Tunisia - Rural Roads Project

Document of The World Bank Report No. 13792-TON STAFF APPRAISAL REPORT REPUBLIC OF TUNISIA RURAL ROADS PROJECT JANUARY 3, 1995 Private Sector Development, Finance & Infrastructure Division Maghreb and Iran Department Middle East & North Africa Regional Office  CURRENCY EQUIVALENTS (As of December 1994) $1= D 1.03 FiSCAL YEAR January 1 - December 31 ACRONYMS AND ABBREVIATIONS CTN Compagnie Tunisienne de Navigation National Shipping Company DGPC Direction Generale des Ponts et Chaussees General Directorate of Bridges and Roads DREH Direction Regionale de I'Equipement et de l'Habitat Regional Directorate of Equipment and Housing ERR Economic Rate of Return GDP Gross Domestic Product HDM Highway Demand Model ICB International Competitive Bidding IWG Interministerial Working Group LCB Local Competitive Bidding MEH Ministere de I'Equipement et de 1'Habitat Ministry of Equipment and Housing MOT Ministry of Transport NPV Net Present Value OPNT Office des Ports Nationaux Tunisiens PDR Programme de Developpement Regional PDRI Programme de Developpement Rural Integre RC Regional Council SNCFT Societe Nationale des Chemins de Fer Tunisiens National Railway Company STAM Societe Tunisienne d'Acconage et de Manutention STIA Societe Tunisienne d 'Industrie Automobile This report was prepared on the basis of an appraisal mission in November 1994 led by Jaffar Bentchikou (Sr. Highway Engineer) and comprising Michel Loir (Sr. Transport Economist), Claudia Sadoff (Economist), Yasser Henda (Project Assistant), Claudia Pardifias (Legal Counsel) and Nicola Renison (Operations Assistant) and with the assistance of Michelle Detwiler, Brigitte Grant and Mireille Pagutalan. Peer reviewer was Antonio Cittati (Sr. Highway Engineer). The processing of the project was supervised by Amir Al-Khafaji, Chief, Private Sector Development, Finance and Infrastructure Division (MNlPI) and Daniel Ritchie, Director, Maghreb and Iran Department.  REPUBLIC OF TUNISIA RURAL ROADS PROJECT 7A[I1LE OF CONTrF-NT Page Table of Contents .1........................ .... ..... .... . . i Loan and Project Summary ................ .. .. ... .. ... .. .. . . iv I. The Transport Sector and The Tunisian Economy .... . 1 A. Country Background .1............. .. .. .. .. .. .. .. .. . . 1 B. Past Economic Performance and Medium-term Prospects .... ...... 2 C. Main Characteristics of The Transport Sector ................. 3 D. Past and Projected Transport Investments .................... 4 E. Transport Sector Issues ............................... 6 F. Bank Assistance Strategy ............................. 11 G. Bank Transport Lending Strategy ......... . . . . . . . . . . . . . . 12 II. Rural Roads and Agriculture Development ......... . . . . . . . . . . . . . 15 A. The Rural Roads within the Road Network ....... . . . . . . . . . . 15 B. Transport Services in Rural Areas ......... . . . . . . . . . . . . . . 16 C. Rural Road Administration ........... . .. . . .. . . .. . . .. . 17 D. Maintenance Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 E. Funding of Rural Roads .............. .. .. .. .. ... .. . . 18 F. Organization of Agricultural Development ........ . . . . . . . . . 20 G. Bank Experience of Previous Rural Road Projects ....... . . . . . 21 III. The Project . ......................................... 23 A. Background, Objectives and Description ................... 23 B. Institutional Reforms ................................ 24 Concept and Content ............................. 24 Cost and Financing .............................. 28 Implementation ................................. 28 C. Pilot Periodic Rehabilitation ........................... 28 Concept and Content ............................. 28 Cost and Financing .............................. 29 Implementation ................................. 29 D. Upgrading Rural Roads .............................. 30 Concept and Content ............................. 30 Cost and Financing .............................. 31 Implementation ................................. 31 E. Costs and Financing ................................ 33  Costs ......................... ..... ..... ... . 33 Financing .................. ... .... ... .... ... . 33 F. Procurement .................... .... .... .... .... . 34 Works ....................................... 34 Consulting Services .............................. 35 General ..... . ................................. 35 G. Disbursement.. . ...... 36 H. Workshops, Implementation, Reporting and Auditing ..... . . . . . . 37 I. Environmental Impact ............. .. .. .. .. ... .. .. .. . . 38 IV. Economic Justification ............ .. .. .. .. .. .. .. .. .. .. .. . 40 V. Agreements and Recommendation ......... . . . . .. . . . . . .. . . . . . . 43 A. Agreements & Understandings Confirmed at Negotiations ..... . . . 43 B. Conditions of Board Presentation ........ . . . . . . . . . . . . . . . . 43 C. Other Covenants ............ .. .. .. .. .. .. .. .. .. .. .. . 44 D. Recommendation ........... .. .. .. .. . .. .. .. .. . .. .. . 44 A 3.1: Institutional Study, Outline TORs ........ . . . . . . . . . . . . . . . . . . 45 A. Concept, Objectives and Methodology ....... . . . . . . . . . . . . . . 45 Concept and Content ......... . .. . . .. . . . .. . . .. . . . . 45 Objectives ............. .. .. .. .. .. ... .. .. .. .. . . 45 Methodology ........... .. .. .. .. . .. .. .. .. .. . .. . 46 B. Road Classification and Budgets ........ . . . . . . . . . . . . . . . . . 46 C. Road Maintenance ........... .. .. . .. .. .. .. . .. .. .. . . 47 A 3.2: Sector Strategy Letter ........... .. .. . .. .. .. . .. .. .. .. . . 49 A 3.3: Road Standards Study, Outline TORs ....... . . . . . . . . . . . . . . . . 52 Objectives ............. ... .. .. ... .. .. ... .. ... . 52 Methodology ............ .. .. .. .. .. .. .. .. .. . .. . 52 A 3.4: Agricultural Indicators ........... .. .. . .. .. .. . .. .. .. .. . . 54 A 3.5: Project Costs, Financing and Disbursement Schedule ...... . . . . . . . . 55 A 3.6: Procurement Arrangements ......... .. . . .. . . .. . . .. . . .. . . . 64 A 3.7: Project Implementation Schedule ........ . . . . . . . . . . . . . . . . . . 65 A 4.1: Economic Evaluation Details ......... .. . . . .. . . . .. . . .. . . . . 66 A. Socio-Economic Framework of Project Roads ...... . . . . . . . . . . 66 B. Methodology of the Economic Evaluation ...... . . . . . . . . . . . . . 86 C. Results of the Economic Evaluation ....... . . . . . . . . . . . . . . . . 87  MAP: IBRD 26534 Tahles and Figures Project Cost . ........................................... v Financing Plan . .......................................... v Estimated Disbursements ..................................... v Table 1.1: Transport Public Investments ........................... 4 Table 2.1: Classified Road Network ............................. 15 Table 2.2: Evolution of Road Budgets ............................ 19 Table 3.1: Pilot Periodic Rehabilitation, Indicators .................... 29 Table 3.2: Upgrading Rural Roads, Per km Average Base Cost .... ........ 31 Table 3.3: Upgrading Rural Roads, Indicators ....................... 31 Table 3.4: Project Cost Summary ............................... 33 Table 3.5: Project Financing .................................. 34 Table 3.6: Procurement Arrangements ........................... 34 Table 3.7: Allocation and Disbursement of the Loan ................... 36 Table 3.8: Disbursement Profiles ............................... 36 Table 4.1.1: Economic Evaluation Summary ....................... 87   REPUBLIC OF TUNISIA RURAL ROADS PROJECT Borrower Republic of Tunisia. Amount $51.5 million. Terms Seventeen years, including a five-year grace period, at the Bank's standard variable interest rate. Objectives The project objectives are public sector restructuring, budgetary reforms, private sector development, the development of improved road standards, the reduction of disparities between urban and rural areas, the reduction of rural to urban migration, and improving the delivery of social services to poorer population. These objectives will be realized through improving maintenance of rural roads, particularly unpaved ones; decentralizing road management responsibilities to local governments, without developing new entities; establishing a link between budgets and road classification; strengthening budgetary discipline, transparency and accountability; targeting specific road maintenance tasks for execution by contract to improve efficiency and to create new development opportunities for a dynamic private sector; and finally minimizing life-cycle costs by making optimum use of gravel road techniques. Project (a) the preparation and initial implementation of an institutional reform Description program (3% of cost); (b) the periodic rehabilitation of approximately 300 km of gravel roads in a pilot program to be carried out by contract in ten Governorates (9% of cost); and (c) the upgrading of about 715 km of priority rural roads to appropriate standards (88% of cost). Project The main benefits will involve savings in road transport costs; improved Benefits access to remote rural areas, which will translate into lower consumer prices, higher farm gate prices for agricultural produce and reduction in rural poverty; and better access to social services such as schools and hospitals. The provision of agricultural extension services will also be facilitated, with a complementary impact on agricultural production. Implementation of the in- stitutional reform program will clarify classification and ownership of local access roads as assets of local government, and a shift toward road maintenance works by contract should alleviate the financial impact of maintenance works on budgetary resources.  Loan and Project Sunuwry Project Risks include both under-funding of parallel public agricultural investments Risks and inadequate institutional reforms. The project mitigates the first risk through a declared commitment from the Govermnent guaranteeing a steady follow-up on agricultural infrastructure investments and extension work in the project roads' zones of influence. The second risk is mitigated through a Letter of Sector Strategy, the signature of which is a condition of Board presentation. Project Cost Local Foreign Total _ ($ million) _ A. Institutional Reforms 0.6 1.8 2.4 B. Pilot Periodic Rehabilita- 2.5 3.9 6.4 tion C. Upgrading Rural Roads 27.3 37.8 65.1 Total Base Cost 30.4 43.5 73.9 Physical Contingencies 2.8 4.3 7.1 Price Contingencies 4.3 3.4 7.7 Total Project Costa 37.5 51.2 88.7 a/ Local costs ($37.5 million equivalent) include $17.7 million equivalent in taxes and duties, to be financed by Government. (Here and throughout the report, some totals do not add up due to rounding). Financing Local Foreign Total Plan ($ million) IBRD 1.0 50.5 51.5 Government 36.5 0.7 37.2 Total 37.5 51.2 88.7 Estimated FY FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 Disbursements ($ miulion) Annual 0.0 2.7 8.0 11.1 10.6 8.6 5.6 3.4 1.5 Cumulative 0.0 2.7 10.7 21.8 32.4 41.0 46.6 50.0 51.5 Economic Rate ERR per subproject ranges from 20% to over 100%. ERR is about of Return 40% for the overall project. Map IBRD 26534  REPUBLIC OF TUNISIA RURAL ROADS PROJECT P0 WTHE RANS!FR7 SEC7 AND THETUN$0A [ECONOMY A. COUNTRY BACKGROUND 1.1 Independent since 1956, Tunisia is the smallest country in Maghreb, covering 163,600 square kilometers with a population of 8.4 million inhabitants in 1992. A third of the population is concentrated in some 7% of the national territory in the Northwest region, where 40% of total nationwide employment is generated. Urban development has been especially fast there, with close to 2 million living in the Greater Tunis area and the rural population of less than 20%. The Northeast enjoys relatively good rainfalls which allows it to sustain adequate agriculture in addition to industrial activities. The Center- East, with Sousse and Sfax as the main cities, ranks second in Tunisia by economic importance, with about 20% of the population living on less than 9% of the area. Agriculture and export oriented industries are the major contributors to production. Mountain barriers have inhibited economic integration in the North-West region where a scattered population lives primarily on agriculture. The arid climate prevailing in most other parts of the country has produced extensive deserts. The south, however, is rich in mineral resources like phosphate rock and hydrocarbons on which a few industrial poles are set up. With a population of 120,000 inhabitants, Gabes is the most important city. The coast attracts significant tourism, in particular the isle of Jerba. 