Tunisia - Second Municipal Development Project

Document of The World Bank Report No. 164 10-TUN PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF FRF 452,800,000 TO THE CAISSE DES PRETS ET DE SOUTIEN DES COLLECTIVITES LOCALES WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA FOR A SECOND MUNICIPAL DEVELOPMENT PROJECT May 15, 1997 Private Sector Development, Finance and Infrastructure Division Maghreb and Iran Department Middle East and North Africa Region  REPUBLIC OF TUNISIA Currency Equivalents Currency Unit = Tunisian Dinar (TD) US$1.00 = TD 0.99 (December 1996) TD 1 = US$1.01 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ANPE Agence nationale pour la protection de I 'environnement (Agency for Environimiienital Protection) CAS Country Assistance Strategy CROP Commission regionale d'orientation du programm-ze (Regional commission for program orientation) CPSCL Cai.sse des prets et dle soutien des collectivites locales (municipal development agency) CQ Comite de quartier (Neighborhood committees) DGAR Direction generale des affaires regionales (General Directorate for Regional Affairs) DGCPL Direction generale des collectivites publiques locales (General Directorate for public and local govemments) EA Environmental Assessment EDI Economic Development Institute EIA Environmental Impact Assessment EME Equipe municipale elargie (extended municipal team) ERR Economic Rate of Return FCCL Fonds commun des colleciivites locales (Local Governments Common Fund) GDP Gross Domestic Product GoT Government of Tunisia LG Local Government MDP Municipal Development Project MEH Ministry of Equipmient and Housing MIP Municipal Investmenit Project MoF Ministry of Finance Mol Ministry of Interior NGO Nongovernmental Organization NPV Net Present Value PIC Programme d 'investissement communal (municipal investment program) SWM Solid Waste Management USAID United States Agency for International Development Vice President K. Dervis Director D. Ritchie Division Chief A. Al-Khafaji Task Manager L. Raimondo  REPUBLIC OF TUNISIA Second Municipal Development Project Project Appraisal Document Table of Contents Page Project Financing Data ..................................................I Block 1: Project Description ..................................................2 1. Project development objectives ..................................................2 2. Project components ..................................................2 3. Benefits and target population ..................................................2 4. Institutional and implementation arrangements ..................................................3 Block 2: Project Rationale ..................................................3 5. CAS objectives supported by the project .3 6. Main sector issues and Government strategy .3 7. Sector issues to be addressed by the project and strategic choices .4 8. Project alternatives considered and reasons for rejection .5 9. Major related projects financed by the Bank and/or other development agencies ...5 10. Lessons learned and reflected in the project design .5 11. Indications of Borrower commitment and ownership .5 12. Value added of Bank support .6 Block 3: Summary Project Assessments .........................................................6.......... 6 13. Economic Assessment .6 14. Financial Assessment .7 15. Technical Assessment .8 16. Institutional Assessment .9 17. Social Assessment .10 18. Environmental Assessment .10 19. Participatory Approach .11 20. Sustainability .11 21. Critical Risks .11 22. Possible Controversial Aspects .11 Block 4: Main Loan Conditions ............................ 12 23. Effectiveness Conditions ............................ 12 24. Others ............................ 12 Block 5: Compliance with Bank Policies ............................ 12 List of Annexes Annex 1: Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Cost Benefit Analysis Summary Annex 5: Financial Summary Annex 6: Procurement and Disbursement Annex 7: Project Processing Budget and Schedule Annex 8: Documents in the Project Files Annex 9: Status of Bank Group Operations in Tunisia Annex 10: Tunisia at a Glance   ITERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Middle East and North Africa Regional Office MENA Country Department I Project Appraisal Document Tunisia Second Municipal Development Project Date: May 15, 1997 [ I Draft lxi Final Task Manager: Laura Raimondo Division Chief: Amir Al-Khafaji Project ID: 46832-TUN Sector: Urban EM Lending Instrument: Loan PTI: [ ] Yes [xl No Project Financing Data x Loan D Credit El Guarantee Fj Other [Specify] For Loans/Credits/Others: Amount : FRF 452,800,000 ~~~~~~~~~......I............ ......................................I...................................................................... ............... ....... Proposed Terms: [] Multicurrency x Single currency Grace period (years): 3 f Standard x Fixed E] LIBOR-based Variable Years to maturity: 14 Commitment fee: 0.75 Service charge: N/A Financing plan (US$m): 220 Source Local Foreign Total Government 92.30 - 92.30 IBRD 3.68 76.32 80.00 Local governments 46.71 - 46.71 Other donors 0.65 0.65 CPSCL 0.69 - 0.69 Borrower: Caisse des Prets et de soutien des collectivites locales Guarantor: Government of Tunisia Responsible agency(ies): CPSCL, Ministry of Interior (Mol). Estimated disbursements (Bank FY/US$m): 1998 1999 2000 2001 2002 Annual 15.0 18.6 18.3 15.5 12.6 Cumulative 15.0 33.6 51.9 67.4 80.0 Expected effectiveness date: November 1997 Closing date: June 30, 2002  Project Appraisal Document Page 2 Country: Tunisia Project Title: Second Municipal Development Project Block 1: Project Description 1. Project development objectives (see Annex I for key performance indicators): The objectives of the proposed project are to: (a) enhance infrastructure and services in Tunisian local governments (LGs); and (b) increase efficiency of public sector management at the local level. These objectives will contribute to the long-term goals of municipal and regional development that the Government of Tunisia (GoT), with the help of the World Bank, initiated with the Municipal Investment Project (MIP) and will be pursuing under the proposed project and future projects. Such objectives will be achieved by focusing, in particular, on: (a) financing, through a credit line to the Caisse des prets et de soutien des collectivit6s locales (CPSCL), as part of the Programme d'investissement communal (PIC), which includes investment priorities for LGs to be carried out during the Ninth Plan (1997-2001); (b) strengthening the financial viability and management of CPSCL; (c) (i) strengthening LG finances through implementation of the local taxation reform, and targeting the finances of poorer LGs by increasing the equalization role of the system of transfers from the central budget; (ii) promoting efficiency in the administration of LGs, and in the management and supervision capabilities of the Direction generale des collectivites publiques locales (DGCPL, part of Mol) and the Direction generale des affaires regionales (DGAR, part of Mol); (d) strengthening the role of the Training Center (Centre national de perfectionnement et de recyclage des cadres regionaux et municipaux) for LG staff; (e) improving the quality of life mostly for disadvantaged neighborhoods and increasing involvement of communities in microprojects for local development; and (f) facilitating private participation, particularly in solid waste management (SWM). 