Tunisia - Second Societe Nationale d'Investissement Project

-,t' -W/Z2--t,K RESTRICTED FILE COPY Report No. P-562 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SOCIETE 3NATIONALE D'INVESTISSEMENT IN T UNISIA July 31, 1967  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT ANID RECOM2-ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDAN TO THE SOCIETEi NATIONALE DIINVESTISSEMENT IN TUNISIA 1. I subrit the following report and recommendation on a proposed loan in an arnount in various currencies equivalent to U.S. $ 10 million to the Societ6 Nationale d'Investissement (S.N.I.) in Tunisia. PART I - HISTORICAL 2. The Societ6 Nationale d'Investissement (S.N.I.) was estab- lished in 1959 as a government-controlled agency to provide equity capital for new and expanding enterprises. Based on IFC studies made in 1964 and 1965 on the invitation of the Tunisian Government, a reorganization of SNI was started in 1965 and completed in 1966, when SIl became a predominantly privately-owned development finance company offering a full range of medium and long term finance to the private industrial and tourist sectors. After this reor- ganization, SNI emerged with a total shore capital of D 1.5 million, ($ 2.9 million) of which the Government holds 14%, foreign banking and financial institutions 8%, private Tunisian shareholders 58% and IFC 20Q. IFC's investment of D 300,000 was made in May, 1966. At the same time the Bank made a loan of $ 5 million, SNI's sole source of foreign exchange to date. 3. In December, 1966, SNI and the Tunisian Government requested a new loan from the Bank of $ 10 million. By then SNI had made loans committing $ 3.2 million of the loan from the Bank and expected the remaining $ 1.8 million to be committed within a few months. Disbur- sement of the existing Bank loan is expected to take place in 1967 and in the first half of 1968. In January and February 1967, a mission visited Tunisia to re-appraise SNI. Negotiations for the proposed Bank loan took place in Washington during June, 1967, with a delega- tion consisting of Mr. Abdelaziz Mathari, President of SNI, and Mr. 14. Karoui, representing the Government. Bank. IDA and IFC Operations 4. The proposed loan, if approved, would be the Bank's fourth in Tunisia and would increase the total amount lent to $ 34 million. IDA has made three credits, totaling $ 24 million. The following is a statement of the Bank loans and IDA credits as of June 30, 1967:  -2- Loan or Credit Amount (U.S.$ million) Number Year Borrower Purpose Bank IDA Undisbursed 29 1962 Republic of Tunisia Education 5.0 380 1964 Republic of Tunisia Port 7.0 1.1 Development 449 1966 Soci6te Nationale Development 5.0 4.4 d'Investissement Finance Co. 94 1966 Republic of Tunisia Education 13.0 12.4 484 1967 Republic of Tunisia Cooperative 12.0 12.0 Farms 99 1967 Republic of Tunisia Cooperative 6.o 6.o Farms Total 24.0 of which has been repaid - Total now outstanding 24.0 Amount sold: .6 of which has been repaid - .6 Total now held by Bank and IDA 23. 24.0 Total undisbursed 17.5 18.h 9 5. With respect to Loan 380 TUN, delays in establishing an autonomous Port Authority as required by the Loan Agreement put off construction of Port facilities by one year. Since then part of the lost time has been regained but, as already notified to the Executive Directors, the Closing Date has had to be postponed from June 30, 1967 until March 31 of next year. 6. In addition to its investment in SNI, TFC invested in NPK- Engrais, a phosphate fertilizer company, lending the company $ 2 million for 10 years and buying 25% of its issued shares for $ 1.5 million. Part of its loan has been sold at par, netting $ 17,600 and just over a fifth of its holding of shares has been sold at par for $ 339,572. 7. The Bank is presently considering projects for further extension of the Port of La Goulette, expansion of water supply systems and an irrigation project in the Medjerda Valley. The Bank is executing agent, of the UNDP Transport Survey on which work will start in the near future and which is expected to lead to further lending, particularly for railroads.  -3 - Consultative Group for Tunisia 8. There is a Consultative Group for Tunisia. At a meeting held in December 1965, the Bank's representatives indicated that the Bank and IDA would be ready to finance up to $ 100 million worth of suitable projects in Tunisia in the years 1966 through 1968. The latest meeting was held in Paris on March 16 and 17, 1967. It discussed the Bank s report "The Current Economic Position and Prospects of Tunisia" (AF 56-b), an earlier version of the report attached, and the International Monetary Fund's report entitled "Tunisia - Recent Economic Developments", and a "Rapport sur le Budget Economique de 1 Ann6e 1967" submitted by the Tunisian delegation. 9. At this meeting the Bank's representatives informed the group that in the interim between the two meetings $ 36 million of loans and credits had been extended to Tunisia by the Bank and IDA and that a number of projects wrere at various stages of appraisal. They expressed the hope that the $ 100 million worth of lending for suitable projects mentioned at the 1965 meeting would still hold good assuming the availability of sound projects and continued improvement of general economic policy and performance. PART n: - DESCRIPTION OF THE PROPOSED LOAN 10. Borrower: Soci6t6 Nationale d'Invastissement Guarantor: Republic of Tunisia Amount: The equivalent of U.S.