Tunisia - Private Industry Support Infrastructure Upgrading Project (Formerly listed as Private Industry Competitiveness Upgrading (PSD I)

Report No. PIC2128 Project Name Tunisia-Private Industry Support (&+) Infrastructure Upgrading Project Region Middle East and North Africa Sector Industry Project ID TNPA40208 Borrower Republic of Tunisia Implementing Agency Ministry of Industry (MOI) Contact: Mr. Mohamed Fadhel Zerelli Director General for Industry, MOI Tel: 216.1.890.319/892.313 Fax: 216.1.285.947/792.420 Date This Update Prepared February 1996 Date Initial PID May 1995 Project Appraisal Date February 1996 Project Board Date June 1996 Background and PSD strategy 1. Tunisia is at a critical point in its economic development, and both Government (GoT) and private sector are keenly aware of it. Economic performance, helped by private sector exports in textiles and agro-industry, has improved following an extensive reform program over the last eight years, which has gone far to liberalize the economy and orient it outward by removing restrictions and administrative controls over external trade, prices and credit. In line with this, the public sector has given way to the private sector in a wide range of activities. 2. However, international experience has shown that, while policy reform is a necessary condition for international competitiveness, it does not by itself guarantee the ability to compete in global markets. The spread of new technologies, even in traditional labor-intensive sectors such as textiles and garments, is reducing the share of labor in total costs and putting a premium on quality, speed, and reliability of delivery and services. Thus, unless policy reforms are supported by measures aimed at enhancing exporters' capacity to produce goods that conform to international norms for price and quality, sustainable export and economic growth may not materialize in Tunisia. 3. While Tunisia has managed to diversify its economy and acquire some new comparative advantages, competitors (such as Turkey, Thailand and Eastern European countries) have been more successful in strengthening their traditional comparative advantages in labor-intensive products, while also exporting higher value-added products. Accordingly, Tunisia's performance is endangered by a lack of diversification of exports and by the lack  of international competitiveness of many industrial enterprises established under high protective barriers. 4. GoT and private sector agree that it is necessary to pursue integration with the world economy and, in particular, the European Union (EU). To this end, it has recently initialed a free trade agreement (FTA) with the EU, involving full trade liberalization over a 12 year period starting in 1997. The scope and pace of trade liberalization are now defined clearly by the free trade agreement between Tunisia and the EU, as well as by Tunisia's recent accession to the GATT/WTO. 5. GoT is fully aware of the necessity of meeting the challenge of such a free trade zone and subsequent cooperation agreement. Since it is seeking to manage and keep to a minimum the disruption and costs which the FTA is expected to cause in the short term, in particular to the industrial fabric, GoT has put in place a program (Programme de Mise a Niveau -- PMN) to upgrade the competitiveness of industrial enterprises to international standards. The European Commission (EC) is playing a leading role in supporting the Tunisian upgrading process, with a program for enhancing competitiveness under preparation, as well as the establishment of a Euro-Tunisian business center (Euro-Tunisie Entreprises - ETE). Critical to the mise a niveau process is the strengthening and upgrading of Tunisia's support infrastructure for industry, to make it more efficient and responsive to the needs of private enterprises; GoT has requested Bank support for this effort. 6. The Bank's PSD strategy in the short-term is to work in parallel on two fronts: (a) support further reform in legal and regulatory frameworks to foster further private sector development, through the proposed Economic Competitiveness Adjustment Loan currently under preparation; and (b) support GoT's efforts to upgrade private firms' competitiveness, through this proposed project, which will parallel finance the EC's program for enhancing competitiveness, and possible subsequent operations. Rationale for Bank Involvement 7. The recent PSA and other ESW identify the main issues to be addressed to make the economy more competitive. They respond to the priorities of GoT, which regards the Bank as a valuable source of policy advice and technical analysis. Moreover, at GoT request and in preparation for Bank support for PSD, the Bank has been executing agent for a set of studies, financed by a Japanese grant, reviewing the needs to upgrade enterprises and strengthen support agencies. The Project is being developed in close cooperation with the EC, as a component of the EC's Programme for Enhancing Competitiveness (PEC), reinforcing the two institutions' partnership for development. -2-  The PMN and the EC Programme for Enhancing Competitiveness 8. GoT has put in place the PMN to assist self-selecting (volunteering) viable enterprises to upgrade to international standards. GoT has established a quadripartite Steering Committee (SC), including representatives of relevant ministries as well as representatives of the financial and enterprise sectors and a representative of the labor union, and chaired by the Minister of Industry, to oversee its PMN. A coordinating entity, the Bureau de Mise a Niveau (BMN) has also been set up, reporting to the Cabinet of the Minister of Industry and serving as technical secretariat to the SC, to guide firms seeking competitiveness upgrading through the process. 