2. Project components (see Annex 3 for detailed project estimates): Component Category Total Costs (US$m) % of Total a. Credit line to CPSCL to Credit 213 96.8 finance priority municipal investments and microprojects. b. Training, technical Technical Assistance 1.4 0.6 assistance, and equipment to strengthen CPSCL management. c. Training, technical Technical Assistance 1.9 0.8 assistance, and equipment to improve management of LGs, Mol, DGCPL, DGAR. d. Technical assistance and Technical Assistance 3.8 1.7 equipment for Training Center. e. Technical assistance and Technical Assistance 0.2 0.1 equipment for community participation programs. Total Project Costs 220 100 3. Benefits and target population: * Expansion and modernization of infrastructure and services in most of the 257 municipalities and 23 regional councils, including increased access to basic facilities for poorer LGs. * Strengthened financial intermediation of CPSCL. * Improved distribution of transfers from GoT to LGs and increased mobilization of fiscal resources at the local level. * Reduced regional disparities. * Improved public sector management at the local level. * 8.5 days of training per high-level LG staff will be provided during project implementation. * Improved public health conditions. * Approximately 10,000 families from around 130 neighborhoods will benefit from small but significant urban environmental improvements and/or enhanced quality of life through around 130 microprojects (see Annex 2). * Of these, about 5,000 adults from around 30 municipalities will gain an increased sense of responsibility for local development and significant experience in working together to develop, manage, and "own" urban development projects. Target population: Local governments, rural councils, regional councils, neighborhood associations, low-income populations targeted by the low-income neighborhood upgrading program within PIC.  Project Appraisal Document Page 3 Country: Tunisia Project Title: Second Municipal Development Project 4. Institutional and implementation arrangements: The Borrower will be CPSCL. GoT will guarantee the loan. Moreover, CPSCL will sign a subsidiary loan with GoT to make funds available to GoT (Mol) to implement components c, d, and e of the project. CPSCL will be responsible for evaluating and financing LG investments, following eligibility criteria for subprojects and beneficiaries satisfactory to the Bank. DGCPL (MoI), together with MoF, will be responsible for implementing local tax reform and the reform of the transfer system, FCCL (Fonds commun des collectivites locales). A project coordinator, reporting directly to the MoI's State Secretary for Local Government, was appointed in 1992 to follow day-to-day project activities and coordination issues of the MIP. Based on the high quality of local supervision, the same coordinator has been participating in preparation of the proposed project and will be monitoring performance indicators during the implementation period. A Consultative Steering Committee, including representatives of all involved ministries and agencies, was appointed to handle coordination issues. Training for LGs will be provided largely by the Training Center. Similar arrangements have worked well during the MIP. Local governments (i.e., urban communes and regional councils) will identify specific investments and target areas in which to implement microprojects. Of these, at least 50 percent will be consultative, and at least 25 percent implemented through community participation. Participatory microprojects will be implemented by EMIE (Equipe municipale elargie), an entity formed by the municipality with NGOs and community organizations (piloted by the USAID-financed GESCOME project) and coordinated by CROP (Commission regionale d'orientation du projet), a regional commission at the governorate level. For all components of the project, financing will be retroactive to March 15, 1997. Block 2: Project Rationale 5. CAS objective(s) supported by the project: Document number and date of latest CAS discussion: 16517-TUN, May 14, 1996. The Second Municipal Development Project will contribute to the CAS objective of strengthening public sector management and provision of infrastructure and services. By enhancing infrastructure in underequipped areas, the project will help diffuse gains from economic growth and reduce regional disparities. By further upgrading LG human resources and introducing information technologies and cost accounting practices into LG administration, the project will improve efficiency in the management of LG operations. Furthermore, by improving CPSCL's financial intermediation and LG revenue mobilization and allocation, it will promote the decentralization process and increase the autonomy of LGs. The project will contribute to the following CAS performance indicators (see CAS, Annex 9): (a) improve the percentage of the urban population with , ped discharge, and (b) improve the percentage of the rural population with access to piped water. 6. Main sector issues and Government strategy: Main sector issues: (a) Tunisia still has a centralized administration with regard to allocation of fiscal resources. To further promote municipal and regional development, GoT will have to find a balance among intergovernmental powers. (b) There are two kinds of transfers to Tunisian communes: current transfers from the Fonds commun des collectivites locales (FCCL), the total amount of which is set annually in the central budget; and capital transfers allocated from different ministries and the FCCL, through CPSCL, to all communes. The latter are always matched with loans from CPSCL according to subsidy rates that are established by decree and vary according to the nature of the subproject financed by CPSCL (see Attachment to Annex 5, page 3 and Annex 4, Part B); loans and grants can be accessed only if the autofinancing rate of the LGs satisfies CPSCL requirements defined by decree (Attachment to Annex 5, page 3). Tunisian communes finance about 80 percent of their current expenditures from current own revenues, and net savings are projected to remain above debt repayments throughout the Ninth Plan. Transfers from FCCL therefore mostly contribute to ensuring sufficient savings to satisfy autofinancing requirements. (c) Various assessments of the existing system of revenue transfers from FCCL to the local budgets have shown that the system needs to be reformed to play a more important equalizing role and help poorer communities to reach minimum standards of infrastructure and services. In most Tunisian communes, services such as water, sewerage, and main roads are provided by national agencies or by the central government. Given the limited responsibilities of the communes and the local nature of services they provide, it can be envisioned that such responsibilities would be financed by local resources. Transfers, in the Tunisian context, are therefore more appropriate to tackle distributional effects, helping communes with low fiscal potential to provide minimum infrastructure and services. (d) LG revenues currently amount to around US$200 million per year and represent 3.8 percent of central government (CG) revenues. In order to significantly upgrade municipal infrastructure and services and more aggressively promote municipal and regional development, local revenues should sharply increase. Nevertheless, the transfer of additional fiscal responsibilities to LG budgets, even though summarily discussed, is not yet part of the GoT strategy for municipal development.  Project Appraisal Document Page 4 Country: Tunisia Project Title: Second Municipal Development Project (e) CPSCL is the GoT-owned institution specialized in lending to LGs and in financing municipal and regional investments identified under the PIC. It can also finance other municipal investments provided that its eligibility criteria are satisfied. In the case of investments classified under the PIC, CPSCL passes GoT subsidies on to LGs and accompanies them with loans; the interest rate, currently at 6.5 percent (up from 2 percent in 1992), should increase to cover the costs of CPSCL's borrowing (mainly from multilateral and bilateral donors) and administrative expenses, and to ensure a positive return in real terms on equity, thereby protecting CPSCL's financial viability. In the medium to longer term, however, CPSCL will have to evolve together with the financial sector, and eventually become a bank. As a bank, its shareholders could include LGs and commercial banks, in addition to GoT. CPSCL and some LGs would be able to mobilize funds by issuing their own bonds. CPSCL could open up to the private sector to play a catalytic role in motivating private sector participation in the financing of municipal infrastructure. (f) Improved cost recovery schemes for municipal services will have to be implemented to ease constraints due to scarce local fiscal resources which persist despite the reform of the local tax system. (g) To