$ 10 million in various currencies Purpose: Financing by the borrower of the foreign exchange costs of specific development projects through loans and other investments for produc- tive purposes to enterprises in Tunisia which are privately controlled. Amortization: By semi-annual payments on May 1 and November 1. The amortization schedule provides for repayment beginning May 1, 1969 and ending May 1, 1985, but is subject to amendment to correspond with repayments to SNI by investment enterprises benefiting from parts of the loan. Each part of the loan will be repayable over a term suited to the investment project in question not exceeding 15 years from the date the loan account is credited.  - 4 - Interest Rate: Interest will be charged on each portion of the loan at the Bank's current rate when it is credited. Commitment Charge: 3/8 of 1% per annum of the undisbursed balance of the loan Prior Approval of Projec-ts: Projects requiring the use of more than $ 100,000 of the loan will be subject to the Bank's prior approval. PART III - THE PROJECT 11. A report entitled "Re-appraisal of the Societ6 Nationale dlInvestissement" (DB-35a) on the proposed project is attached. 12. Industria:L and mineral production represents about 19% and tourism about 2% of Tunisia's gross domestic product. While the industry contribut;ion to total exports is still small, it is signi- ficant for the ba:Lance of payments because many industrial products are substitutes for imports and because industrial exports can be expected to grow. Foreign exchange receipts from tourism have been increasing very fast (about 60% per year since 1961) and contributed 15% of total foreign exchange receipts in 1965. There is room for substantial further investments both in industry and tourism, and the Government is making a genuine effort to encourage private enterprise in these two fields. 13. SNI is the principal institutional source of long term loan and equity finance to private industrial and tourist enterprises in Tunisia. Prior to its reorganization in 1965/1966, its activity was almost entirely confined to promoting and making direct equity investment in new enterprises. SNI's Policy Statement, contained in Annex 2 of the Re-Appraisal Report, reflects the broadening of SiNI's objectives after its reorganization. It now provides medium and long term loans as well as equity investments. The Government intends SNI to continue to be the principal source of long term funds to private industry and tourism. As of December 31, 1966, SNI long term resources amounted to D 6.2 million, i.e. D 2.3 million in share capital and government grant, D 0.6 million in a government interest-free subordinated loan, and D 3.3 million in other long term loans, including the first Bank loan (D 2.6 million). Under the first Loan Agreement with the Bank, SNI has agreed to limit borrowings with a term of more than one year to an amount three times the sum of its own equity and the subordinated government loan. The remaining long term borrowing capacity of SNI is thus ample. SNI also accepts call and term depcsits from some public enterprises and institutions.  At the end of 1966 these deposits arnounted to close to D 2 million and were approximately matched by liquid assets. Finally SNI also benefits from a four years' exemption from income tax and other taxes, an annual subsidy for four years and a government guarantee permitting SNI to sell, within five years, its previous equity investments at their book value. 14. SNI's performance has so far been satisfactory, and the rate of loan approval has been higher than expected, amounting to D 3n2 million (equivalent to about $ 6 million) over the period May, 1966 to May, 1967. SI'I's capital structure is sound, and its profitability is expected to develop satisfactorily. With the benefits of exemption from taxes and the government subsidy of D 50,000 per year, net profit on share capital was 10.3% in 1966 and is expected to rise to 16% in 1968. The special tax status and subsidy will then be terminated. Profits are therefore likely to fall to about 1Q% on share capital in 1969 but are estimated to rise again to about 13% in 1970 on the assumption that the projected level of loan and investment activity is attained and that the program of portfolio sales is carried out, as agreed under the five year government guarantee mentioned above. This level of profits would cover the interest payable on SNI2s borrowings at least 1.7 times. 15. SMI's progress in organization and administration has also been satisfactory. Present management, consisting of the Managing Director, the General Manager, and a foreign advisor, have undertaken their responsibilities ably, and the quality of management is expected to be maintained. In addition, measures further to improve project appraisal and follow-up and accounting have been discussed with SNI representatives and appropriate steps are to be taken to implement them. In recognition of the progress made, the Bank agreed to raise the size of individual commitments of the Bank's loan which may be made on SNIs own authority without prior approval of the Bank. The old limit was $ 50,000; the new is $ 100,000. With this new limit about one-third of SNIts foreign exchange loans by number and about 80, by amount will still be subject to prior approval by the Bank. 16. In the three-year period 1967-1969, it is estimated that total private investment in Tunisia will amount to some D 14 million in indus- try and some D 28 million in tourism. Balanced financing of this invest- ment will require about D 24 million in loan capital (of which D 14 million would be in foreign exchange) and D 18 million in equity capital. Taking into account the uncommitted part of the first Bank loan at the end of 1966 and the amounts expected to be provided by supplier credits and direct foreign loans, SNI would need $ 11 million until the end of 1969 to meet foreign exchange requirements. During the same period, SNI is expected to lend about D 2.4 million and make equity investments of about D 400,000 to finance domestic requirements. Taking into account the sale of shares in its portfolio under the government guarantee (see paragraphs 13 and 14), SNI would need about $ 2 million equivalent of additional funds for these Dinar financings. Thus SNI would need about $ 13 million  - 6 - altogether. The proposed Bank loan would provide $ 10 million exclusi- vely for foreign exchange needs. An additional loan of about $ 3 million is under discussion with the Swedish Government to cover the balance of SNI's foreign exchange requirements as well as the local currency needs. 