1.2 Agricultural development and reduction of the food deficit are at the core of the government's economic policy. Overall, close to 50% of the population lives in rural areas where poverty remains widespread, due to a succession of drought years (especially 1988 and 1989) and road infrastructure deficiencies. Limited water resources constitute a major constraint to the pursuit of economic growth which boosts water demand for an increasing variety of uses. The some 2% annual growth of the population adds to pressures on renewable water resources, three-quarters of which are already used. Developing agricultural production must go together with better utilization of existing land resources and improved water management. There is ample scope for raising productivity in the case of many arable plots now isolated because their access roads were not maintained and deteriorated over time. Restoring rural roads will create strong incentives for private farmers to renovate or develop irrigation systems that will allow land to regain its fertility and to shift to higher-value crops. On the whole, transportation is a powerful factor for economic integration. Its development will reduce the important income disparities existing between the various regions' and, in the case at hand, it will be a powerful lever to reduce poverty in the country2. 1/ In 1994, a famnily residing in Tunis would consume on average twice that which would be consumed by the same family in the central-western, northwestern, or Southern parts of the country. 2/ There is a ratio of 1:2 between the consumption of rural families and urban ones.  2 Chapter I 1.3 The Government's administrative organization is being decentralized. The country is subdivided into 23 Governorates headed each by a governor who, as the government representative, has direct authority over local branches of central ministries. There are several administrative tiers between the governorate and the municipality which is the base unit. The Regional Council, headed by the governor, is given a key role in the preparation and execution of the regional plan, with the support of consultative assemblies or rural councils. Law 89-11 of February 4, 1989 has defined the responsibilities of governors, but its implementation remains hampered by lack of local human and financial resources. At present, the vole of the decentralized administration remains limited and there are frequent overlaps of responsibility detrimental to the development of coherent strategies. The government has fully acknowledged this issue and studies will be commissioned to obtain optimal solutions. B. PAST ECONOMIC PERFORMANCE AND MEDIUM-TERM PROSPECTS 1.4 Tunisia is a resilient lower-middle income country which was able to harness its core resources to reach a GNP per capita of $1,730 in 1992, one of the highest in the sub-region. The balance of payments crisis of 1986 that resulted from high public investments and a decline in oil export earnings as a result of depletion of reserves and falling world prices, led to implementation of a structural adjustment program supported by the Bank through a series of adjustment loans and the IMF through a Stand-by and an Extended Arrangement. Its main objectives were to orient the economy outward and place increased reliance on the private sector. The program, which included a reform of the tax system, liberalization of trade and prices, and privatization of a number of activities was successfully concluded. Despite catastrophic droughts in 1988 and 1989, GDP managed to achieve some gains instead of falling as in the past under such circumstances. Non-oil exports grew at close to 15% per year in volume in 1987-89, compared to 5.4% in 1980-86. The current account deficit fell from about 8% to about 1 % of GDP over that period. The budget deficit was also reduced to 3.5 % of GDP. Renewed dynamism was instilled in the economy by straightening of macroeconomic policies, allowing Tunisia to make the most of favorable circumstances like the boom in Europe, its principal export market, and a large and unexpected flow of tourists from neighboring countries. 1.5 Over the past five years, the country has achieved reasonable growth with low inflation. From 1989 to 1993, GDP growth rates averaged about 5% per year with fluctuations largely depending on rainfalls, only adequate every two years. The onset of the Gulf crisis in August 1990 caused a drastic reduction of tourism which fell in 1991 by 30% from its level twelve months earlier, and prompted precautionary stockpiling that caused the current account deficit to rise above 5 % of GDP that year. The recovery came strong in 1992, owing to good crops and an influx of tourists. GDP growth reached 8%. Further tightening of monetary policy brought the current account and the budget deficit down to 4 and 2.4% of the GDP respectively in 1993. Inflation which had run at 7% per year was gradually reduced to 4.5% in 1993. Additional support from the Bank, through an adjustment loan (Loan 3424-Tun) approved in December 1991, and  The Transport Sector and the Tunisian Economy 3 from the IMF which prolonged its Extended Arrangement by one year, helped the Government to get over the Gulf crisis. 1.6 Prospects of sustaining a GDP growth rate of 5% until the end of the decade will rely on increasing investment efficiency; the incremental capital output ratio should be brought back to 4.5 or about its level in the mid-seventies. A shift toward private investments, and greater incentives to savings through increasing the cost of capital relative to wages, would contribute to that result. The current account deficit is expected to further decline to less than 4% by 1995, and the debt service ratio should fall to 16.4% of exports in the late nineties. Its restored good credit standing will allow Tunisia to resume borrowing on international markets in the coming years. C. MAIN CHARACTERISTICS OF THE TRANSPORT SECTOR 1.7 The state road network comprises close to 18,000 km, of which two thirds are paved. Its tripartite classification (by decreasing order of importance: Grand parcours or National, Moyenne communication or Regional, and Route Vicinale d'Etat or local) was established by Law 86-17 of March 1986. The 6,000 km long national basic network comprises the core roads sustaining communications between main economic centers. In addition, there is a sizeable albeit poorly recorded3 network of small municipal roads and tracks of interest to agriculture and forestry. Paved road density greatly varies. It goes from 10 m/km2 in the Kebili and Tataouine Governorates to close to 1,000 mAcm around Tunis, with a national average of 70 m/km2. The paved road network is in good condition over 70% of its length. Official estimates of the vehicle fleet give a total of nearly 500,000 units in 1992 that likely include a number a scrapped vehicles. The latest Bank estimate gave a total of 290,000 vehicles in 1989. With an annual registration rate of 30,000 vehicles in the last 5 years, and assuming the number of rebuilt vehicles is half that of the newly registered ones, the car fleet can be expected to reach around 370,0C0 by 1994. Road traffic developed at a fast pace of 11 % per year between 1977 and 1982, its elasticity to GDP being above 1.5. In the following 5 years, road traffic continued to grow but much more slowly, at an annual rate of 4% per year roughly equivalent to that of GDP. Fast growth was recorded between 1987 and 1992, mainly in truck transportation following liberalizing measures. The economic importance of roads for domestic transport is paramount: railways cover less than 5 % of urban and interurban passenger transport needs, and around 15% of total freight traffic. Similarly, the role of shipping is essential to foreign trade as only 5 % of exports and imports use other modes. Overall, the transport sector's share of GDP should be close to 4%. Chapter 2 provides more details on roads. 31 Generally, the number given is 60,000 km of track. The accuracy of this data is difficult to verify today.  4 Chapter I D. PAST AND PROJECTED TRANSPORT INVESTMENTS 1.8 Fixed investments overall have been marginally declining from 30% of GDP before 1986 to 28% in 1993. The transport sector increased its share of the total from less than 11% under the Sixth Plan (1982-86) to 13% under the Seventh Plan (1987-91). In the investment strategy of Tunisia, the priority given to transport seems to have gained strength from one Plan to the next. Within transport, the emphasis is increasingly placed on highways and road transport, which absorbed 52 % of investment resources under the Seventh Plan compared to 37% under the previous Plan. Investment details are shown in Table 1.1: Transport Public Investments. Table 1.1: Transport Public Investments (current D million) Sub sectors VIh Plan (1982-86) VI!' Plan (1987-91) VIIi Plan (1992-96) (actual) (actual) (planned) Highways: - infrastructure 244 469 1030 - transport 102 274 495 total 346 743 1525 Railways: - SNCFT 205 182 188 - SMLT 125 18 126 total 330 320 314 Maritime: - ports 115 50 112 - shipping 46 14 8 total 161 54 301 Air transport: - airports 15 83 97 - airlines l70 166 543 total 85 249 640 Grand Total 922 1366 2780 1.9 The Bank's Sixth Highway project (Loan 2896-Tun, Highway Maintenance and Rehabilitation Project) and construction of the Hammamet-M'Saken motorway were the main single items under the Seventh Plan. New construction and upgrading accounted for about half of road funding. The rapid development of special programs for construction of rural roads falling outside the purview of the Ministry of Equipment was a distinct feature of that period. The road transport market was liberalized in 1988, which triggered rapid growth of investments mostly for restructuring national and regional enterprises for passenger and freight transport. Among other modes, air transport nearly doubled its share of total investment to some 18% under the Seventh Plan. A third of airport investments went for new construction in Tabarka. Renewal of  The Transport Sector and the Tunisian Economy 5 the Tunis Air fleet and the development of Tuninter boosted airlines investments from D 70 million to D 166 million from the Sixth Plan to the Seventh Plan. Ports and shipping investments were marking a pause. Fishing ports, the construction of Zarzis (a primarily oil port), and a quay in Gabes account for most of Government funding. Other investments by the Office des Ports Nationaux