improve the effectiveness of the investment program for LGs, community participation in defining and implementing programs should be increased. (h) The participation of the private sector in the financing and management of municipal infrastructure is still very weak. During preparation, numerous legal and financial constraints were highlighted (see project files) and actions recommended. Furthermore, solid waste management, one of the main aspects of municipal infrastructure under LG responsibility, has a very unclear institutional setup. Government strategy: (a) GoT's municipal development strategy, outlined in a request for financing submitted to the Bank, has centered on: (i) gradually pursuing the decentralization process and strengthening the management capacity of LGs, improving their planning capacity, and introducing cost accounting procedures, databases, and information networks; (ii) favoring the participation of consultative groups such as rural councils or neighborhood associations in the management of municipal or regional infrastructure projects; (iii) reinforcing the role of the Training Center; and (iv) consolidating CPSCL's role and successful performance. (b) On January 26, 1997, the Code de lafiscalite locale was approved by the Parliament. This reform of the local tax system (property tax, business tax, hotel tax, and others), prepared under the MIP, aims at simplifying, rationalizing, and eliminating major distortions in the local taxation system and across municipalities. Its effective implementation will have a limited but positive impact on LG budgets (10-15 percent increase in revenues, including additional revenues due to expected improvements in recovery rates). During negotiations, agreement was reached to take appropriate actions to implement the reform in a timely manner, and to reform FCCL under the proposed project, by December 31, 1997. The reform of FCCL will ensure more adequate resources to those local governments that have limited fiscal potential (see Annex 4). With the local taxation reform and the reform of the transfer system, all LGs will be able to implement the Ninth Plan PIC, estimated at TD 657 million for the 1997-2001 period, keeping their level of indebtedness under control. (c) The Government formally favors greater involvement by the private sector in municipal financing. Mol, with USAID support, has analyzed in detail some of the issues involved in implementing a program of solid waste management, one of the main responsibilities of LGs, considering in particular possibilities for private sector involvement. Under project preparation numerous options were analyzed and proposed (see project files). However, decisions on legal and regulatory mechanisms to create an environment conducive to private participation tend to be delayed. The investment program for solid waste management, proposed as an urgent need for the Ninth Plan, is likely to be delayed due to lack of institutional transparency and decisions on an appropriate public/private formula, even though private sector involvement could, in the long term, help reduce pressure on LG budgets and improve the quality of service. 7. Sector issues to be addressed by the project and strategic choices: * The proposed project will limit its focus to the following sector issues: * Implementation of the local taxation reform and preparation and implementation of the reform of the current transfer system. * Strengthening CPSCL's financial viability, as mentioned in para. 14, and its project preparation and evaluation capacity, including assistance to LGs. A longer-term strategy regarding its role as part of the financial sector, as well as the applicability of prudential regulations and banking supervision by the Central Bank, was discussed with GoT. Agreement to carry out a strategy study by June 30, 1999 for CPSCL detailing measures and actions to be implemented under the Tenth Plan was reached during negotiations. * Strengthening administrative and technical capabilities of LGs, DGCPL, and DGAR through training and equipment. * A systematic expansion of active participation by citizens, neighborhood associations, and local NGOs in selected microprojects for improvement of disadvantaged urban neighborhoods, and widespread consultation on the selection of such microprojects. * Providing financial/legal advisory services for facilitating private participation and preparing tender documents and contracts. * Selective financing of a phased program of SWM according to the conditions listed in para. 15.  Project Appraisal Document Page 5 Country: Tunisia Project Title: Second Municipal Development Projecd 8. Project alternatives considered and reasons for rejection: Fostering the institutional development of CPSCL to become a bank under the proposed project was discussed during preparation as a possible alternative, and GoT retains it as a long-term objective to be fulfilled during the Tenth Plan (2002-2006). The CPSCL institutional study, covenanted under the proposed project (para. 24), is expected to clarify what legal, institutional, and managerial changes will be required. 9. Major related projects financed by the Bank and/or other development agencies (completed, ongoing, and planned): Sector issue Proiect Latest Form 590 Ratings (Bank-financed projects only) IP DO Bank-financed Municipal development Municipal Investment Project HS S Ongoing, expected to close by mid 1997 Other development agencies -Private participation in environmental services HG-005 USAID, numerous studies completed -Community participation GESCOME-USAID, ODESYPANO, NW mountainous areas project - GTZ/Bank -Decentralization and TA to local governments H 6-004 USAID - Municipal investments French and Italian bilateral programs - Solid waste management in the Medjerda KFW 10. Lessons learned and reflected in proposed project design: (a) Local govermnents are playing an increasing role in economic development. Decentralization is a long-term process which has direct economic impacts and helps build support for the democratic process. Successful municipal development projects are based on efficient management and mobilization of the fiscal resources of LGs. Their design is adapted to the pace of reforms for which clear ownership is shown and to the actual level of managerial strength of the LGs (see EDI, " Preparer un projet de developpement municipal," 1996). The ongoing MIP has strengthened the LGs' ability to effectively deliver local services, improve the selection of development priorities, and better manage local resource utilization and allocation. The restructuring of CPSCL and the huge training program carried out under the MIP have contributed to revitalizing the LG investment program and improving operational efficiency. Requests to the Caisse for project financing have grown in number and quality and have intensified. This is reflected in MIP's fast disbursement profile (in June 1996, actual disbursement was at 86 percent of the loan amount when only 54.4 percent of the time had elapsed between Board approval and the expected closing date). Still, municipal revenues represent only 1.2 percent of GDP and 3.8 percent of GoT revenues, indicating that the decentralization process is only beginning. (b) The ongoing MIP has demonstrated the need for more rigorous environmental and economic analysis (see paras. 15 and 18 and Annex 4) and closer technical supervision (see para. 15) of subprojects. The proposed project will strengthen CPSCL's economic and environmental eligibility criteria for subprojects, improve supervision practices, and introduce post- evaluation techniques. (c) The proposed project will continue to address the remaining institutional weaknesses of the LGs, identified during MIP supervision, and will emphasize cost recovery. Administrative and operational efficiency will be addressed by introducing information technologies and cost accounting in LG administration, revising the budgetary nomenclature, and training LG officials to manage private contracts. (d) The proposed project will increase involvement of communities in local development activities to achieve sustainability of: (i) process and impact, (ii) social cohesion, and (iii) enhanced community responsibility for neighborhoods. Pressure to deliver rapid results in participatory projects can result in choices being imposed on local communities which do not reflect their true priorities and which prejudice long-term sustainability of the investment; fully participatory microprojects should be allowed at least two years for completion. Municipal financial procedures and budget lines may require adjustment to permit expenditure on demand-driven projects to be defined through community consultation. 