Tunisia - Second Societe Nationale d'Investissement Project

2~~1o4A'ILE5/IP FILE COPY ERESTRICTED Report No. DB-35a 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 The report may not be published nor may it be quoted as representing their views.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 INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVELOPMENT ASSOCIATION RE-APPRAISAL OF THE SOCIETE NATIONALE D'INVESTISSEMENT (TUNISIA) July 13, 1967 Development Finance Companies  CURRENCY EQUIVALENTS US$ 1. 00 Dinar 0. 525 Dinar 1.000 = US$ 1.90  RE-APPRAISAL OF THE SOCIETE NATIONALE D INVESTISSEMENT This report is based on the findings of a mission to Tunis in January/February 1967, composed of Messrs. Sekse and Nougaim of IFC TABLE OF CONTENTS age SUMMARY AND CONCLUSIONS I. INTRODJCTION 1 II. FINANCING AND GROWTH OF INDUSTRY AND TOURISM 1 Investment Trends 1 Role of the Pablic and Private Sectors and SNI 2 III. DESCRIPTION OF SNI 3 Reorganization 3 Resources 4 Organization, Personnel and Procedures 5 IV. OPERATIONS 7 Prior to Reorganization 7 Loan and Investment Activities in 1966; Policies 9 Deposit Business 10 V. OPERATING RESULTS AND FINANCIAL POSITION 10 Operating Results 10 Financial Pbsition 11 VI. PROSFECTS 12 Outlook for Private Investment in Industry and Tourism 12 Forms of Finance Required 13 Prospective Demands on SNI 13 Exposure in Tourist Projects 14 Financial Forecasts 16 VII. CONCLUSIONS AND RECOMMDATIONS 16  LIST OF ANNEXES 1. List of Shareholders as of January 31, 1967 2. Statement of General Policies and Operations Adopted by the Board of Directors on July 4, 1966 3. Board of Directors and Executive Committee as of Apri:L 4, 1967 4. Organization Chart 5. Equity Fbrtfolio at December 31, 1966 6. Loans Approved in 1966 and 1967 7. Fast anid Projected Income Statements 8. Past and Projected Balance Sheets 9. Past and Projected Operations 1966 to 1969 10. Projected Cash Flow Statements  SUMMARY AND CONCLUSIONS i. The Societ6 Nationale d'Investissement (SNI) was established in 1959 with a share capital of D 2 million, 58% owned by the Tunisian Govern- ment. Between 1959 and 1965, SNI invested most of its capital in the equity of new and expanding enterprises and, having no other long-term resources, could not meet new demands for equity and long-term loan capital. During 1965 and 1966, it was therefore reorganized, with the assistance of IFC and the Bank. ii. The reorganized SNI emerged with a share capital of D 1.5 million, and with a majority private ownership. IFC invested D 300,000 in SNI shares and both local and foreign financial institutions became shareholders. The Government gave it various forms of financial assistance, and the Bank granted SNI a loan of $5 million, SNI's only source of foreign exchange. As a result of these measures, SNI's resources were more than doubled, from D 2.5 million to more than D' 6 million. iii. Activities in 1966 and so far in 1967 have developed satisfactorily and at a higher rate than IFC had expected. The emphasis shifted from equity investments to long-term loans, of which SNI approved almost D 2 million in the last seven months of 1966 and D 1.2 million in the first four months of 1967. Of the total D 3.2 million, D 2.5 million ($h.8 million equivalent) was for foreign exchange requirements, and SNI will need new foreign exchange resources soon. It requested, in December 1966, a new loan of $10 million from the Bank. iv. Organizationally and administratively, SNI's progress has also been satisfactory. Management is in good control; the organization, with a reduced stalf, functions better than before; project appraisal has im- proved. However, further strengthening and improvement are necessary, new appraisal staff needed and, in particular, a system of regular follow-up of loans and investments must be installed. v. SNI's capital structure is sound. Its net profit (tax exempt, and including a Government subsidy) corresponded to 10.3% on the share capital in 1966, and is expected to increase to 16% in 1968. Profits are likely to drop to about 10% on share capital in 1969, when they will be subject to taxes and the special subsidy will be discontinued, but should rise again to about 12.5-13% in 1970. The assumptions are that the pro- jected level of activity is attained, and that SNI sells at ie1at Dlmillion of its unprofitable share portfolio for investment of the proceeds into loans and profitable investments. If not, profitability will not reach the levels here predicted, and SNI should consider measures to improve it, including the increasing of its lending rate.  - ii - vi. In the three-year period 1967-1969, the annual level of private investment is expected to be bet-ween-D 4.5-6 million in manufacturing in- dustry, and between D 8-10 million in the tourist sector. For SNI, this indicates new business at approximately the same rate as in the past year - D 3 million per annum or a little more. vii. Tourism is proving to be a sector with great growth potential in Tunisia, and the Government has decided to leave most of new investments to the private sector. SNI will be a main source of long-term finance for tourist projects, and its exposure in this sector will build up rapLdly. Although little can be done to protect SNI against internal or external factors which might adversely affect the conditions of the tourist trade, SNI's management must do all it can to minimize the risks over which it has some measure of control. Among such measures are careful project ap- praisals, insistence on sufficient equity capital, qualified management, and adequate security for projects financed. Spreading the risks geo- graphically and over various categories of projects should also be en- deavored. viii. In the two-and-a-half -years to the end of 1969, SNI would need new resources of $13 million to cover loans and investments expected to be approved, of which about $11 million for foreign exchange requirements and $2 million for dinar use. It could, therefore, effectively use a new Bank loan, as requested, of $10 million as well as an additional loam of $3 million to be used partly for foreign exchange, partly for dinar re- quirements. The assumption for this estimate is that SNI will have sold, by the end of 1969, D 0.8 million of its old share portfolio, under guaran- tee of the Government. ix. Thie terms and conditions of the proposed new Bank loan should largely follow those of the first loan. Its proceeds should be for the foreign exchange expenditures of specific projects, and its repayment schedule should reflect SNI's repayment schedules for sub-loans finatnced from the loan, normally not to extend beyond 15 years. Each portion of the loan credited to the loan account would carry the interes-t rate then applicable for similar Bank loans., If SNI proposes to finance equity investments from the loan, all should, as now, have the Bank's prior approval before crediting to the loan account. For loans, however, it is suggested that only those higher than the equivalent of $100,000 would be subject to prior approval by the Bank. The present "free limit" is $t50,000. As another new feature, the loan would carry the Bank's normal commitment fee, i.e. on the entire undisbursed amount of the loan starting 60 days after the signing of the loan agreement. As for the first Bank loan to SNI, the Government has agreed to assume the foreign exchange risk related to SNI's repayment of the loan.  RE-APPRAISAL OF THE SOCIETE NATIONALE D'INVESTISSEMENT I. INTRODUCTION 1. In May 1966, IFC made an investment equivalent to about $570,000 in the shares of the reorganized Societ6 Nationale d'Investissement (SNI). The IFC investment was coupled with a Bank loan of $5.0 million to SNI. By December 1966, SNI had approved loans of about $3.2 million to be financed from the Bank loan, and requested a new loan of $10 million. II. FINANCING AND GROWTH OF INDUSTRY AND TOUTRISM Investment Trends 2. Reference is invited to the Bank's recent economic report on Tunisia.!/ Tunisia has pursued in the past few years an aggressive in- vestment policy. Total investment went up from 14% of GDP in 1960 tC) 28% in 1965-66.J Although domestic savings increased from 9% to 13%' of GDP during the same period and foreign capital inflow averaged $100 mil- lion a year, this was not enough to finance the heavy investment program and part of the financing was met by a rise in the money supply. Since GDP was stagnant during 1966 mainly as a result of a serious drought in that year, the rise in the money supply resulted in some pressure on prices. 3. As a result of these pressures, and in accord with the recom- mendations of the International Monetary Fund, the Government decided to cut down the rate of investment to 20% of GDP or D 110 million in 1967. Severe restrictions have been put into effect by the Central Bank in order to limit the expansion of credit during 1967. The discount rate was raised from 4% to 5% in September 1966; this was followed by an increase in the interest rate on medium-term rediscountable loans from a range of 6.25% to 7% to a ranige of 7.25% to 8%. The financing of investments by com- mercial banks - mainly by way of med-Lum-term credits rediscountable at the Central Bank - has been sharply reduced for 1967 to the level of repay- ments received on the same type of credits. Investments in both manu- facturing and tourism can be made only after they have been approved by the "Commission d'Investissement". "The Current Economic Pbsition and Prospects of Tunisia", Report No. AF-56b, dated February 20, 1967. GDP in 1966 amounted to D h40.4 million of which D 63.0 million was accounted for my manufacturing and D 10.5 million by tourism.  -2- 4. Despite the reduced overall investment figure, real output is expected to increase by 6% annually (from a previous average level of 5.5% for the years 1960 through 1966) as a result of the greater produc- tivity expected in new investments as well as the delayed entry into production of several big projects started between 1964 and 1966. The better productivity would be achieved through a reduction in non-productive investments as well as the growing role given to private enterprise in the manufacturing and tourism sectors. Role of the Public and Private Sectors and SNI 5. Since 1959-60, the major share of industrial financing has been done by the Government either directly through equity participations or indirectly through its banking and insurance subsidiaries lending or taking equity positions in industrial companies. 6. The GJovernment is now anxious to encourage private enterprise in order to mobilize more fully the resources of the private sector and to improve the productivity of new investments. The reorganization of SNI into a privately-owned institution was a step in this direction. The Government has expressed interest in selling to private investors some of its investments in light manufacturing industries, such as tex- tiles. A tax exemption of four years is granted to all new enterprises. 7. With respect to tourism, the Government intends to leave most new investments to the private sector. In addition, it has enacted a series of financial measures designed to encourage private investment in this field. Thus, hotel pfomoters may be reimbursed for their original architectural studies, they may be given choice land at very low prices and their interest charges may be subsidized by three percentage points, but only if 45% of total financing is provided by equity. 8. This policy of encouraging private entrepreneurs together with the remarkable growth of tourism in recent years has yielded results and there is a good number of entrepreneurs willing to invest in tourist facilities. Foreign exchange receipts from this source have increased at the rate of 60% per year from 1961 to 1966 and they totaled approxi- mately D 15 million in 1966. Not all regions of Tunisia have developed their tourist trade at the same rate, however, and hotel occupancy ratios are much higher in the southern than in the northern part of the country. 9. Until 1966 the main source of foreign exchange for investment in manufacturing industry was suppliers' credits. However, new suppliers' credits have to be approved by the Central Bank which has decided to limit these to $17 million in 1967 ($4 million for hotels and industry and the rest for general infrastructure projects) as compared to $42 million for 1965 and $21 million for 1966. Another source has been an AID loan of $5.0 million administered by the Societ6 Tunisienne de Banque (STB).  -3- However, the AID loan has now been exhausted. SNI thus emerges as the main institutional channel of long-term foleign exchange credit for the financing of new private investment in manufacturing and tourism. This situation lends substance to the intentions of the Government in deciding to reorganize SNI. III. DESCRIPTION OF SNI Reorganization 10. SNI: was reorganized duringr 1965 and 1966 with the assistance of IFC and the Bank. Prior to SNI's reorganization, its share capital of two million dinars was held 58% by the Government and government agencies and 42% by over 80,000 small Tunisian investors. From its inception in 1959, SNI devoted its resources to the provision of equity capital to new enter- prises. Operating with this limited scope and with only its own equity capital for resources, SNI could not effectively meet the demand for in- vestment finance, and also was not profitable. Its difficulties were compounded by a lack of continuity in its management. 11. The reorganization of SNI involved a reduction of its share capital to D 1.5 million, the sale by the Government and the Central Bank of some of their shares to IFC and to private banks, both Tunisian and foreign, the provision of a Government grant and a long-term, low- cost subordinated loan to supplement the equity capital, and the Bank loan. SNI's long-term resources were more than doubled, from about D 2.5 million to more than D 6 million, and SNI emerged as a predomi- nantly private institution. Annex 1 is a list of major shareholders as of December 31 1966. 