Tunisiens (OPNT) and other port operators for modernization, equipment, and rehabilitation fell to half their level under the Sixth Plan. Investments in cargo handling equipment were small, due to financial constraints experienced by the Societe Tunisienne d'Acconage et de Manutention (STAM). Very limited investments were made for modernization of maritime transport, despite obvious needs. Railway investments fell sharply, from 36% under the Sixth Plan to less than 24% under the Seventh Plan. The rolling stock is where expenses were curtailed most and the construction of new lines was suspended. By contrast, rail track modernization and renewal investments doubled between the Sixth and Seventh Plan. 1.10 The Eighth Plan (1992-1996) is under implementation. It provides for D 2.8 billion of transport investments. The proportion of investments channeled to roads is practically unchanged, at 55 % of total. Construction of motorways (Hammamet-Sfax and Tunis-Bizerte) constitutes one-fifth of investments in the sub-sector. The public funds allocated should amount to D 150 million, compared to D 50 million under the Sixth Plan. Other motorway investments are provided, but these resources will be raised on the financial market by the concessionaire4 created in 1992. Nearly D 200 million are allocated to urban network development, mainly in the Greater Tunis area. About D 150 million ought to be spent for construction and development of rural roads under various programs. The budget for road rehabilitation and maintenance is close to D 300 million. Other investments are earmarked for the construction and improvement of roads and bridges. Investments by public transport operators should be equivalent in real terms to their amounts under the Seventh Plan. 1.11 Investment by airlines and shipping companies are expected to increase four-fold to D 700 million, compared to D 170 million under the Seventh Plan. The objective is to modernize the fleet to strengthen the public companies' competitive capacity and expand market shares. New local companies entering the market will contribute to a rise in investment. The national airline, Tunis Air, carries the brunt of the air transport program through continued implementation of its fleet renewal program. For shipping, purchases of Roll on-Roll off, container ships, and one car ferry by the Compagnie Tunisienne de Navigation (CTN) are expected to be accompanied by development of privately owned maritime companies, which entered the market after 1992. Port investments doubled their nominal value though with very little increase in their share (4%). They mainly focus on construction of new Roll on-Roll off terminals in Gabes and Bizerte, dredging in some ports, acquisition of tugboats, equipment for the container terminal at Rades, and extension of oil facilities at Bizerte. As for railways, investments included in the Contract Plan between the Societe Nationale des Chemins de Fer Tunisiens (SNCFT) and the Government come to a total of D 188 million, of which D 41 The Societ Nationale des Autoroutes  6 Chapter 1 68 million (36%) is for rolling stock. As far as rail infrastructure is concerned, the network development expenses correspond to operations launched under the Sixth Plan and are limited to doubling 40 kilometers of the Borj Cedria-Kalaa Kebira line, the Sousse Mahdia junction, and the modernization of the suburban lines south of Tunis. This confirms a definite shift of priority in favor of maintenance, which for the Eighth Plan, accounts for a little less than 60% of railway infrastructure investments. E. TRANSPORT SECTOR ISSUES 1.12 Investment planning. Institutional strengthening occurred at this level after the Cellule de Planification et de Coordination des Transports, established under the Fourth Highway Project at the Ministry of Transport in 1984, failed in its mission to develop effective investment appraisal tools, and was discarded. The Direction Generale de la Planification et des Etudes under this same ministry was reorganized in 1992 to take charge of the sector's management and planning. It is composed of fifteen higher level staff who may still lack practical experience of complex transport economic studies, and extensive knowledge of the various systems used throughout the world which could inspire the important reforms currently underway in Tunisia. Decentralization, while multiplying decision-making centers, worsens the coordination problem that already existed between ministries in charge of developing transport related projects. Aware that a lack of analytical skills still persists, Direction Generale de la Planification et des Etudes is about to launch strategic studies toward preparing the Ninth Plan. They include a Transport Master Plan with a focus on rail and road coordination, master plan studies for urban transport in Sfax and Tunis, and a shipping restructuring study. This vast program addresses real problems, and will try to bring about renewed dynamism to transport planning following the strengthening and streamlining phase under the Eighth Plan. One of the main objectives is greater transport fluidity within multimodal systems. An added factor to the problems at hand is the need for a better balance between economic efficiency and poverty reduction, especially in relation to urban transport. The Bank could make a useful contribution to improved strategic thinking on the transport sector. 1.13 Cost recovery remains insufficient for a number of transport companies operating on markets which are still regulated. SNCFT is a case in point. Its deficit reached D 15 million in 1993 for sales of D 75 million, whereas the contract-plan signed with the State in 1992 anticipates a progressive return to financial sustainability, after the State had settled liabilities of up to D 220 million. A major cause for this deficit is the freeze imposed on phosphate transport tariffs since 1983. Recent studies have shown that the tariffs covered only 70% of the cost, but the difficult situation facing the phosphate industry, currently being restructured, discouraged initiatives to raise tariffs to this day. Compensation SNCFT could rightly claim has not been awarded. Road passenger transport is in a similar situation. The Societe Nationale de Transport Rural et Interurbain, an inter-regional public transport company has high labor costs and a tight financial situation, preventing it from renewing its bus fleet in a timely manner. The twelve public regional transport companies, which manage intra- and inter-regional  The Transport Sector and the Tunisian Economy 7 urban services, are also experiencing a difficult situation in connection with the low level of state controlled tariffs, the lack of compensation for social transport services, and, for seven of them not governed by a contract-plan, the burden of accumulated debts. Poor management and labor redundancy are often major factors. In 1993, the Caisse de Compensation (adjustment funds) disbursed a total of D 42 million to regional companies, of which D 18 million were earmarked for urban and suburban transport in Tunis. Regarding road infrastructure, a 1988 Bank study5 showed that proceeds from road user taxation generally covered capital, recurrent road costs, plus congestion costs (the largest component) despite the implicit subsidies on diesel oil that existed at the time. This conclusion must have gained strength by now. The 1994 prices per liter range from $0.52 for premium gasoline to $0.30 for diesel oil, compared to c.i.f. prices in the $0.15-0.13 range on the world market. This implies substantial effective fuel taxation levels in all cases. However, there were indications at the time that certain categories of vehicles might be undercharged, such as small and heavy trucks, and that some changes may have to be made. Furthermore, the government finances both roads and rail infrastructure but, whereas road user fees generally cover more than twice the estimated recoverable costs, the railway tariffs used by both SNCFT and SMLT (Societe du Metro Liger de Tunis) do not cover construction, nor major rail maintenance, whereas fair competition would require fiscal neutrality between the two modes. Port and airport infrastrcture had also been financed by Governmert until 1993, when it was transferred it respectively to OPAT and OPNT. 1.14 Import processing, which make up nearly two thirds of international trade of general goods6 in Tunisien Ports, is hampered by lengthy procedures with real costs that go beyond what is shown on invoices. Cargo handling in the Tunis port complex, which deals with nearly half of general goods shipped, is the monopoly of the state-owned STAM. The tariff schedule for cargo handling is controlled by the state who sets a national ceiling. It has been noted that the tariffs used in Tunis are higher than in the other ports where STAM is in competition with other companies. On the whole, port productivity is weak in comparison with international standards. The penetration rate of new port and shipping technologies remains relatively low7, and is probably inferior to what it would have been on a deregulated market. Tariff control, with a freeze since 1985, has been a burden on companies, which resulted in low equipment investments. Tunis' captive and lucrative market allowed STAM to endure inefficiency and high costs, in particular concerning port manpower which is characterized by restrictive labor practices and redundancy. Liberalization of port cargo handling is under consideration. 5/ World Bank Discussion Papers: "Road Transport Taxation in Developing Countries. The Design of User Charges and Taxes for Tunisia". No.26 6/ This category represents a traffic share much higher in value than in volume, and often consumes most of the port services and space. Here, the stakes of port efficiency are high. 7/ Containerization in 1993 reached only 76,000 EVP for all Tunisien ports. S/ STAM began investing in 1992. The private sector makes few investments.  8 Chapter I Some abnormalities also exist in shipping and shipping insurance, although their impact in 1994 may be rather limited. The Compagnie Nationale des Transports Maritimes has long enjoyed the privilege of sole representative of the national flag, which meant that it was to be given a 48 hours notice by shippers wishing to use other shipping company services9. CTN, however, endured various constraints related to its public status, like when measures to support the balance of payments deferred its ongoing fleet modernization program to the Eighth Plan. Its obligation to maintain loss-making lines to the West African coast constitutes another anomaly, hardly lessened by rebates on port tariffs granted by OPNT under a contract terminated in 19931'. Compulsory national insurance schemes constitute another source of excess costs in CIF (Cost, Insurance and Freight) imports"1. Customs verifications can be very disruptive and expensive, and slow down the flow of port activities, especially on imported goods. The benefits from early development of computer-based clearance systems are nullified by the continued practice of systematic inspection of all goods declared. Significant gains in terms of international competitiveness would likely be derived from the removal of such transport barriers. The creation of a single checkpoint in Rades in 1992 is a step in the right direction. 