11. Indications of Borrower commitment and ownership: The proposed project is part of the FY 97-99 lending program discussed and agreed upon with GoT under the CAS. Furthermore, GoT sent an official request for financing dated April 19, 1996, which included a description of the proposed project content and a preparation schedule. The proposed project is part of the Ninth Development Plan for the 1997-2001 period and is considered the instrument to move Tunisia's municipal development strategy forward. While ownership is undoubtedly strong, commitment to  Project Appraisal Document Page 6 Country: Tunisia Project Title: Second Municipal Development Projed solve some of the issues that the project should address may be weaker. These issues include implementation of cost recovery schemes for municipal services and increasing private participation. Prior to Board presentation the following measures were or will be taken: - Appointment of a Steering Committee to supervise project preparation and implementation and address intraministerial issues (September 1996); - Approval by the Parliament of the Code de lafiscal!tW locale, the new local tax law (January 1997); - Transmittal to the World Bank (March 22, 1997) of a letter summarizing the Government's position on the measures to be taken to: (i) effectively implement the local tax reform, (ii) reform FCCL, and (iii) adjust CPSCL's interest rates in order to improve its financial viability. The content of the letter was found to be satisfactory. - Submission to the World Bank of a draft policy letter on the Government strategy for municipal development and decentralization, which was agreed upon at negotiations (April 1997); - Transmittal of the signed policy letter prior to Board presentation; - A phased implementation of the FCCL reform was agreed upon during appraisal and confirmed at negotiations; - Adjustment of CPSCL's interest rates to an average level of 7.5 percent. During appraisal a detailed report titled Appui institutionnel au Deuxieme projet de developpement municipal, prepared by Mol, the Training Center, and CPSCL was discussed; the report identifies the content and measures to be implemented under each technical assistance component. A final version was submitted at negotiations and is therefore an integral part of the Project Implementation Plan. Other planned actions were agreed upon during appraisal and are listed under para. 24 as actions covenanted in the loan agreement. 12. Value added of Bank support: The Bank has been collaborating with GoT for the past 25 years and has been very active in the infrastructure and urban sectors. The lending relationship with GoT has been policy dominated, aimed at strengthening the dialogue and cooperation. GoT asked the Bank to finance the proposed project so that the Bank would: (a) ensure a comprehensive program of municipal development to support institutional and legal reforms as well as the municipal investment program; (b) enhance the debate on policy issues and partnership with other donors to maximize the success of the proposed project and promote timely implementation; (c) ensure that the measures to create an environment conducive to private participation will be implemented; and (d) provide professional advice. Block 3: Summary Project Assessments (Detailed assessments are in the project file. See Annex 4) 13. Economic assessment [ I Cost-Benefit Analysis: [ ] Cost Effectiveness [ Other (see Annex 4): NPV= n.a.; Analysis: [Specify] ERR= at least 10% for subprojects with quantifiable benefits. * An assessment of local finances and the role played by FCCL was carried out (Annex 4, part B; see project files). * Reform proposals for the transfer system were discussed with GoT during appraisal and an agreement was reached on a timetable for implementation of the reform. The reform principle of reducing the current uneven distribution of transfers, favoring those communes which are fiscally poorer, and allowing them to satisfy basic infrastructure priorities was agreed upon; the specific formula to change the distribution of transfers will be submitted to the Bank by September 30, 1997. * The fiscal impact of the project and of the proposed reform of the transfer system were analyzed (Annex 4, part B; see project files). * Assessment of economic eligibility criteria for CPSCL financing was carried out (Annex 4, part A). Fiscal impact (for all projects): The proposed project will have a fiscal impact on Tunisian communes through both increased expenditures on debt repayment and increased revenues generated by the new investments. It was estimated that in 2001 the share of current revenues paid out in repayment will rise to 18-20 percent. This is still considered sustainable given the high saving ratio of Tunisian communes. It was not possible to quantify the impact on revenues since only a few MIP-financed projects were completed and their working period is limited (Annex 4, part B).  Project Appraisal Document Page 7 Country Tunisia Project Title: Second Municipal Development Project 14. Financial assessment of CPSCL NPV= n.a. FRR= at least 12% for subprojects (see Annex 5) (a) CPSCL's past financial performance: CPSCL's financial indicators for 1993 - 2001, in TDm, are given below. For detailed actual and projected financial statements see Annex 5. 1993 1995 1997 1999 2001 Actual Actual Forecast Forecast Forecast Loan Disbursements to Local Gvts. 35.7 30.0 46.0 52.0 56.0 Transfer of Gvt. Subsidies 11.0 24.7 27.5 40.0 61.4 Portfolio of Loans to Local Gvts. 136.3 191.4 253.2 306.8 355.6 Equity 89.1 94.4 99.4 107.0 118.0 Total Revenue 5.3 9.2 12.5 16.7 21.5 Net Income 2.2 2.9 2.6 4.4 5.9 Net Income/Total Assets 1.6% 1.4% 1.0% 1.3% 1.5% ReturnonEquity 2.5% 3.2% 2.7% 4.2% 5.1% Loan Disbursements financed by Internal Cash Generation 26.0% 46.9% 38.6% 59.3% 40.2% Equity / Total Balance Sheet 57.5% 42.7% 35.4% 31.3% 29.6% Long Term Debt / Total Balance Sheet 26.5% 50.0% 58.6% 60.3% 64.4% Over the past four years CPSCL has largely complied with the financial covenants of the first municipal investment project. Interest on most new loans to local governments has been 6.5 percent. In spite of the cost of borrowed funds being higher than interest revenue on the portfolio, i .e., 5.3 percent vs. 4.1 percent on average over the last three years, the average net income/total assets ratio has been 1.5 percent for 1994-1996, thanks to CPSCL's large equity, which was TD 97m at the end of 1996, or 39 percent of the balance sheet total. Return on equity for the years 1993 to 1996, however, was only 2.5 to 3.4 percent, not sufficient to protect the equity base against inflation. (b) Ouality of loan portfolio: CPSCL has markedly improved the collection of arrears since 1992, including long overdue amounts, to a collection ratio of better than 95 percent, using the leverage of new loan and subsidy approvals and disbursements. It has been closely monitoring the debt service capacity of about 30 municipalities with liquidity problems. At the end of 1996, their arrears to CPSCL amounted to TD 4.4m, or 1.8 percent of total assets. Most of this debt was less than one year old, but also included TD 0.5m from 1992 and before. (c) CPSCL's future financial performance: CPSCL's lending to local governments over the Ninth Plan (1997 - 2001) would amount to TD 257m, cofinanced by TD 213m of Government subsidies channeled through CPSCL, coming essentially from FCCL (TD 99m) and Title 2 of the Government's annual budget (TD 97m). (For the blend of loans and subsidies in each project type see page 3 of the Attachment to Annex 5). In order to protect its equity position from being eroded by inflation and reach a positive return in real terms, CPSCL will have to raise its interest