12. SNI's Policy Statement adopted at the time of the reorganiza- tion (Annex 2) reflects also a change in emphasis in SNI's activities. From being a promoter and equity investor in new enterprises, both govern- ment and private, SNI was to become a broadly-based development finance company concerned with providing long-term loans as well as equity par- ticipations in private industry and tourism. It would encourage the creation of new enterprises in the private s"tor and would try to assist in the formation of a capital market. However, only in very special circumstances would SNI take on management responsibilities for companies in which it has invested.  Resources 13. SNI's total long-term resources as of December 31, 1966 can be summarized as follows: (D '000) Share capital 1,500 Reserves 312 Government grant 500 Government subordinated loan 615 Central Bank loan 185 Caisse Nationale de S6curit6 Sociale (CNSS) loan 470 IBID loan ($5 million) 2,625 TOTAL 6,207 Included in the amount of reserves above is an amount of D 140,000 of stock dividends, the value of which is covered by a Government guarantee (cf. para. 26). The Government grant is not to be repaid, and constitutes part of SNI's equity. The terms ancd conditions of the three local long- term loans are as follows: Original Balance Interest Total Year Lender Amount Outstanding Rate Term Granted Government D615,000 D615,000 None 30 years 1966 (including 15 years grace) Central Bank D185,000 D185,000 5% 15 years 1966 (including 3 years grace) Caisse Natioriale D500,000 D470,000 4% 15 years 1964 de Securit6 (including Sociale 2 years grace) The Government loan is subordinated to other debt and ranks pari passu with the share capital in liquidation.  14. IBRD Loan. The Bank loan of $5 million (equivalent to about D 2.6 million) was signed on May 16, 1966 and became effective in July 1966. Projects involving a sub-loan of more than $50,000 require the prior approval of the Bank before the Loan Account may be credited. If SNI proposes to finance an equity investment from the proceeds of the Bank loan, the Bank's prior approval is required in all cases, ir- respective of amount. As of June 20, 1967, the position of the loan was as follows: Projects approved by SNI for loan approx. $4,900,000 Credited by Bank 2,677,000 Submitted to Bank and under review $ 48h,000 Total $3,161,000 Remains to be submitted for crediting $1,839,000 Disbursed $ 533,000 SNI expects that it will have submitted the entire $5 million to the Bank for crediting by September 30, 1967. Organization, Personnel and Procedures 15. Board. SNI has a Board of 11 directors representing the prin- cipal groups of shareholders: One, the Government; one, the Central Bank; four, private Tunisian business; two, Tunisian banks; two, foreign banks; one, IFC. Annex 3 gives the names and affiliations of the B3oard members as well as membership of the Executive Committee. 16. Executive Committee. Appointed by the Board from its members, the Executive Committee consists of the President, the Administrateur Delegue, the Central Bank representative, one representative of the Tunisian banks and one representative of the other private shareho-Lders. The Executive Committee has authority to approve commitments up to a limit of D 50,000 and supervises the affairs of SNI between Board Meetings. 17. Management. Mr. Abdelaziz Mathari, President and Director General since 1958 of the government-owned Societe Tunisienne de Banque (STB), the largest commercial bank in Tunisia, was appointed Chairman of the Board and chief executive officer of the SNI in August 1965; he remains President of STB and divides his time between the two institu- tions. He is highly respected in private as well as Government circles and his experience is of great value to SNI.  18. Besides the President, day-to-day management is the responsi- bility of SNI's General Mainager (Administrateur Delegue), who is also appointed by the Board. The present General Manager is M5r. Rachid Ben Yedder, who joined SNI in the summer of 1965. Although at that time he had no investment finance experience, he appears to be an able manager. His relationis with the private business community are also good. F1r. Mar- cello Luri, seconded to SNI as an adviser by the Banca Commerciale Italiana for a two-year term, arrived in Tunisia in June 1966. He works well with management and staff and has been valuable to SNI in helping to organize the work, particularly in tne project appraisal department. 