1.15 Efforts to liberalize and privatize the transport sector must be pursued. Recurrent road maintenance is still largely done by force account, based on the dubious argument that private contractors would not be able, or willing, to take over works from the administration; whereas the reality is more of a narrow market crowded out by the latter. Road transport was liberalized in 1989, and the private sector rose to the occasion by rapidly expanding its market share'2 and contributing to higher productivity and lower costs. Privatization of most regional companies began in 1994, and five of them will be sold before the end of the year."3 Measures related to STM which before 1988 was responsible for 70% of trucking, owing to its monopoly, will come at a later stage. For urban and interurban passenger services, the private sector remains confined to taxis and car-for-hire services requiring an authorization to operate. The private sector can have access to the transport market in Tunis for minibus services, under state supervision. In ports, OPNT still manages and provides some services such as consignment and towing, which could well be the private sector's responsibility. In cargo handling, STAM is competing with six private companies'4 in other ports than the Tunis complex. The conditions don't seem to be quite right for greater dynamism by private port operators. For shipping, two private companies have been established in 1992, another followed to take over some of the Gabes-Chimie Transport Fleet, a public company in liquidation, 9/ According to the MOT, this right would no longer be given. IO/ A proposal to stop shipping services to Africa's west coast is being studied. 11/ Most imports though are Cost & Freight, thus avoiding c.i.f. double insurance system. 12/ In 1993, the private sector operated at a capacity of nearly 15,000 tons, or 30% of the total. 131 Four will be sold on the stock-exchange, the fifth was sold through competitive bidding. 14/ STTAT, Socam, Couronne, Stumar, K. Dammak, Samaara  The Transport Sector and the Tunisian Economy 9 while a fourth one is about to start"5. The private sector has so far been confined to tramping services and is in a somewhat stagnant state. Regular lines, which in 1993 represented nearly half of CTN's turnover, will probably be open to private shipowners as early as 1995. Shipping is widely open to international competition except for the Southern-France lines under the Code de Conduite des Conferences Manitimes, which should disappear with the pursuit of European market integration. CTN's market share represents no more than one quarter of regular lines'6 and the private sector's expansion could strengthen Tunisian shipowners' market share. At this time, SNCFT is the sole rail transport operator. In air transport, the national airline Tunis Air has coexisted since 1992 with Air Liberte (a charter), Tuninter (a mixed venture for domestic transport with Tunis Air owning 40% of the capital) and Tunisavia (helicopter and taxi-plane services). Airports are fully managed by OPAT, including cargo handling services. Across the transport sector, projects are being studied to pursue privatization efforts. A formula, opening the public companies to private capital transit through their listing on the stock exchange market and issuance of new stocks, to be followed later by a more thorough privatization, seems to be in favor with the Tunisian authorities. 1.16 Road budgets remain generally insufficient and their structure does not allow for the transparency required for programming and expenditure follow-up. Normalized maintenance requirements exceed by 50% what is physically achievable under actual budget constraints. One of the biggest gaps relates to periodic maintenance of road shoulders. When road budgets are strained, as is the case in Tunisia, it is all the more important to set sound priorities and define the core network that should be maintained at all costs'7. Traffic expansion heightens maintenance problems because it implies more frequent and major repairs: budget constraints compel the road administration to increasingly neglect the secondary road network and to depart from the main network's optimal maintenance policy (about 6,000 km) by using extensive resealing to defer heavy and costly maintenance. Even more important is to avoid expanding the network without making sure that recurrent costs will be affordable and fully funded. Although there is no evidence that the road investment structure is basically unbalanced, it seems advisable to slow down some road construction and improvement programs in order to better endow the investment budget for network strengthening and rehabilitation. It can also be noted that programs' diversity and the multiple sources of financing'8 run the risk of diminishing programs' coherence and making it difficult to control that funds are adequateley allocated and spent. As for routine and periodic maintenance budgets, loopholes in the institutional setup leave the non classified roads in a difficult budget situation. Tunisia's road classification dates back to March 1986, and is being revised. 15] The companies are respectively TSTC, CMN, CMN Tanker, and Petronav. 16! It covers only 15% with the ships it owns. 11/ A computerized network management system is being installed and, within 2 years, will facilitate needed prioritization. 18/ This is the case for rural roads (PDRI, PDR, National Solidarity Fund program, "26 26", etc.)  10 ChapterI Responsibilities between the Ministry of Infrastructure and local governments are not always well defined. When provinces and municipalities are responsible for road management, the allocated budget does not match their needs. A poor balance is also maintained between investment and maintenance. Programs like the PDRI finance construction of rural roads but no arrangement is made for their future maintenance, which tends to favor paving over cheaper standards because maintenance constraints are deferred to a much later date. The importance of road maintenance works by force account, and analytical accounting'9 gaps also contribute to reducing budget discipline and transparency. 1.17 Road safety is low by international standards and the government should be mobilized more forcefuilly against this social scourge20. Action is needed in many areas, from vehicle controls to drivers' education, through improved road infrastructure and signalling, and better enforcement of road traffic regulations by the police. These actions need efficient coordination as they involve many entities. Truck overloading is another issue that has adverse impacts on road deterioration and road safety. Improving by a factor of 10 the highway safety ratios seems both necessary and achievable in the long term. 1.18 Vehicle assembling and imports are entrusted to several companies with the most important being the Societe Tunisienne d'Industrie Automobile (STIA), a parastatal. Since 1994, STIA no longer holds the monopoly for the direct import of vehicles used for international transport, and which are largely exonerated of customs duties and taxes by the new Code des Investissements. For domestic transport vehicles, imports rest on quotas shared by STIA and private importers. STIA has a major market share, representing two-thirds of total. The present system is constraining to the effect that foreign supplies must respect a minimal 15% "integration rate" of the sales price.2' F. BANK ASSISTANCE STRATEGY 1.19 Since 1962, IDA and the Bank lent a total of $3.2 billion to Tunisia. The implementation experience is satisfactory, and the overall rating of the portfolio is one of the highest among Bank borrowers. Bank projects were instrumental in the important policy changes and institution building that have taken place in Tunisia. Past Bank lending emphasized support for long-term investments in infrastructure and social sectors, shifting more recently to agriculture and industrial development together with adjustment operations. As of March 31, 1994, transport and urban infrastructure represented about a fourth of the Bank Group's outstanding commitments. Designed to 19/ A new network and analytical accounting management system developed under the VI' project is being installed. It should significantly improve the efficiency of maintenance work programming and facilitate cost controls. It will be operational in 1996. 2Q/ In 1993, 10,000 accidents were recorded with 1,273 dead and 12,549 wounded. 21/ Meaning that some components must be produced locally (i.e. windows or bus seats)  The Transport Sector and the Tunisian Economy 11 help the government complete the ongoing adjustment program, the Bank's assistance strategy emphasizes five principles: (a) the private sector should be given opportunities to play the leading role in an outward looking economy; (b) the public sector and administration should evolve toward less intervention and control, and become more supportive of the private sector; (c) the financial viability of the social protection system has to be enhanced; (d) better management of natural resources, particularly of scarce water resources, must be supported; and (e) the integration of Tunisia in the "global" market is essential to sustainable growth. 1.20 The pace of privatization needs to be sped up. The policy environment and the regulatory framework still hamper initiatives by more dynamic investors. Infrastructure bottlenecks, transport included, should be removed to facilitate not only commercial activities but tourism as well. An operation in support of private sector development is planned to meet these objectives. Indirect support will also be given under investment projects like the one proposed. Future lending will further address pending issues in the financial sector like, among other things, the poor management of lending risks by banks, and their inadequate coverage of customer needs in rural areas. 1.21 The ongoing liberalization creates a compelling need for the public administration to undergo profound changes and acquire new skills. One of two Institutional Develop- ment Fund grants focuses on trade facilitation through streamlining of customs and port procedures. Other preparatory steps are taken toward launching a public administration modernization project aimed at providing a strong private sector oriented framework for administrative reforms. Decentralization is the second major change that should be supported, with special reference to management of the Government financial resources. Local authorities still lack expertise in investment planning and programming, and a second municipal development project is envisaged to enhance local capabilities in resource management and service delivery. The proposed project fits well in the Bank's strategy by promoting transfer of rural road management responsibilities to local governments. 1.22 Poverty alleviation is another priority even though the estimated incidence of absolute poverty of about 7% is lower than in most developing country. Pockets of poverty remain, like in the Northwest and in central Tunisia. Rural areas are the most affected, but the elimination of redundant workers in public enterprises will also create risks of urban poverty. The Bank and the goveinment undertook a number of studies to shape out a broad reform of the social security system which will be supported by a social sector project. The emphasis is also on education, which should be more responsive to the needs of the productive sector and facilitate employment. An employment and training project is designed to achieve this objective. By improving traffic conditions in rural areas, and promoting standards that require more regular maintenance operations and, therefore, more permanent work, the proposed project directly contributes to poverty alleviation where it is most needed.  