rates further on new loans, to an average 7.5 percent. The net income/total assets ratio would then reach 1.5 percent by the year 2000. Return on equity would improve to 5 percent by 2001, exceeding inflation which is projected to decrease to around 3 percent by then. Improvement would come only gradually over the period of the Ninth Plan while the new loans at higher interest rates join the portfolio. CPSCL's capital structure would remain very satisfactory throughout the Ninth Plan period. Equity would still be 30 percent of the balance sheet total at the end of 2001, in spite of the growing loan portfolio and long-term debt. (d) Sensitivity analysis: The most sensitive variable is the interest rate charged by CPSCL to the local governments. The base case above assumes an average rate of 7.5 percent throughout the period 1997 - 2001 (i.e. 7.5 percent for infrastructure, 8.5 percent for commercial projects, and 6 percent on certain supplies). In case CPSCL would continue to charge the rates in effect in 1996, i.e., 6.5 percent for infrastructure and commercial projects and 4 percent for supplies, the net income/total assets ratio would remain 1.0 percent; the return on equity would not exceed 3.6 percent and would remain negative in real terms. This confirms that as a minimum CPSCL should charge the average 7.5 percent rate of the base scenario. Therefore, the Government has put the above-mentioned interest rate structure into effect, to be applied starting 1997. (e) Conditionality: To protect CPSCL's capital structure and enhance its earnings performance, the following covenants were agreed upon: (i) a net income/total assets ratio of at least 1.0 percent through 1998, and at least 1.5 percent starting 1999; (ii) a rate of return on equity of 3 percent by 1998, 4 percent by 1999 and in 2000, and 5 percent by 2001; (iii) debt service coverage of 1.5 times; and (iv) internal cash generation to finance at least 35 percent of CPSCL's loan disbursements  Project Appraisal Document Page 8 Country: Tunisia Project Title: Second Municipal Development Project through 1998, and 40 percent starting 1999. In addition to these covenants, performance indicators have also been agreed upon for measuring CPSCL's administrative expenses, reduction of debt service arrears, and its capital structure (see table in Annex 5, para. 9). (f) Accounting and auditing arrangements (see also Annex 5): As a financial institution, but not a bank supervised by the central bank, CPSCL does not yet apply banking sector accounting and prudential rules. The institutional study of the project would analyze which bank accounting and prudential principles CPSCL should adopt during the coming years, such as portfolio risk analysis, provisions for arrears, and capital adequacy monitoring. The present audit arrangements are satisfactory and would be continued under the proposed project. CPSCL's auditors are from a private firm of Tunis. Audits are up to date. Opinions on CPSCL's financial statements and accounts of the ongoing project have been unqualified. 15. Technical assessment: The Investment Program for Local Governments (Programme d'investissement communal, or PIC) for the period 1997-2001, prepared by the Tunisian authorities, has been confirmed during the first quarter of 1997 by the Council of Ministers (see Attachment to Annex 2). The investment is estimated at TD 657m, an increase of 54 percent compared to the 1992-1996 PIC, in which infrastructure accounted for 35 percent, productive facilities for 7 percent, and upgrading of low-income neighborhoods for 13 percent. New types of investments are planned in two sectors: solid waste landfills are planned for TD 25m, and small infrastructure works by rural councils are estimated at TD 29m. The PIC would be financed in part by the World Bank and the French cooperation and in part by other donors to be determined. Landfills and transfer stations financing prerequisite. Before the first request for landfill financing is approved by the Bank, the Government will submit a plan for the Bank's approval: (i) proposing clearly defined institutional arrangements identifying the owner, the financier of the investment and exploitation, and the operator of the proposed works; (ii) providing evidence of the issuance of technical and environmental standards and authorizations for landfills and transfer stations, as required in Law 96-41 on solid waste; and (iii) in the event the management of the landfill or the transfer station is contracted out to the private sector, describing the measures undertaken and completed to eliminate legal constraints limiting contracting out to the private sector. Eligibility criteria. The proposed project would finance TD 213m of investments under specific eligibility criteria. The investments include infrastructure (urban roads and sidewalks, water, drainage, sewerage, solid waste, green and recreational areas, and street lighting), commercial facilities, and low-income neighborhood upgrading. The investment would also include microprojects, defined as small projects of urban environmental improvement or social development costing an average of DT 30,000 and no more than DT 50,000. Microprojects are not restricted to certain sectors but must fall within the scope of activities undertaken or supported by municipalities or CQs. The eligibility criteria for subprojects listed in the MIP are still valid since they led to successful implementation. Several amendments are nevertheless proposed: commercial facilities subprojects and subprojects above US$1 million would include sensitivity analysis, and eligibility ratios would be determined for each category of infrastructure subprojects and become progressively mandatory for subproject selection. Eligibility criteria for financing landfill construction, and evaluated as appropriate to enhance the environmental quality of subprojects, would be introduced in the operational manual of CPSCL by December 31, 2000. Based on these criteria, the financing documents should include: (a) a financing plan with cost recovery procedures; (b) economic justification for the reference zone covered by the subproject landfill to ensure an optimal economy of scale; (c) feasibility and implementation documents consistent with national technical environmental standards and optimizing the investment costs through progressive implementation or other appropriate measures; (d) an operational plan with clear definition of the owner of works, the operator, cost recovery, and, if needed, conditions for contracting out. Concerning the landfills and transfer stations financed by the line of credit, in addition to points (a) to (d) described above, (e) an environmental assessment report approved by ANPE and satisfactory to the Bank will be requested. Subproject appraisal. Appraisal procedures were greatly improved during implementation of the first project. CPSCL established procedural guidelines for the communes, which provide basic information for subproject preparation, and prepared an operational manual for its own staff. In preparation for the second project, CPSCL will improve the appraisal procedures with (a) new simplified standard reports to facilitate Board evaluation; and (b) creation of a document containing data useful for implementation and supervision, which can be used throughout the life of the subproject. The guidelines and operational manual have been updated according to a schedule discussed during the appraisal mission (see para. 24). Subproject supervision. The supervision procedure will be strengthened and developed. Improvements will come from the creation of standard documents, computerization of the subproject database, and creation of local offices in several regions, which will increase contact with the communes during subproject implementation.  