17. As mentioned above, tourism has a growing importance in the Tunisian economy and SNI, as an institution devoted to Tunisian develop- ment, is expected to finance a substantial portion of all investments in this field. SNIs portfolio will thus contain an increasing share of loan and equity investment in tourist projects. SNI appreciates that there are many risks in the tourist business and intends to exercise caution when appraising tourist projects, and to keep th.se investments under continuous review. PART IV - LEGAL INSTRUMENTS AND AUTHPRITY 18. The Draft Loan Agreement between the Bank and SNI, the Draft Guarantee Agreement between the Republic of Tunisia and the Bank, and the Report of the Committee provided for in Article ITI, Section 4 (iii) of the Articles of Agreement ara being distributed to the Executive Directors separately. 19. The Loarn and Guarantee Agreements would generally follow the terms and conditions of those contained in Loan 449-TUN, dated May 16, 1966. However, in accordance with the recent decision of the Executive Directors, the proposed loan would carry the Bank's normal commitment charge, i.e. on the entire undisbursed amount. of the loan starting 60 days after the signing of the Loan Agreement. PART V - THE ECONOMY 20. An econcmic report entitled "The Current Economic Position and prospects of Tunisia" (Report AF-56c) dated March 10, 1967, is attached. 21 During the period 1960 through 1965 the gross domestic product of Tunisia grew at a rate of 5.5% per year spurred by real fixed investment averaging 24% of GDPo At the same time, exports of goods and services grew relatively little so that, despite high levels of public and private long-term capital inflow, foreign exchange reserves were run down rapidly through 1964. A devaluation at the end of that year temporarily halted the deline in the country's external financial position, bult 1966 brought a poor harvest and, though exports increased, a reduction of over $ 20 million in net foreign assets. At the end  -7- of the year gross foreign assets stood at $ 23 million and net foreign assets were negative by about $ 25 million. Debt service in 1965 came to 13% of foreign earnings on goods and services, and the fact that a substantial part of capital inflow in 1964, 1965 and 1966 consisted of supplier credits portended an even heavier burden in the near future. 22. At the end of 1966 and in the early months of 1967, the Tunisian Government took a number of decisions, some of them in connection with a Fund stand-by arrangement, to cope with the dete- riorating financial situation. Perhaps the most significant of them was a decision to reduce total new fixed investment from the estimated D 127 million in 1966 to D 110 million in 1967. All the cuts were to be made in investment by central government and by public enterprises. Related was the government forecast that recourse to supplier credits would be only $ 17 million in 1967 as compared to $ 40 million and $ 20 million in 1965 and 1966, respectively. At the meeting of the Consultative Group in March, 1967, the Government affirmed its intention of improving performance in other respects by: (i) adjusting its investment program more closely to economic prio- rities, with special emphasis to be given to producing for exports; (ii) encouraging private investment; (iii) increasing domestic savings primarily through reducing the rate of growth of current government expenditures; (iv) improving the investment planning and general management of public enterprises. 23. In June an economic mission visited Tunisia to update our information on external debt and on the progress of the economy. The mission found that Tunisia's progress in economic policy and performance was in line with the Tunisian Government's policy and statements to the Bank and the Consultative Group. In the light of the Tunisian Government's intention to encourage private invest- merit in the years immediately ahead, the kind of lending here pro- posed would appear to be particularly appropriate and would permit less recourse to supplier credits. PART VI - COMPLIANCE IITH ARTICLES OF AGREEMENT 24. I am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 25. I recommenid that the Executive Directors adopt the following resolution:  - 8 - RESOLUTION NO. Approval of Loan to Soci6t6 Nationale dtInvestissement in an amount equivalent to U.S.$ 10,000,000 to be guaranteed by the Republic of TunLisia RESOLVED: THAT the Bank shall grant a loan to Societ6 Nationale d'Inves- tissement to be guaranteed by the Republic of Tunisia, in an amount in various currencies equivalent to ten million... United States dollars (U.S.$ 10,000,000), to mature on and prior to the date or dates to be determined as set forth in the form of Loan Agreement (Second Development Finance Company ProJect) between the Bank and Soci6te Nationale d'Investissement which has been presented to this meeting, to bear interest a-t the rate or rates to be determined as set forth therein, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in said form of Loan Agreement and the form of Guarantee Agreement (Second Development Finance Company Project) between the Republic of Tunisia and the Bank, which have been presented to this meeting. George D. Woods President by S. R. Cope Attachment July 31:, 1967