12 Chapter I 1.23 In the long run, Tunisia's development will depend on how efficiently it protects its natural resources and the environment. By year 2000, known potable water resources will have been mobilized in full and demand growth will have to be met from higher efficiency in water use, recycling, and ultimately desalination. The government awareness of these issues is already acute, and the Bank intends to help sharpen it further through studies. Its ongoing and proposed lending for forestry, agriculture, and water sector development will support soil conservation efforts and water and land use efficiency. The proposed project provides indirect support to agricultural development which will find new opportunities in improved transportation. Arable lands that had been progressively isolated and neglected will be returned to efficient production, by irrigation for some. The proposed project, therefore, makes a direct contribution to better land and water uses. G. BANK TRANSPORT LENDING STRATEGY 1.24 Bank transport lending should focus on issues most constraining to economic and social development, and on which the Government awareness has reached a stage where decisive action on its part can be reasonably expected. Current constraints and transport sector deficiencies relate largely to the port, marine transport and highway sub-sectors, where there are substantial opportunities for improvements. Main shortcomings can be summarized as follows: (a) containerization made few inroads in Tunisian foreign trade because ports do not have adequate facilities; (b) port productivity is low by regional standards; costs are higher, mostly in Tunis' ports where STAM's monopole seems to be partly responsible; the organization of port operations allows for restrictive practices by unionized labor, and raises employment well above needs; mixing conventional and containerized cargos in Rades port also contributes to lowering productivy; (c) the national shipping line was slow to modernize its fleet; plans to acquire two container carriers and two roro ships constitute a long awaited answer to the Tunisian shippers' needs, showing the limitations of a company's strategy under state policy regulations; the private sector's failure to show its expected dynamism leads to questions regarding what handicaps could exist in an already well liberalized framework; (d) customs procedures are cumbersome, with systematic inspection of all declared goods; they contribute to the fact that shipments spend more time in Tunisian ports than at sea; (e) the existing road classification contains gaps leaving most rural roads without designated ownership; it aggravates funding issues, and often result in maintenance neglect and premature deterioration; (f) road budget structures, whether for investments or operations, do not respond adequately to the financial needs for road maintenance, are not conducive to budget transparency, complicating the analysis by objectives and control on how  The Transport Sector and the Tunisian Economy 13 the allocated resources are spent; moreover, works by force account are not yet strictly monitorable, which tend to weaken the budgetary discipline; (g) road maintenance is largely carried out by force account; not only is it associated with lower productivity and quality standards, but it also limits development of small private road contractors; (h) construction standards for rural roads22 are often higher than economically warranted; this problem is partly linked to inadequacy in the road classification, partly due to insufficient maintenance budgets and to the perception that paving roads reduce maintenance requirements. 1.25 As for ports and shipping, enhancing international competitiveness of the Tunisian economy would easily qualify as the paramount objective in future Bank transport lending. It calls for liberalization of the shipping market, opening of cargo handling to competition in the Tunis ports, promotion of a strong and competitive freight forwarding profession2 in view of the role it should play for development of efficient intermodal transport systems, and facilitation of international transport procedures. Without cost-efficient shipping, and fast port transit, Tunisia will fail to develop, or even maintain, its market share of world trade and lose opportunities to attract private capital ventures in search of the good and relatively cheap labor it can provide. One should acknowledge, however, that a consensus must be built first for major reforms in this area to succeed. The vested interests of public monopolies and the traditional stonewalling of customs must be overcome, which requires more than advocating changes. The case for reforms in the specific context of Tunisia should be articulated on the basis of technical studies detailing how to proceed, the likely benefits and costs to be derived, the way to mitigate adverse impacts. This process is about to start in a concerted effort inside the Bank for private sector promotion. A transport lending operation should be the natural conclusion of that effort, and include such financing mechanism as ECOs (Extended Cofinancing Operations) to facilitate private takeovers of port and shipping services. 1.26 For domestic land transport, the railway problems seem the least important to tackle, not only because the Bank's review of the Eighth Plan showed a much satisfactory adjustment in the level of public spending for railroads, now representing less than 7% of total public investments in transport compared to 13% under the previous plan, but also because a much higher priority is given to maintenance, which the Bank has long recommended. Besides, the relative importance of railway traffic is low. For road transport, pending pricing and public management issues are essentially related to urban and, to a much lesser extent, interurban passenger transport. Reforms in this area should be pursued, but at a slower pace that takes into account the need to avoid conflicts between financial sustainablity and poverty alleviation. 22/ In particular, curvature and width of the platform. 23/ Regulations were established at the end of 1994 to give legal status to the freight forwarding profession.  14 Chapter! 1.27 Because of the large benefits at stakes and the potential for government to act swiftly and decisively, the Bank lending strategy should now focus on public sector management, including decentralization of responsibilities; budgetary reforms; private sector development; and improving road standards. Decentralization of road respon- sibilities came as an imperfect implementation of the 1989 decentralization Law in the sub-sector, leaves grey areas as to ownership and funding responsibilities; the objective is to improve the road classification by transferring some to the regional level. By establishing a link between budgets and road classification, budgetary reforms will strengthen budgetary discipline. Reducing road maintenance by force account will have a significant impact on the cost and quality of road works, and will create new development opportunities for a dynamic private sector. Improved road standards will minimize life-cycle costs by making optimum use of gravel road techniques.  REPUBLIC OF TUNISIA RURAL ROADS PROJECT DD. IRURAL 1ROADS AND lAMCULTURIE DgEVEL6DPMEN' A. THE RURAL ROADS WITHIN THE ROAD NETWORK 2.1 The road network is fairly developed in the north-eastern part of the country, but tends to become more sketchy as it extends away from the coast and in southern provinces. There are a few remote areas in the south-east, the center-west, the Haute Mejerda, and the Bizerte's sahel. Even where the road network density is the highest, missing links exist that both increase travel distances and leave rural areas in isolation. The land tenure, characterized by a great majority of small farms (less than 20 hectares), intensifies needs for common use feeder roads. The Government policy provides for gradual completion of a well structured network, and has been supported by the Bank through three rural roads projects. These projects are generally designed with a dual purpose: one is to improve farming conditions with special reference to easier and cheaper access to supplies and market outlets, the other to improve traffic condition where the road network shows structural gaps. The current length and composition of the road network are given in Table 2.1: Classified Road Network. Table 2.1 Classified Road Network (1994 - km)24 Standard National Provincial Local Classification Total (GP) (MC) (RRVE) in progress -paved 3,793 4,537 2,241 1,149 11,720 (66%) -unpaved25 50 402 701 21 1,174 (7%) - tracks 236 1,583 2,908 149 4,876 (27%) Total 4,079 6,522 5,850 1,319 17,770 (100%) (23%) (37%) (33%) (7%) 2.2 About two-third of the 18,000 km-long network is paved, including 140 km of motorways now in operation. Around 1,800 km of roads have been paved between 1986 and 1994, representing annual increments of 225 km. Over two-third of these increments related to paving of rural roads many of which are not yet classified. The 1987 road inventory showed that close to 72% of paved roads were in good condition at the time. No precise data exists on condition of the unpaved network which is deemed to be in generally bad given the paucity of financial resources allocated to their maintenance. Many rural roads are impassable during rains. Not included in Table 1. 1 are about 60,000 km of summarily built tracks. 24/ The road classification is underway. Data shown in the table correspond to a preliminary selection carried out by DGPC. Other roads may ultimately find their way into the classification. 25! Engineered gravel and improved earth roads.  16 Chapter 11 2.3 The inventory of unclassified rural roads and tracks is wrought with imprecision. Roads outside urban areas and mostly carrying goods related to agriculture production are estimated at about 20,000 km. A recent inventory of engineered rural roads gave a total of 6,017 km which were built under the following program: - World Bank: 2,241.5 km (Third and Fifth Projects) - PDRI26: 1,297.5 km - PDR27 and others: 2,478.0 km. This included 3,382 km of paved roads (56%) and 2,635 km of unpaved roads (44%). 