Project Appraisal Document Page 9 Country: Tunisia Project Title: Second Municipal Development Project 16. Institutional assessment: (a) Executing agencies. (i) CPSCL's role and its evolution CPSCL was created in 1975 as an autonomous administrative agency in charge of the distribution of Government funds to local governments; it was essentially a cashier's window because all decisions were, in fact, made by DGCPL, the supervisory body in charge of CPSCL. Since inception, CPSCL had not worked properly due to understaffing and poor structure. This resulted in a general abandonment of the institution, the staff of which was reduced to three at the beginning of the 1990s. In 1992, CPSCL was restructured into a state-owned financial institution, subject to the rules of etablissements publics ai caractere industriel et commercial, with its own lending policies administered by a board chaired by the Minister of Interior and composed of representatives of Mol, MoF, MEH (Ministere de I 'equipement et de I 'habitat), and the Bank of Tunisia. CPSCL's management and operations have been developed and strengthened under the MIP; its new lending policies, rigorous financial requirements, and role of assisting the municipalities in developing their project preparation and implementation have largely been responsible for improving municipal infrastructure and management over the last few years. At the end of 1995, CPSCL had 54 staff and processed 1,200 subprojects at a total investment cost of TD 138 million. Its resources are limited to external long-term borrowing; it cannot receive local government deposits and cannot finance nor play a guarantor role for privately financed municipal infrastructure investments. During the Ninth Plan and under implementation of the proposed project, CPSCL is expected to consolidate its performance, improve its financial management, and launch the second phase of its institutional transition. While the reform of municipal finance (local taxation and transfer system) will be implemented and CPSCL's current interest rates will be adjusted to better reflect the costs of borrowing and managing resources, different institutional options will be assessed and a strategy defined to integrate CPSCL into the financial sector, submit it to appropriate prudential regulations, and identify proper supervision by the Bank of Tunisia. Furthermore, new financial products will be created to allow CPSCL to play a catalytic role in the development of private sector financing of infrastructure at the municipal level (see note on private sector participation in project file). A set of actions has already been discussed and agreed upon with CPSCL to facilitate such an institutional transition (see Annex 5). In addition, an institutional development study, with terms of reference agreed upon with the Bank, will be launched during the first year of project implementation and will identify CPSCL's best opportunities to play a catalytic role for municipal development in a more competitive environment, as well as what legal, institutional and managerial changes are required. (ii) Other executing agencies: Training Center. DGCPL. and DGAR The Training Center was created in July 1995 to respond to the training needs of local and regional governments more efficiently and with a higher level of quality. The Center is an autonomous entity under the administrative supervision of Mol. Its board is chaired by its director, and the board members are Mol, CPSCL, and the National Administrative School. The Center is financed through a budget annexed to the Mol budget and through international donors. Moreover, the legislation allows direct financing of the Center by LGs. A strategic study completed in 1995 proposed an organizational scheme and a training program over the period 1995-1998. Although its initial performance has been highly satisfactory, the Center still needs international technical assistance to improve organization, extend its activities, and reach sustainability in operations. DGCPL, within Mol, is in charge of LG management. A financial database, cost accounting for LGs, and performance indicators were introduced during MIP implementation. DGCPL will keep improving its monitoring capacities by extending the database to human resources data, generalizing the cost accounting system, and pursuing computerization of LG functions. DGAR, also within Mol, is in charge of regional governments, rural councils, and neighborhood committees (comites de quartiers, or CQ). Its objectives are to improve management capacity of the regions through better equipment and increase the autonomy of rural councils and improve the efficiency of the CQs by promoting their own infrastructure investment programs. The two directorates have the common objective of facilitating decentralization with the creation of a Research Center. (b) Project management. The line of credit and the technical assistance to CPSCL (components "a" and "b") will be executed by CPSCL, while components "c", "d", and "e" will be executed by Mol. Microprojects, like any other infrastructure project financed by the line of credit, will ultimately be implemented by the local governments with the participation of the final beneficiaries (see Annex 2). The CPSCL, through its Direction financi&re, will continue to keep a record of project accounts, be responsible for overall financial management  Project Appraisal Document Page 10 Country: Tunisia Project Title: Second Municipal Development Project of the project, and follow up on project disbursement. Such an arrangement was highly satisfactory under MIP and will be maintained under the proposed project. The project coordinator within the MOI will ensure coordination among project components and executing agencies (CPSCL, DGCPL, DGAR, and Mol's Training Center) and will be in charge of consolidating the monitoring of project performance indicators during implementation. 17. Social assessment: Local social assessment will be conducted during the project to identify community priorities for microprojects and assess their willingness to participate. A more important equalization role for the system of transfers from the central budget to benefit the poorest communities will be agreed upon during appraisal. 18. Environmental assessment: Environmental category [ A [X1 B [1 C (a) CPSCL has made constant improvements in its internal procedures under MIP to achieve an effective environmental screening process. Recently it adopted a checklist of environmental impacts for large urban projects, to identify activities that require mitigation. It intends to expand this screening checklist approach for additional large projects. CPSCL also routinely requires that summary evaluations of environmental impacts be prepared for basic municipal infrastructure subprojects (e.g., roads, sidewalks), which constitute the majority of subprojects. CPSCL usually finances these types of projects without any formal approval by the Tunisia environmental regulatory agency, the Agence nationale pour la protection de 1'environnement (ANPE). For certain pre- identified projects (solid waste, slaughterhouses, wholesale food markets), as specified in the Tunisian regulations on environmental impact assessment, more extensive environmental impact studies are required as part of the technical studies. These environmental impact studies must be submitted to ANPE for review and approval before CPSCL finances the subproject. For the Municipal Investment Project, these procedures ensured adequate screening to manage the environmental risks associated with the subprojects. (b) Complementary to new measures being undertaken, CPSCL has agreed to upgrade its approach to the environmental review of subprojects, to more systematically manage the environmental risks of a larger volume of more complex subprojects. Since the environmental legislation and regulations are generally adequate in Tunisia, the main objective will be to ensure that subprojects comply with Tunisian laws and regulations. The principle tool for review is CPSCL's operational procedures manual. CPSCL agreed to pursue the revision of the operational manual, and to appoint, by December 31, 1997, a specialist responsible for the environmental review system, or alternatively, to hire a qualified professional. The environmental specialist, in coordination with ANPE, will be responsible for (i) reviewing the operational manual and following up on modifications to environmental laws and regulations; (ii) outlining a training program for appraisal and monitoring of subprojects, liaising with the Training Center, and preparing training programs for him or