9. A diagnostic study, covering inter alia market potential, management capability, technical performance and know-how, and financial strength as well as competitiveness, will be prepared by specialist consultants for each firm; where actual or achievable competitiveness is shown, preparation of a competitiveness upgrading plan (CUP) would follow, covering areas such as quality, productivity, environmental issues, recapitalization, organization and management, as well as physical investments. The firm will implement this plan with support and appropriate technical assistance from various primarily private sector sources, whether domestic or foreign, coordinated through the BMN. Access to financing under the PMN is conditioned on implementation by the firm of the agreed CUP. The sectoral technical centers (STCs) are viewed as essential players in the program, both directly as providers of services to firms, and as facilitators of access to specialized foreign assistance. 10. The European Commission (EC) is playing a leading role in supporting the upgrading process, with a Programme for Enhancing Competitiveness (PEC) under preparation, to support the development of venture capital, provide technical assistance to the process, and provide training to the banking system. The EC is also putting in place a Euro-Tunisian business center (ETE), which will undertake diagnoses of firms and provide them with appropriate technical assistance, as well as promote joint ventures between Tunisian and European firms. 11. The PEC comprises the following components: (a) fostering the development of the Tunisian capital market, through the provision of venture capital, through the EIB; (b) support to the Bureau de Mise a Niveau (BMN), in particular through: (i) the organization of study tours for Tunisian decision makers and of workshops in Tunisia on themes relating to the mise a niveau process; and (ii) the provision of direct technical assistance to the BMN. The EC has requested Bank support for and participation in part (i) of this component; (c) a broad training program for the banking system, addressing each bank's individual needs as well as areas of general concern; (d) financing for a program manager to cordinate EC involvement in PSD issues in Tunisia; and (e) the Bank project to upgrade the private industry support infrastructure. The Bank and EC would provide parallel financing -3 -  through their respective operations; the EC may partly finance the TA and training component of the Project. 12. The objective of the proposed Project is to put in place an efficient and market-responsive system of support agencies, providing appropriate assistance to the private sector, consisting mainly of small and medium enterprises (SMEs), and in particular to firms seeking to become internationally competitive. The Project will be one component of the EC program aimed at supporting Tunisian efforts, through the PMN, to improve the international competitiveness of viable private sector enterprises. 13. The Project will provide finance, and possibly technical assistance, to support: (i) the institutional reform and strengthening of existing industrial support agencies, namely the four existing sectoral technical centers; (ii) the creation of additional technical centers; (iii) the establishment of the national metrology system; and (iv) the institutional reform and strengthening of the export promotion center, CEPEX. 14. Assistance to Existing Industrial Support Agencies. The Project will provide finance to support the reform of the four sectoral technical centers (STCs) providing assistance to the industrial sector (CETTEX -- textiles, CETIME -- engineering and electrical industries, CNCC -- leather and shoes, and CTMCCV -- building materials, ceramics and glass). The Project will help develop Tunisian capacity to provide specialized advice to industry, often through transfer of know-how from foreign consultants, and sustain the impetus received from the recent reform of their Boards, three-quarters of the members of which are now from the private sector. 