2.4 The characteristics of rural roads are diverse, from simple earth tracks with no drainage that are rarely graded, or tracks across in rocky terrains which are not maintained and often bumpy, to engineered unpaved road graded and periodically regravelled, to paved roads. The construction standards applied by the General Directorate of Bridges and Roads (DGPC) are evolutionary, starting from a simple 6 m- wide and unpaved platform with drainage and surelevation to ensure year-round traffic serviceability, to an intermediary stage similar in all to the first one except for the platform which is 9 m-wide and on which a 5 m-wide gravel travelling surface is added. The lowest paved road standard substitutes a bituminous overlay to the gravel one just described, whereas the most advanced standard is comparable to that of national roads, with an 11 m-wide platform and a 6 m-wide travelling surface. The latter paved standard normally applies to road with traffic above 600 vehicle per day, and the former to roads with traffic between 300 and 600 vehicles per day. Paving may sometimes be carried out under conditions of lower traffic but in ruggy terrain, areas subjected to sand accumula- tion, and agricultural regions producing crops that must be promptly evacuated, or which can be damaged while transported on bad roads. B. TRANSPORT SERVICES IN RURAL AREAS 2.5 Rural transport corresponds to services rendered along itineraries that are predominantly unpaved. Most of these services are provided by medium to small size vehicles on a for-hire basis. Decree 92-1904 dated October 26, 1992 which regulates road freight transport makes exception for rural transport: the own-account as well as for-hire transport of agricultural products is not subjected to authorization by the Ministry of transport as long as the gross vehicle weight is 12 tons or lower. For-hire transport of passengers on the contrary is subject to authorization by municipalities for services rendered within their jurisdiction, by the Governor if more than one municipality is served within a province, and by the Ministry of Transport in all other cases. The authorization is given for fixed itineraries, and tariffs are controlled. The Government tried to improve transport conditions in rural areas, with particular reference to passenger safety, by setting technical standards for multipurpose vehicles and promoting their construction and commercialization. This attempt failed as the price of 26/ Programme de Developpement Rural Integre under the Ministry of Planning. 221 Projet de Developpement Regional.  Rural Roads and Agriculture Development 17 the standard vehicle (D 35,000) was unaffordable to most. Passenger and freight still move predominantly in old and unfit vehicles. The Ministry of Transport intends to take steps to limit to five years the age of vehicles in operation for provision of for-hire passenger services. Regulations are not strictly enforced. C. RURAL ROAD ADMINISTRATION 2.6 DGPC, under the Ministry of Equipment and Housing (MEH), was created by Decree No. 88-1413 dated July 22, 1988 to take on management of the State road network. Main responsibilities relate to design and implementation of the national road policy from construction to operations and maintenance. They only marginally touch upon rural roads since DGPC is to promote development of components of the rural network that could eventually be classified in the State road network. Better integration of rural areas through good connections to the main road network is a priority objective of the Eighth Plan, which DGPC has to pursue more actively. DGPC had already been reorganized and decentralized in 1981. This management system somewhat lost in cohesivenes, since the 23 provincial heads of public works services no more have DGPC as their line manager, but report directly to the Regional Director of Equipment, himself reporting to the Governor. Nonetheless, the overall situation remains under control. The headquarters now comprise seven specialized branches for project programming and supervision, studies, operations and maintenance, management of the equipment fleet, laboratory studies, administration, and training. About 500 civil servants are based at DGPC headquarters, and twice as much in the decentralized units. More than 3,000 laborers are hired to carry out force account works. 2.7 The status of rural roads shows diversity and loose ends in the means given for empowerment. Some fall under the responsibility of municipalities and other ministries, but most are managed by the Regional Council (RC), the governing assembly of province under the tutelage of the Ministry of Interior. The RC is a legal and financially autonomous entity established by Law 89-11 of February 4, 1989 and includes locally elected representatives (members of Parliament, presidents of urban and rural councils). The directors of local branches of the Government administration attend its meetings. The RC has its own budget and raises tax revenues. Some of the Conseils Generaux have developed road in-house technical expertise. Most of their resources come from the central budget as RCs have delegated responsibility from the Government to manage national programs within provinces. A March 1989 decision by the Government assigns management of 5,500 km of rural roads to DGPC, generally the roads built at good technical standards under Bank projects and other programs which are, or might be, classified at a later stage. About 62% of these roads are paved.  18 Chapter 11 D. MAINTENANCE ORGANIZATION 2.8 Roads maintenance is contracted out for periodic renewal of asphalt concrete overlays and heavy maintenance like rehabilitation and strengthening. Other operations are executed by force account under the decentralized public works administration. Management of the equipment fleet is one of the functions where substantial progress is needed. The fleet includes around 1,300 items, nearly half of which have been purchased in the eighties, and 25% is 15 year-old or more. The fleet's heterogeneity is a problem for maintenance, and a third of it is out of service awaiting repairs. Productivity of the fleet in operation is mediocre. Its organization is decentralized, and the equipment has been distributed to the 23 provinces. Notwithstanding the prerogative that the Minister of Equipment and Housing has to reallocate it as and when needed for greater efficiency, the fleet tends to be permanently based and used exclusively by the province. Part of it is apportioned to the Zones, a sub-territorial unit in the province, which further aggravates operational rigidities. Two graders are available per province to carry out routine maintenance of unpaved rural roads. There is one workshop per province, and a central workshop managed by one of the DGPC directions which handles major repairs and all purchases. The level of activity at the central workshop has plunged in late years, a likely consequence of slow and mediocre services and of recent attempts to charge the provinces for services rendered. Rental rates, charged for replacement equipment sent to provinces pending repair of their own, or to users outside the DGPC organization, are based on an old and inadequate tariff. Cost accounting for periodic and routine maintenance is being upgraded for classified roads; the related pilot program, currently limited to six governorates, will be gradually generalized to the whole country. The development of a road data bank is also in progress, together with setting up of a computerized system for optimization of road maintenance programming28. Rural roads should be included in a next phiase of network management development. The real costs of works by force-account are difficult to ascertain, and they are incomplete: only costs directly related to operations are recorded, exclusive of depreciation and labor. That gives a highly distorted picture of total costs, and falsely entertains the widespread belief that force account works are much cheaper than works by contract. E. FUNDING OF RURAL ROADS 2.9 Construction of rural roads in the eighties intensified as a result of the emphasis placed by Government on rural development. The larger resources allocated to rural road investments came from the central budget, and several agricultural development offices. Extensive support was also received from the Donors community: from the Bank, under the Third (First Rural Roads) and the Fifth Highway Projects which financed 2,200 km, and from various Arab funds. The rapid development of special programs characterizes 28/ The new pavement management system, developed under the Sixth Highway Project, is based on the COGES cost accounting system, a road aata Bank using the Visage software, and a computerized optimization model called Evalue which is transposed from the system used in France.  Rural Roads and Agriculture Development 19 the recent period. About 1,300 km of paved rural roads have been built under the PDRI initiated by the Ministry of Planning. Construction of rural roads also came under the PDRs managed by the Ministry of Agriculture. Funding for paving of engineered rural roads is also available under the Fonds National de Solidarite created in December 1992 to reduce social inequalities and help impoverished areas (zones d'ombre). Overall, rural road investments increased from about D 100 million in the Seventh Plan to about D150 million in the Eighth Plan. The main program is for construction of 1,400 km of rural roads, the responsibility of which is split equally between DGPC and the Commissariat General de Developpement Regional (Regional Development General Commissionership) under the Ministry of Planning. Implementation started in 1994, two years behind schedule. The plan also provides for purchase of equipment for public works to a total of D 7 million. 2.10 Since 1983, the DGPC budget includes a line item for maintenance of rural roads (Article 60 - paragraph 12 of the Finance Law), which helped to streamline budgeting of unclassified roads; the authority to commit related funds is delegated to the Directeur Regional de l'Equipement. The Conseil Regional is consulted on the proposed allocation of credits across the govemorate. Resources allocated to article 60-12 remained at a largely symbolic level during the first five years, then soared from D 260,000 in 1988 to D 2,2 million in 1994, a 750% increase compared to 95% for the maintenance budget for classified roads (D 15 million in 1994). The rural roads budget was raised to D 2.3 million in 1994. The Government decision in 1989 to concentrate resources on the 5,500 km-long priority rural has led to a much more effective use of budgets. However, the equipment and crews are often called by local governments to carry out construction and rehabilitation works outside the priority network for which they are not fully compensat- ed; this amounts to a diversion of resources with potentially adverse consequences on future sustainability of rural road maintenance. The 1994 budget includes D 839,000 for routine and periodic maintenance of paved rural roads (3,400 km out of the 5,500 km), up from D 50,000 in 1991. A risk exists that a growing portion of resources allocated to rural roads be used for coverage of growing periodic maintenance needs of only those that have been paved and start to deteriorate. Notwithstanding progress achieved to date, rural road maintenance remains largely underfunded. Regravelling should normally be done every five years on average; instead, the 1994 budget provides for regravelling of only 220 km which, given the total length of 2,100 km, gives an average periodicity of about ten years for such works. Table 2.2: Evoluion of Road Budgets summarizes main data on road budgets in Tunisia, showing the rural road maintenance budget to be about 13% of total spending for maintenance, and 1.7% of all road expenditures, including investments. As for investments for construction and upgrading of rural roads, they represented some 5% of total road investments over 1992-94.  