herself and the managers; (iii) working on specific environmental issues; (iv) ensuring coordination within CPSCL on environmental issues for appraisal and monitoring of subprojects, and providing environmental advices to CPSCL technical staff. The operational manual will be revised by December 31, 1998, to gather information in order to classify subprojects according to their impact on the environment, define the need for an EIA, a simplified EIA, or no specific environmental requirement. To achieve this, the operational manual will introduce standard documents (checklists or other types) to measure environmental impact, standard TORs for an EIA or for simplified EIA for all categories of subprojects, and in particular the subprojects identified in Decree 91-362. Technical staff will receive training, during the implementation period of MDP II, in the environmental review of subprojects, to allow for quality control of environmental reports and to bring to the attention of CPSCL any subprojects with serious environmental risks. As part of better quality control procedures, CPSCL will also consult regularly with ANPE to discuss specific questions related to individual subprojects. (c) During preappraisal, several EIA reports for proposed landfills were reviewed; to facilitate effective implementation, additional work may be recommended on the EIA reports. To allow solid waste landfills to be eligible for Bank financing under MDP II, the Bank will require EIAs to meet Bank guidelines, in particular on the following issues: (i) final landfill closure measures, (ii) records of public consultations and participation, (iii) definition of financial mechanisms to ensure adequate environmental monitoring, (iv) conformity with the technical environmental standards for landfills, and (v) identification of means for arm's length environmental enforcement. Once the review is completed and any recommended revisions completed, each EA report will be approved by ANPE, and then forwarded to the Bank for review. After a no objection is issued by the Bank for each report and the other eligibility criteria complied with (see para. 15), disbursements for the landfills will be approved.  Project Appraisal Document Page 11 Country: Tunisia Project Title: Second Municipal Development Project 19. Participatory approach: Identification/Preparation Implementation Operation Beneficiaries/community groups CON CON/COL COL Intermediary NGOs IS CON/COL COL Academic institutions Local government CON/COL COL COL Other donors CON/COL COL COL More than half of the approximately 130 microprojects will be identified through participatory, community-based needs assessment. About 70 microprojects in Kasserine, Sousse, and neighboring governorates will be identified for full participation, involving collaboration among municipal authorities, representatives of local NGOs, and community representatives in project design, implementation, financing, monitoring and evaluation. The results of microprojects with full participation and those with consultation but without participation will be compared in order to draw lessons for wider replication. 20. Sustainability: * Increasing managerial efficiency of LGs (introduction of a cost accounting system, design and implementation of municipal databank systems, computerization of the local fiscal system, and improved qualification of human resources). * Introduction of appropriate cost recovery schemes (e.g., user fees) for municipal services. * Further strengthening of CPSCL's financial viability. The implementation of these measures, including those improving LG revenues, should generate a sustainable mechanism for project financing and implementation of the LG investment programs. 21. Critical risks (see fourth column of Annex 1): Project outputs to development objectives Risk Risk Rating Risk Minimization Measure Local tax reform is not implemented on time Substantial Close follow-up and technical assistance will be provided by the project or effectively Lack of agreement on the proposed FCCL Modest Extensive analysis and discussion are being carried out reform Project components to outputs Risk Risk Ratin Risk Minimization Measure Delay in project implementation Low Close follow-up of project implementation. Commitment from GoT will be sought to supply timely FCCL funds to LGs DGCPL, municipalities, and neighborhood Medium Ample technical support and training for small number of fully committees will give priority to rapid participatory projects microproject identification and execution over local community priorities Municipalities will not possess proper Modest Followup during appraisal disbursement procedures Overall project risk rating Risk Risk Rating Modest 22. Possible controversial aspects: Tax and transfer system reforms will benefit some municipalities but others will lose. Resistance from the losers can be anticipated. The reform will have to foresee a transition period during which adjustments in transfer allocations will be leveled out. Municipalities may resist further CPSCL interest rate adjustments after the increases from 2 to 6.5 during the 1992-1995 period.  Project Appraisal Document Page 12 Country: Tunisia Project Title: Second Municipal Development Project Block 4: Main Loan Conditions 23. Effectiveness conditions: Execution of the Subsidiary Loan Agreement between CPSCL and the Government. 24. Others: Board conditions: - Adjustment of CPSCL interest rates to 7.5 percent on average; - Submission of a signed strategy letter on municipal development and decentralization, as agreed upon at negotiations, containing the agreed upon timetable for implementation of the FCCL reform. Loan to CPSCL - Financial covenants: (a) a net income/total assets ratio of at least 1.0 percent through 1998, and at least 1.5 percent starting 1999; (b) a rate of return on equity of 3 percent by 1998, 4 percent by 1999 and 2000, and 5 percent by 2001; (c) debt service coverage of 1.5 times; and (d) internal cash generation to finance at least 35 percent of CPSCL's loan disbursements through 1998, and 40 percent starting 1999; - appointment by CPSCL of a specialist responsible for the environmental review system by December 31, 1997; - the strategic study on institutional restructuring of CPSCL will be completed by June 30, 1999; - the Operational manual of CPSCL will be revised to contain improved environmental guidelines by December 31, 1998; - a second revision of the Operational Manual, containing the agreed upon outcomes of the technical assistance provided under the project, will be submitted by December 31, 2000; - a comprehensive mid-term review of all project components will be conducted by CPSCL in consultation with MoI and the Training Center by June 30, 2000; - eligibility criteria for subproject reproducing the same covenants established under Loan 3507; for financing of landfills and transfer stations under the line of credit, the additional criteria listed in para 15. under the "Eligibility criteria" sub-paragraph, points (a), (b), (c), (d) and (e) will apply; - standard reporting and auditing covenants will apply. GoT Guarantee Agreement - an amendment to Law 75/36, Article 3, reforming the distribution of FCCL to the LGs, will be submitted to the Parliament not later than December 31, 1997; - a full-time Project Coordinator with appropriate terms of reference and with suitable qualifications and experience will be maintained throughout Project implementation; - a comprehensive evaluation report of all project components will be prepared by the Project Coordinator in close consultation with Mol's directorates, the Training Center, and CPSCL by December 31, 1999; - a mid-term review of the project components will be conducted with the World Bank by June 30, 2000; - standard reporting and auditing covenants will apply; - GoT will establish CPSCL interest rates to such levels to allow CPSCL to meet the financial covenants listed above. - an implementation plan describing the community participation strategy and defining the selection criteria for the neighborhoods and the governorates will be submitted to the Bank for its approval before March 31, 1998. Disbursement Conditions - before CPSCL's first request for financing a landfill