15. New Sectoral Technical Centers. The establishment of new STCs will also be assisted. It is currently proposed that four new STCs be established: for wood and furniture, for chemical industries, for wrapping and packaging, and for food processing industries. Feasibility studies are currently underway for these new STCs, under terms of reference acceptable to the Bank, the results of which are expected by mid-July 1996. New STCs will be established along similar lines to the reformed existing STCs. 16. Metrology. In addition, an accreditation system is being set up for product certification (to ISO 9000 standards, etc.). Most STCs are ready to perform product certification; they will be involved in this activity as well as in the related activities of the national metrology system (NMS) which is also to be established. The proposed NMS is currently being defined after which specific needs for industrial metrology can be defined. The Project will finance equipment for the NMS, mainly for industrial metrology, in addition to the metrology investments undertaken by individual STCs to meet their sectors' needs. The inclusion of this component in the project along with the STCs will help ensure the availability to SMIs of needed services in the areas of quality assurance and product certification. - 4-  17. CEPEX. The Project will provide financial assistance to support the reform of the export promotion center (CEPEX). The issues, and therefore the solutions, with respect to CEPEX are similar to those regarding the existing STCs; the main differences concern the fact that CEPEX serves all exporters or potential exporters, whether industrial or not, and performs more services for GoT. Project Cost, Financing and Implementation 18. The total estimated project cost is some US$53 million equivalent, with direct and indirect foreign exchange costs accounting for about 77 percent of total costs; the Bank loan would finance around 47 to 56 percent of total project costs (US$25-30 million equivalent). Cofinancing for the Project is expected. A project implementation unit (PIU) will be established in the Ministry of Industry, supervised by a Project Director, to administer the project on behalf of GoT. Environmental Aspects 19. In accordance with O.D. 4.01, this project has been classified in category "B". Please see attached Environmental Annex. Lessons of Bank Experience 20. Design of the project reflects conclusions of a review of completed projects in industrial technology development (TD), namely: (a) the impact of a technology project on TD hinges on the existence of a clearly defined strategy, where TD is seen as part of the overall process of industrialization; (b) the framework of incentives is a crucial determinant of success; (c) the strengthening of industrial technology capabilities may need intervention to promote research and development activities; (d) involvement in TD projects has resulted not only in the development of institutions and financing mechanisms but in the reform of technology policy; (e) successful development of institutions and mechanisms has hinged on the creation of solid management, with administrative and monitoring capabilities built- in to the technology functions; (f) the Bank's role has been critical when the success of the project depends on a sustained commitment in areas where financial returns are difficult to quantify or limited in the short term; and (g) technology policy as it relates to industry has a major role in determining competitiveness and productivity, and cannot be seen in isolation from macro-economic, trade, industrial and regulatory policies. Risks 21. There is a risk that the institutional reform of the existing STCs and CEPEX may not be fully implemented, allowing the STCs and CEPEX to continue past practices rather than reorient their activities clearly toward satisfying the expressed needs of private sector firms. The consultation process underway with key - 5 -  representatives of the concerned sectors (who make up the majority of the boards of the STCs and half of CEPEX's board), the STCs and CEPEX, and GoT during the preparation of the performance contracts should mitigate this risk. Also, GoT is now fully convinced of the need for, and soundness of, the proposed reform. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending April 25, 1997. - 6 -  Annex Environmental Annex Upgrading the competitiveness of private industrial enterprises to international standards requires a review not only of the financial soundness of these enterprises and their support institutions but also of their technological, environmental, and management performance. This includes in particular an assessment of: the production process; the quality control system; the consumption and use of raw material, water, and energy; the production and management of waste; and the degree of compliance with environmental and quality requirements and standards (both national and international). The support institutions (the STCs) should be prepared to provide the best example as well as the best service and advice in these areas. Training on environmental issues, institutional strengthening and other enhancement/mitigation measures will be an integral part of the technical assistance and investment support program to STCs and other beneficiary agencies under the project. The establishment of a national metrology system will be also supported under the project. The project will have an overall environmental positive impact by enhancing STCs' environmental capacity and performance and by helping improve compliance of private industrial firms assisted by the STCs with relevant Tunisian and international environmental requirements and standards. -7-