20 Chapter II Table 2.2: Evolution of Road Budgets (D million) Nature of expen- 1988 1989 1990 1991 1992 1993 1994 ditures (budget) Investments -budget 28.0 38.8 38.5 63.3 80.0 85.2 -off budget 1210 9-8 325 SSA 49-A 1A total 40.0 58.6 71.0 87.3 118.7 129.4 99.6 RecurrenL - classified r. 7.7 8.8 10.2 11.5 13.1 14.0 15.0 - rural roads 0Q3 0-2 1L0 L5 L9 2_1 2.2 total 8.0 10.2 11.2 13.0 15.0 16.1 17.2 Grand Total 48.0 68.8 82.2 90.3 133.7 145.5 116.7 F. ORGANIZATION OF AGRICULTURAL DEVELOPMENT 2.11 Agriculture is an important sector in Tunisia and generates substantial foreign exchange earnings. About 16% of fixed investments made during 1986-92 were in the sector. Nearly half the population still lives in rural areas which sustain a third of jobs nationwide with most related to farming. The private sector controls about 95% of production. The Eighth Plan aims at increasing food self-sufficiency, and safeguarding the land productive capacity currently threatened by depletion of water reserves and over-exploitation. Greater efforts are being made to increase output from the rainfed sector where an important potential for increased yields still exists. The timely provision of farm inputs and extension services, and economical transport of products to markets depend in part on the availability of all-weather access in agricultural areas. Four components of the ongoing Plan have special relevance to the proposed project: - the cereal plan, targeting annual production of 25 million quintaux by year 2000; - the vegetable oil plan, designed to turnaround that sector and maintain annual production at some 220,000 tons; - the livestock production plan, scheduling increases of meat and milk production to cover respectively 90 and 80% of Tunisian consumption by year 2000; - the development plan for citrus fruits, aiming at renewal of orchards to raise overall production to 300,000 tons in 1996, 50% above its average level in the early nineties. 2.12 Total investments planned under the Eighth Plan for agriculture amount to D3.9 billion, more than twice the spending level under the previous plan. Financing is to come from the Government budget for 53% of total. The local banking system is called to contribute 27% of total, much more than in the past. The balance of 20% will be self- financed by farmers. Agricultural investments foreseen under the proposed project are an essential complement to road investments for generation of project economic benefits, and represent a mere 2% of total agricultural investments included in the Eighth Plan.  Rural Roads and Agriculture Development 21 2.13 The institutional framework for programming and implementation of agriculture development in conjunction with construction of rural roads is complex. The Ministry of Agriculture has overall responsibility for agricultural planning and development. The Commissariat Regional de Developpement Agricole (Agricultural Development General Commissionership) established in each governorate is responsible for overseeing the coordination of programs of semi-autonomous public agricultural agencies and the decentralized administration of the Ministry of Agriculture. Commissariat Regional de Developpement Agricole liaises with the local banking system under the auspices of a Comite d'Octroi de Credit Agricole to ensure that credits needed by public and private operators to implement the program will be forthcoming. Extension services are provided by Agence de Vulgarisation et de Formation Agricole, a public agency under the Ministry of Agriculture, through its local antennas, the Cellules Territoriale de Vulgarisation at the Delegation level, and the Cellule de Rayonnement Agricole at the Imada level, which is the smallest of administrative units in Tunisia. The Miniistry of Planning and Regional Development plays an active part through the Commissariat General de Developpement Regional which manages the PDRI program. Government budget funds finance the grants allowing the banks to lend at lower-than-market rates. Some are general purpose funds (FOSDA), others are specialized like PAAF for fruit- tree planting, or PRAS for rehabilitation of plantations. Others are Governorate specific, like the FIDA to finance the Sidi Bouzid and Kasserine areas, the PEF to develop oases near Gafsa. The lines of credit under the PDR and PDRI are managed by the Banque Nationale Agricole (National Agricultural Bank) network. Basic infrastructure is always financed by the Government. G. BANK EXPERIENCE OF PREVIOUS RURAL ROAD PROJECTS 2.14 The transport sector in Tunisia received ten loans totalling $294 million. Project lending focussed on highways (six projects), ports (three projects) and railways (one project). Highway projects experienced implementation delays attributable to cumbersome administrative disbursement, and procurement procedures yet to be alleviated. Disagreement between the National Tender Board (Commission Superieure des Marches) and the Bank on bidding procedures, pre-selection and short-listing especially, has not been fully resolved to date. Shortages of counterpart funds, prompted by devaluation of the Tunisian Dinar, often delayed completion of highway projects. In general, the overall performance has suffered from lack of Government ownership. Staffing and training were a constant stumbling block and, as such, warrant careful consideration in future lending. Rural Roads Projects comprised the Third Highway (First Rural Roads) Project (Loan 1601-TUN) and the Fifth Highway Project (Loan 2108-TUN). In addition to the generic problems encountered by highway projects, shortfalls of agricultural accompanying measures and investments have hindered full achievement of planned development objectives. 2.15 The Third Highway Project (Loan 1601-TUN, $32.0 million) was approved in July 1978 as a pilot exercise to assist Government in defining its rural development policy and in setting up a scheme to bring about parallel agricultural investments to fund  22 Chapter II purchases of inputs needed by farmers. It provided technical assistance to the Ministries of Public Works and Agriculture. The project also upgraded rural roads standards (1,089 kms) and financed purchase of rural roads maintenance equipment. The project completion report and the project performance audit report concluded that all components aiming at improving the standards of living in rural areas, other than agricultural investments, met their targets. Agricultural credit facilities under the project were used to a limited extent only. That raised questions as to the soundness of the methodology used at appraisal which justified rural roads investments by project-induced benefits for agriculture. A comprehensive measurement of socio-economic benefits in the influence areas would give a better account of project impacts. 2.16 The Fifth Highway Project (Loan 2108-TUN, $35.5 million) is a follow-up to the Third highway project, with linkages to the Third agriculture project for credit to farmers. It followed the same approach combining rural roads improvement works and parallel agricultural investments in the road influence area. It was designed to raise the level of service to a minimum all-weather standard for 1,186 kms of rural roads, to improve the road maintenance organization, to fund purchase of equipment for five vehicle inspection stations, and to increase agricultural production within the zone of influence of the project roads. Unlike the Third project, it did not experience problems relating to credits to agriculture. Some components, however, have not been achieved, like spot improvements of feeder roads, or were delayed by administrative and organizational changes, like the road safety component and other institutional develop- ment. Road works were satisfactorily completed. 2.17 Bank strategy for feeder road construction in Tunisia, initiated by the then- innovative Third Highway Project, is to combine road improvement with agricultural investments. The experience acquired in Tunisia over more than ten years through two specialized projects demonstrates that the contribution of rural roads to rural development could be important, subject to essential prerequisites. The coordination between agricultural investments and road improvement works is shown to be crucial, albeit not easy to achieve given barriers that exist in the Tunisian public administration. A quality coordination is no less important inside the Bank between the highway and agriculture staff. Institutional issues relating to transfer of management responsibilities closer to the population directly benefiting from rural roads projects, and definition of priority criteria and technical service standards for rural roads, should also be addressed in a thorough manner. Disbursement and procurement issues, including an improved dialogue with the National Tender Board, should further be dealt with. The present project fully accords with this Bank's strategy so defined.  REPUBLIC OF TUNISIA RURAL ROADS PROJECT 000. THE PnodEcT A. BACKGROUND, OBJECTIVES AND DESCRIPTION 3.1 A rural roads improvement and maintenance project was originally identified in 1989. Due to several changes in the lending program, the Bank has then proposed that its scope be extended to other areas of the highway sub-sector, but the Government, unwilling to risk delaying the intervention of the Bank in a priority subsector, has preferred to keep the scope unchanged. 3.2 Rationale for Bank Involvement. The Bank will contribute to the project by bringing a wealth of experience on improving road network management. Furthermore, the Bank can be a powerful catalyst in the institutional reform process. From its outside position, the Bank would be able to assist in overcoming the gridlock that so often characterizes decentralization of management responsibilities and other institutional reforms, in particular by exposing the rationale behind it. 3.3 Objectives. In line with the Bank's Development strategy for the 1990's in Tunisia, the project objectives are public sector restructuring, budgetary reforms, private sector development, the development of improved road standards, the reduction of disparities between urban and rural areas, the reduction of rural to urban migration, and improving the delivery of social services to poorer population. These objectives will be realized through improving maintenance of rural roads, particularly unpaved ones; decentralizing road management responsibilities to local governments, without developing new entities; establishing a link between budgets and road classification; strengthening budgetary discipline, transparency and accountability; targeting specific road maintenance tasks for execution by contract to improve efficiency (reduce cost and improve quality) and to create new development opportunities for a dynamic private sector; and finally minimizing life-cycle costs by making optimum use of gravel road techniques. 3.4 Description. The proposed project would include: (a) preparation and initial phase of implementation of an institutional reform program; (b) the periodic rehabilitation of approximately 300 km of gravel roads in a pilot program to be carried out by contract in ten Govemorates (9% of cost); and (c) the upgrading of about 715 km of priority rural roads to appropriate standards.  24 Chapter III B. INSTITUTIONAL REFORMS Concept and Content 3.5 Issues. It is not uncommon for the bulk of rural roads to receive little or no maintenance between their initial upgrading and the time they reach such high roughness levels that pressure from road users, through local officials and elected representatives, results in unprogramed emergency maintenance, followed by another upgrading (often paving). This economically inefficient life-cycle is due to several interrelated reasons, the main ones are listed below. 