19. SNIts management team provides strong, competent management. Both Mr. Nathari and Mr. Ben Yedder expect to remain with SNI for some years, thus providing a continuity of management. It also appears desirable that SNI should have an experienced adviser beyond June 1968, when Mr. Luri's term expires. If his term cannot be extended, SNI will start looking for somebody else to replace him. 20. Organization and Procedures. Annex 4 is an organization chart of SNI. The institution is divided into three operational departments, the Credit Department, responsible for the appraisal of projects, the Portfolio Department, responsible for the supervision of SNI's equity investments, and an Administration and Accounting Department. 21. SNI has made a good start in staffing and organizing its Credit Department. Project appraisals are usually of fair but varying quality. With experience further improvements in the appraisals can no doubt be expected. Mr. Majoul, the head of the Credit Department, was formerly Assistant Manager of STB's Credit Department, and appears well qualified for his position. He is assisted by six young economics and commerce graduates, three of whom are Tunisians and three Europeans, and by one senior engineer. The three young Europeans are in Tunisia for a two-year assignment in substitution for their military service obligations. In view of the transient nature of the Europeans' assignments, more permanent staff should be recruited. If at all possible, some of the new staff should have experience in the appraisal of hotel projects in view of the heavy investments which SNI expects in this sector. It would also be desirable to have one more engineer to assist in the technical appraisal of projects. 22. I'he supervision of loans and investments has not yet been put on a regular basis. However, there has been some follow-up by the Portfolio Department and through board memberships in those companies in which SNI has a relatively large shareholding. Accounts from these companies are received regularly, but no analysis of them or of operations is carried out and there have not been any serious attempts to evaluate the quality of the equity investments. The growing loan portfolio accentuates the need for a regular system of follow-up and SNI's management intends to take the necessary steps to install such a system.  23. Summary. Progress has been made during the past year in develop- ing an experienced staff. Several unnecessary jobs have been abolished and payroll was reduced to D 4o,500 in 1966 from D 61,000 in 1965. Quality of staff at the departmental level is still somewhat uneven and efforts must continue to train the present staff and to recruit qualified personnel. IV. O.RATIONS Prior to Reorganization 24. Equity Investments. Between 1959 and the end of 1965, SMI made equity investments in approximately fifty companies, mostly new projects, twelve of which it promoted itself. The yearly amount of equity invest- ments was as follows: 1959/61 D 890,000 1962 594,000 1963 496,000 1964 56,000 1965 156,000 D 2,192,000 The reduction in the yearly volume of equity investments reflected SNI's diminishing resources which, however, were replenished from some sales of investments. In 1963, SMI sold, at cost price, investments with a book value of D 423,600, chiefly to the principal Tunisian Insurance Company (STAR) and to the Caisse Nationale de Securite Sociale (CNSS) and during 1965 two com- panies issued share dividends totaling D 139,630. SNI's equity portfolio had a book va:Lue of D 1.86 million at the end of 1965. 25. Loans and Guarantees. In October 1964, SNI began some lendcing activities and had loaned approximately D 0.5 million, medium-term, by the end of 1965. Also, SNI found itself extending guarantees on behalf of some of the newly created companies it had promoted and giving them short- term loans or advances until more permanent financing could be found. A8 of December 3:l, 1965, short-term advances totaled approximately D 0.55 mil- lion and guarantees outstanding amounted to D 0.66 million. 26. Government Guarantee. At the time of the reorganization, practi- cally all resources had been invested and very little cash was available. In order to facilitate the reorganization process, avoid a lengthy and difficult evaluation of the portfolio and insure SNI's ability to recover the resources already committed, the Government undertook to guarantee the book value of SNI's shareholdings and the repayment of loans, and to assume the liability for guarantees outstanding as of December 31, 1965.  - 8 - 27. With respect to the equity portfolio, the guarantee enables SNI to sell within five years, if it so wishes, part or all of its share port- folio. If SNI cannot find purchasers willing to pay SNI's book cost or better, the Government will have the choice to make up the loss or to take over the shares in question at SNI's book cost. On the other hand, if SNI sells shares at a profit during the guarantee period, the gain will accrue to the Government, but the possible surplus of gains over losses wil:L only be payable at the end of the guarantee period. 28. Annex 5 lists the 44 companies in which shares are held, showing their earnings record in 1965 and dividends paid out in 1966. Twenty companies made a profit in 1965, 12 companies made losses or were in liquidation, and 12 companies were still under construction or just starting operations. The 20 profitable companies represented an SNI investment of about D 1.1 million, and the net profit after tax of these conpanies attributable to SNI's shareholdings were D 453,564, representing a return of 40%. However, only 10 of the 20 companies paid dividends, D 38,0:37 in all; a return of only 4.85% on SNI's investment in these 10 companies, and no more than 2% on the whole share portfolio. This is a very unsatisfactory return to SNI, and the return is entirely incommensurate with actual company earnings. SNI, being a major shareholder and represented on the Board of many of the companies, should certainly press fo. higher pay-ots. Dividend payments should be ve-7y mich largei if they were to corr ensate SNI for the foregone income that it would earn by selling the unprofitable shares and lending the proceeds at 8%. 29. So far, SNI has only sold or liquidated about D 90,000 of the guaranteed shareholdings, without loss or need to invoke the guarantee. From several points of view, more substantial share sales appear desirable. Firstly, SNI needs new dinar resources (cf. para. 49); secondly, most of the shares give no return whatsoever to SNI; and thirdly, some of the shareholdings are likely to result in losses. Within the next 3-1/2 years, therefore, SNI should dispose of overly vulnerable shareholdings, sell its shares in companies now making losses and not likely to become profit- able, and also consider selling the shares in profit-making companies which are not likely to be willing to pay reasonable dividends. 30. Because of the low return, most of SNI's shares offer little attraction to private investors, and the absence of a developed capiltal market adds to the difficulty in finding private purchasers willing to pay SNI's book cost or better for the shares. Many of the shares will therefore have to be sold at a loss, or taken over by the Government. During the negotiations concerning the proposed new Bank loan to SNI,, the Government reaffirmed its willingness to redeem, if SNI so wishes, the entire guaranteed share portfolio by end-1970. However, before offering shares to the Government, SNI will explore all possibilities of selling them into private hands.  Loan and Investment Activities in 1966; policies 31. Apart from three small equity investments totaling D 70,700 in companies to wghich SNI granted new long-term loans (an air charter com- pany, a yeast factory and a furniture factory), SNI's activity during 1966 was concesntrated on long-term lending to industry and tourism. Annex 6 contains a list of loans approved during 1966. In all, SNI ap- proved 21 loans for a total of D 1,961,300. Of this total, D 1,764,800 (equivalent to $3.35 million) was for foreign exchange requirements. These 21 loans represented a broad risk diversification over 14 different industries, including tourism. Four hotel projects totaled D 547,000 and the largest industrial loans were made to a wood particle board factory and to a canned food project. Most loans have a term of between 6 and 11 years, incLuding up to two years of grace. The average size was D 93,000 ($177,000). 32. When negotiations were under way for the reorganization of SNI, the prevailing interest rates for long-term loans were around 7% and it was felt that these rates were too low to insure SNI's profitability. The Government and the Central Bank, which have to approve lending rates, agreed therefore that SNI would be free to charge, for its loans, the rates of interest necessary to assure it a satisfactory profitability. To start with, rates ranging between 7-8% were thought to be appropriate. In actual fact, SNI has charged 8% on all loans. However, in the case of medium-term credits rediscountable at the Central Bank, SNI would charge 2-1/2% above the discount rate, or 7-1/2% at present. These rates appear to have gained general acceptance, helped no doubt by the general re- strictions on credit and the