education Project) between the Republic of Tunisia and the Association which has been presented to this meeting. Attachment George D. 'toods President by J. Burke Knapp 'Tashington, D.C. September 2, 1966