3.6 Public sector restructuring. The legal ownership status of local rural roads is often not explicitly defined. No more than 2,500 km of the approximately 10,000 km of roads built under previous rural road development programs have been classified. Responsibilities for maintenance of the remaining roads have not been explicitly assigned. The Governnent decided in 1989 to allocate a budget (art 60-12 of the Finance Law) to the Ministry of Equipment for maintaining about 5,500 km of unclassified roads built to engineering standards (para 2.10). The remaining 2,000 km, as well as other local rural roads, are implicitly included in assets of the Regional Councils (RC), which have, however, no maintenance budget for them. 3.7 Budgetary reforms. The way funding is organized may not fully promote budgetary discipline, accountability and transparency. The current budget classification is disconnected from the new analytical accounting under pilot implementation. For force account works, this makes it difficult to easily compare actual vs. planned expenditures or to assess how much was actually spent on a particular road and what particular maintenance tasks were actually carried out. Also the diversity of funding sources does not favor separation of maintenance expenditures from investments. Special funds transferred to the RCs are often earmarked for consumables, thus diverting force account teams from maintenance to lesser priority construction tasks. 3.8 Private sector development. All road maintenance activities are currently carried out by force account, using a rather large equipment fleet spread among the 23 DREHs. There are documented cases where rigidities in the organization of force account works have lead to few productive hours per work day (with hours spent daily shuttling workers to and from the worksite). The quality of works is reduced because quality control functions are carried out by the staff in charge of their execution. The capacity of the equipment fleet is underused not only because of its physical scattering (complementary pieces may have different bases and individual DREHs needs are often a fraction of the capacity of the equipment they have), but also because equipment maintenance is inefficiently carried out and generates long periods of equipment unavailability (Tunisia is a good example of how constraining the logistics of maintaining a large and disparate equipment fleet can be). This situation is anachronistic, as countries at Tunisia's develop- ment level have long ago started a shift to maintenance works by contract. Furthermore,  The Project 25 the full potential of the domestic contracting industry is currently untapped in the road subsector. 3.9 Rural road standards. The methodology used to economically justify rural roads upgrading works looks at the benefits of a combination of both agricultural and road investments in a given zone of influence. As the agricultural potential of these zones is large, so are the benefits, and this has permitted the development of unnecessarily costly construction standards. Furthermore, the construction standards reflect the bias Tunisia has built over time against gravel roads. Gravel pavements are considered only as stopgap measures while the road shifts rapidly from a local feeder function to a connecting one. Thus gravel roads are overdesigned on purpose to facilitate a prompt later paving29. It is clear that Tunisia, like numerous countries, has to develop under strict budgetary constraints. Hence, choices have to be made at different levels and stages to provide maximum benefits for the minimum life-cycle cost. 3.10 Preparation. The Government has setup, through a decision by MEH, an Inter- ministerial Working Group (IWG) on road institutional issues. The group includes representatives of the Ministries of Equipment and Housing, Planning and Regional Development, Agriculture, Interior and Finance, and their regional services. At negotia- tions, the Government agreed to update, through a decision by MEH, the signature of which was a condition of Board presentation, the time frame and the setting-up of the IWG, particularly to detail the objectives and include a representative from the Ministry of Transport. The IWG will be assisted by consultants under Terns of Reference developed with the Bank's assistance and financed by the investment budget of the Ministry of Planning and Regional Development under a program for strategic studies (Annex 3.1: Institutional Study, Outline TORs) . 3.11 Objectives. The Government confirmed at Negotiations that it will prepare and carry out a program of institutional reforms aimed at setting up a new policy for network management and maintenance improvements of the public road network and the reduction of the current institutional weaknesses in the subsector. This program, spelled out in Annex 3.2: Sector Strategy Letter, the signature of which was a condition of Board presentation, consists of: (a) public sector reforms aimed at decentralizing rural roads management to RCs, without developing new road management entities; (b) budgetary reforms aimed at establishing a link between budgets and road classification, strengthening budgetary discipline, accountability and transparency, and improving the balance between maintenance and investment; (c) private sector development aimed at targeting specific road maintenance tasks for execution by contract; and 291 This overdesign, by requiring costly quarry-processed materials, also has the unfortunate effect of making the tenporary gravel pavement more difficult and costlier to maintain.  26 Chapter Ill (d) reforms on rural road standards aimed at minimizing life-cycle costs by making optimum use of gravel road techniques. 3.12 Description. Preparation of the reforms will also be supported under the proposed project by assisting the IWG with study trips and training. This project element also includes a separate but related study to update the construction and maintenance standards of rural roads (Annex 3.3: Road Standards Study, Outline TORs), in order to refine and improve them, with the objective of minimizing life-cycle costs, the principle being adopted for the Rural Roads Upgrading component. 3.13 The public sector restructuring will aim at: (a) empowering regional councils with responsibilities over local affairs, as they are closer to rural areas and better aware of rural road user needs, for more respon- sive management of the rural network; which means specifically, road reclassification with transfer to regional councils of: (i) rural road ownership and decision on technical standards (upgrading levels and investment vs. maintenance); (ii) budget resources; and (b) preventing the development of new bureaucratic entities at the local level by using, to the fullest extent, the road management capabilities of the DREHs under a contractual approach. 3.14 The first step in reviewing road classification & ownership will be a road inventory and the establishment of technical classification standards and upgrad- ing/downgrading criteria on the basis of road functions. Associated legal and regulatory procedures will also be drafted. 3.15 The budgetary reforms will aim at: (a) strengthening maintenance expenditures for a better balance between maintenance expenditures and road investment; (b) establishing a strong link between budgets, budgetary standards and budgetary resources on one hand, and road classification levels on the other hand; (c) improving the regulatory and budgetary framework and strengthening budget discipline, accountability and transparency, in order to: (i) prevent the diversion of resources away from their intended purpose with stricter procedures for transferring budgetary resources from one road or one type of works to new explicitly defined ones; (ii) clearly separate investment from maintenance expenditures; (iii) promote life-cycle cost savings and a better balance between investment and maintenance expenditures; (iv) set up regular and systematic maintenance of gravel roads.  The Project 27 3.16 The first step in reviewing the budgetary framework will be an analysis of the road budget structure along with simulations aimed at defining optimal maintenance strategies. This will constitute the basis for budget allocations by type of work and by eventual technical and financial criteria for road classification. 3.17 Private sector development will aim at creating new development opportunities for a dynamic private sector by: (a) moving gradually albeit decisively toward road maintenance by contract for periodic activities easily programmable, measurable and not requiring specific skills from contractors, and most of routine maintenance, in order to: (i) streamline the organizational setup by separating supervision and quality control functions from execution functions; (ii) promote management transparency and accountability for use of scarce maintenance funds; and (iii) improve the efficiency of the allocated resources, i.e. reduce cost and improve quality and productivity; (b) keeping force account capacities only for works which: (i) are difficult to program in advance; (ii) are difficult to measure; (iii) are too scattered; (iv) do not attract competitive bids; (c) establishing programs to: (i) retrain a core of civil servants for programming, quality control and supervision functions of contracted out works; (ii) privatize a large part of the current equipment fleet; (iii) encourage staff to leave the civil service and start small scale enterprises. 3.18 The first step in reviewing force account vs. contracting will be an analytical accounting exercise to compare actual costs of contract vs. force account maintenance on a selected set of road works. This would serve as a major tool in prioritizing tasks suitable for execution by the private sector. Accompanying measures related to state managed equipment and to the equipment directorate's new status will be handled carefully and different solutions ranging from strengthening existing construction enterprises, to creating and promoting new entities will be proposed. An action plan will be drawn up, which will include quality controls by road laboratories. 3.19 The review of construction and maintenance standards for rural roads will aim, on the basis of the standards used for the Project roads, at making optimum use of gravel road techniques and minimizing life-cycle costs.  28 Chapter Iii Cost and Financing 3.20 The base cost of this component (studies and technical assistance) is $2.4 million. The percentage of taxes is 17%. The Bank will finance 100% of costs excluding taxes, or 83% of total costs including taxes. Implementation 3.21 Organization. Consultants will report to DGPC but will work very closely with, and support the work of the IWG. More specifically, their role is to: (a) bring external expertise and experience; (b) elaborate technical documents; (c) initiate meetings and promote debates. 3.22 Schedule. The study of the IWG, supported by consultants, will be launched in early 1995. Signing the consulting services contract was a condition of Board presentation. It was agreed at negotiations that an Institutional Action Plan, developed from the results of the study and detailing the execution of institutional reforms, will be prepared and submitted to the Bank no later than March 31, 1996. The plan, reviewed on the basis of the Bank's comments, will be implemented immediately and completed by the end of the year 2001. C. PILOT PERIODIC REHABILITATION Concept and Content 3.23 Issue. Due to institutional difficulties and rigidities in financing contract works under the recurrent budget (Title One), inappropriate construction standards, insufficient budgets and unclear legal ownership status, rural road maintenance in Tunisia is limited to urgent interventions or heavy upgrading, with little or no annual and periodic mainte- nance. This maintenance strategy has lead, unfortunately, to the neglect of a large part of the rural roads network as the heavy upgrading rate is slow (440 km a year under the XIII