rise in the discount rate. 33. SNI usually obtains a first mortgage on buildings and equipment as a security for its loans, but in some cases settles for chattel mort- gages and personal guarantees only. Total equity investments will be limited to the equivalent of SNI's own equity, including the Government grant. SNI will not invest in the equity of any single enterprise more than 10% of the sum of its own equity plus the subordinated government loans; at present, this means a maximum of about D 300,000 ($570,000). Total commitment in any single enterprise whether as loans or equity is limited to 15% of the same basis or D 450,000 at present. SNI will not engage in operations smaller than D 15,000. In actual practice, SNI has kept well within these limitations, found in its policy statement (Annex 2). It also has, in most cases, restricted its financing of any project to a maximum of 50% of total project cost, and intends to continue this as a general rule. 34. In its agreement with the Bank, dated May 16, 1966, to guarantee the Bank's loan to SNI, the Government undertook to protect SiTI against the foreien exchaLnge risk connected with this loan. The Government has a,reed to assume this risk also for the proposed second Bank loan.  - 1.0 - Deposit Business 35. In 196h, SNI started to accept call and term deposits and some large deposits from public enterprises and governmental institutions were transferred from STB to SNI. The total volume of deposits reached D 1.98 million by the end of 1965 and declined slightly to D 1.95 million by the end of 1966. SNI pays between 1.25% and 1.75% on call deposits, which represent about 90% of all deposits, and up to 3.5% on a few small- term deposits. It employs these funds as well as some of its excess cash balances at fluctuating interest rates in a 28-day money market maintained by the Central Bank. At present, SNI receives interest on these funds at a rate of 5-1/2%. As of December 31, 1966, the total amount on loan to the money market stood at D 2.32 million as compared with short-term deposits of D 1.95 million. SNI does not actively seek to increase its deposit business, and there are very few depositors, mainly government agencies and a few client companies. Two sources account for approximately 75% of the total amount. They are the Caisse Nationale de Securite Sociale and the Caisse des Prets aux Communes. For the latter, SNI receives the funds at the beginning of the fiscal year and acts as a disbursing agent for the Government in its loans to small municipalities, so in this case the "deposit" is really a managed fund rather than a regular deposit. 36. SNI's deposit business is carried out in a restrained and prudent manner and cannot be seen in any way to interfere with its primary financing functions as a development finance company. There is practically no element of competition with deposit banks, the deposits are adequately matched by SNI's liquid assets, they are mostly of a special character, and constitute an important source of income for SNI. V. OPERATING RESULTS AND FINANCIAL POSITION Operating Results 37. IV agreement with the Government, SNI's income until the end of 1968 is tax exempt, provided SNI pays no more than 4% dividends to its shareholders. For four years, 1965 through 1968, the Government also pays SNI D 50,000 annually towards its administrative expenses. 38. Summarized income statements for 1965 and 1966 are shown in Annex 7. In 1966, net operational income (excluding the Government subsidy) increased almost three times, from D 38,900 in 1965 to D 105,100. This corresponds to a before-tax return of 2.6% on the share capital in 1965, 7% in 1966. Including the Government subsidy, the return in 1966 was 10.3% on the share capital. A major portion of the income in both years stermmed from SNI's short-term place.ments in the money market (see para. 35). SNI received, in 1966, D 101,000 more in interest than it paid on funds used in these operations. I)ividends received on equity investments increased from D 28,800 in 1965 to D 38,000 in 1966, but were still just over 2% average return on all of these investments in 1966.  39. Administrative expenses decreased, both absolutely and rela.tively, in 1966, but wiere still fairly high at about 1.6% of total assets. 40. SNI's first dividend to its shareholders, 4%, was declared for the year of 1965. The amount, D 60,000, was to be paid partly from 1965 income, partly from retained earnings. 4% has been declared also for 1966. Financial Position 41. Sumnarized balance sheets as of December 31, 1965 and 1966, are given in Annec 8. They can be conde:nsed as follows: December 31, 1965 1966 (Dinars '000) Short-term investments and other current assets 2,921 3,2991/ Medium and long-term loans 483 6021l Equity investments 1,859 1,8371/ Fixed assets, establishment costs (net) 122 106 ASSETS 5,385 5,844 Deposits and other current l:iabilities 2,168 2,172 Conventional borrowings 500 745 Subordinated Government loan 500 615 Capital, reserves and un- distributed earnings 2,217 2,312 LIABILITIES AND EQUITY 5,385 5,A44 42. SNI's liquid position is strong, with a current ratio of 1 .5:1 at the end of 1966. Practically all of the current assets are either money market placements (at 5-1/2%) or short-term advances (at 6-8%). 1/ These include the following amounts guaranteed by the Government: Short-term advances D 5h7,000 Medium-term and long-term loans 433,000 Equity investments 1,820,000  - 12 - 43. in its 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 total of its own equity and the subordinated Government loan. As of December 31, 1966, this gave SNI a borrowing capacity of D 8.8 million ($16.7 million), of which only D 745,000 ($1.4 million equivalent) had actually been drawn down. As only about D 300,000 of loans and inves-t- ments outstanding at December 31, 1966 were not covered by the Government guarantee, reserves and retained earnings, D 812,000, were adequate and no special bad debt provisions appear to be needed. VI. PROSFECTS Outlook for Private Investment in Industry and Tourism 44. Excluding the large investments in the El Fouladh steel mill, completed in 1965, investment in manufacturing industry was stable around D 13-14 million per year in 1965 and 1966. Because of the completion of some large textile mills (public sector) in 1966 and of the general auster- ity program (see para. 3), the Bank?s Economic Report predicts lower total investments in industry in 1967 (D l) million) and in 1968 (D 8 million), but expects them to increase to almost D 12 million in 1969 and to around D 15 million in 1970. However, the t;emporary drop in investments will probably be in the public rather than in the private sector; in the latter, investments could be expected to grow from an estimated annual level of D 4 million in 1966 to about D 6 million by 1969. 45. Investments in hotels and other tourist facilities could be as large as, or larger than, investments in industry and practically all these investments are likely to be in the private sector. In 1966, an estimated D 12 million was invested in the tourist sector. At the end of the year, some 90 projects, for a hotel capacity of almost 16,000 beds, were re- gistered with the Government's tourist promotion agencylJ to be set up and completed in 1967, 1968 and 1969. At an estimated average cost per bed of D 2,500, these projects would require D 40 million. In comparison, the Bank's Economic Report suggests that 13,000 new hotel beds should be added by the end of .1969, to the estimated 17,000 beds at the end of 1966, at a total cost of about D 32 million. This would mean an annual investment level of around D 11 million. For the purpose of the following projections, it has been assumed that investments in private hotels and other tourist lJ Commissariat G6neral au Tourisme et au Thermalisme (CGTT).  - 13 - facilities will be D 8 million in 1967 and D 10 million in each year 1968 and 1969. Investment levels in private industry and tourism would, on these assumptions, be as follows: 1967 1968 1969 Industry 4.5 5.0 6.o Hotels 8.o 10.0 10.0 12.5 15.0 16.0 Forms of Finance Required 46. In 'runisia, equity finances less than half of new investments both in industry and hotels. New hotels have been set up with as little as 30% equity capital, which appears much too low. In the following it has been assumned that the debt/equity structure for new investments will be 55:45 for industry, 60:40 for hotels. At least 50% of the cost of in- vestments in industry, and about 25%, on average, of the cost of hotels, are likely to be for equipment imported from abroad. Based on an annual investment level of D 14 million, which is a little less than the estimated average (D 14.5 million) for 1967-69, the following estimate of forms and amounts of finance needed in one year can be made: Dinars million US$ Industry Hotels Total Equivalent Foreign ]3cchange loans 2.5 2.3 4.8 9.1 Dinar loans 0.3 3.1 3.4 6.5 Equity capital 2.2 3.6 5.8 11.0 5.0 9.0 14.0 26.6 Prospective Demands on SNI 47. Foreign Exchange. Beside suppliers' credits and possible direct loans from abroad, SNI is the only supplier of foreign exchange loans in Tunisia. Assuming that suppliers' credits and direct foreign investmiepts in industry and hotels will amount to between $4-5 million per annum