or a transfer station is approved, the Guarantor will transmit to the Bank for its approval a plan as specified in para. 15 (landfills and transfer stations financing prerequisite). Block 5: Compliance with Bank Policies I I This project complies with all applicable Barik policies. [XI The following exceptions to Bank policies are recommended for approval: The Borrower, CPSCL, is not in compliance with one of the financial covenants, the adjustment of interest rates to 8.5 percent by January 1997, as agreed upon under the Municipal Investment Project in order to approximate market rates and protect the financial viability of CPSCL. An adjustment satisfactory to the Bank is expected to take place prior to Board presentation. Considering the decrease in borrowing costs, money market rate, and the inflation rate in Tunisia, an adjustment to an average 7.5 percent will be considered satisfactory. The project complies with all other applicable Bank policies. Task Manager: Laura Raimondo Division Chief: Amir Al-Khafaji  Annex 1 Tunisia - Second Municipal Development Project Project Design Summary Narrative Summary Key Performance Monitoring and Supervision Critical Assumptions and Indicators' Risks POC/CAS: As listed in Annex A9 of the (CAS to Bank Mission): CAS report: Strengthening public * Improve percentage of LG technical services and * Favorable macroeconomic sector management and urban population with piped SONEDE statistics, INRS conditions provision of infrastructure discharge (from 60 to 75 surveys * Stable budget allocations to and services percent in 1995-1999 period) FCCL or transfer of fiscal * Improve percentage of responsibility to LGs rural population with access SONEDE, Ministry of to safe water (from 66 to 75 Agriculture per cent in 1995-1999 period) Project Development (Development Objectives to Objectives: CAS Objective) Enhancing municipal * Investment cost of PIC DGCPL and CPSCL * The expected LGs' infrastructure and services per year revenue increases due to * Investment cost of line of local taxation reform and credit per year improved recovery rates * Investment cost of line of materialize credit per inhabitant for the concerned communes * The amount of subsidies (FCCL) distributed to poorer LGs is increased compared to 1995 level * Increase efficiency of * Number of LGs DGPCL and DGELF public sector management at introducing cost accounting the local level procedures. * Rate of recovery of DGCPL, CPSCL direct tax roll will increase on average from 50% to 70 % by the end of the project. Project Outputs: Outputs to Development Objectives) * Improved municipal Improvements in service PIU and technical departments LGs' sustained efforts to infrastructure and services levels (additional km of roads, of LGs submit timely financing people connected to water and requests to CPSCL are sewerage, etc) to be specified continued * Increased capability of * Number of software DGCPL, supervision reports Measwres to finance training in LGs to plan, implement and applications in the communes a sustainable way are not manage municipal services * Number of communes agreed upon concerned by the Training Center reports, implementation of software DGCPL statistics on LG application increases during personnel of LGs I project implementation I I Baseline and targeted values should be shown, with the latter divided into values expected at mid-term, end of project and full impact.  Annex 1 Page 2 of 3 * Number of days of training per year / total number of regional and municipal higher level staff * Percentage of action plans implemented 6 months after the training IHigher fiscal discipline Total amount of arrears each CPSCL statistics A number of local governments in management of LGs' December 31, as compared may try to avoid local rigidity, budgets and debt service with the total (interest and using political clout. capacity capital) amount to be repaid by the communes in the past 12 months. to decrease to 10 percent by 2001. Rationalization of local * All municipalities will DGCPL, PIU, MoF and * Measures are not taken to taxation system have updated their tax roll supervision reports prepared by equip LGs to implement reform satisfactorily by mid-tenn consultants in a timely manner review * TIB+TNB per inhabitant and per year for each commune * TIB+TNB+taxes on economic activities per inhabitant per year * All fiscal, parafiscal taxes and other taxes based on communal equipements per inhabitant and per year * Draft text to reform the * Approval of the * Lack of agreement on the transfer system amendment of Article 3 of proposed reform Law 75/36. * Strengthened CPSCL * Return on equity of at * Supervision missions, * Agreement to adjust financial viability and least 5% by 2001 project progress reports interest rates is not reached management * Net income on total assets equal to 1.5 % by 2001 * Audit report and CPSCL * Administrative costs not annual reports to exceed 0.6% p.a. of total assets * Self-financing of lending activities between 35 to 40 % or higher * Debt service coverage of at least 1.5% * Improved quality of life * Local quality of life * Regional Steering * New style of operating, and immediate urban indicators Committees not easy to assimilate to environment of 130 of the * EME, CROP and local * NGO reports habitual approaches most disadvantaged governement capacity to * Bank supervision * Community suspicions neighborhoods prepare and implement and disillusionment. * Community microprojects to improve participation, sense of during project responsibility and social implementation cohesion * Quantity and quality of participation of the I communities (time, money, I  Annex 1 Page 3 of 3 representativeness) to improve during project implementation Project Components (Components to Outputs) a. Finance priority municipal Credit Line to CPSCL CPSCL reports LGs sustaining efforts to investments to finance municipal prepare timely financing investments: requests are not continued US$ 213 million b. Training and equipment for Institutional and technical Audits, supervision missions GoT not commnitted to CPSCL assistance development: transform financial structure of US$ 1.4 million CPSCL in the short-term c. Training and equipment for Institutional and technical DGCPL reports, * Slow implementation LGs, DGCPL (Mol) and capacity development: supervision missions DGAR US$ 1.9 million d. Technical assistance and Training for LG staff, Training Center reports equipment for the Training equipment and works: Center US$3.8 million e. Support community Community participation NGOs, reports from entity in * LGs commit sufficient participation programs development: charge of coordination, funds for this component US$ 0.2 million supervision mission Municipal disbursement _________________________ =________________________ __________________________ proc edures assured   Annex 2 Tunisia - Second Municipal Development Project Detailed Project Description Project Component "a" - Municipal Infrastructure - US$213 million 1. US$76.3 million line of credit to CPSCL which will provide loans to eligible beneficiaries for municipal infrastructure subprojects, most of which are part of the approved Programme d 'Investissement Municipal, and for microprojects, defined as a small project of urban environment improvement or social development. Microprojects are not restricted to certain sectors, but must fall within the scope of activities undertaken or supported by municipalities or CQs. Details of estimated investment costs financed by the line of credit are reported in Annex 3. 2. The eligible beneficiaries are all local governments (communes and regional council) and municipal agencies that comply with CPSCL's lending policies and environmental guidelines, which are detailed in CPSCL's operational manual and found satisfactory to the Bank. For regional councils, the Caisse will apply the same rules and eligibility criteria applied to local govermnents. During project implementation the operational manual will be revised to further upgrade the environmental guidelines, strengthen the economic criteria for subproject screening, and integrate the outcomes of the technical assistance work carried out for improving technical evaluation of projects, supervision, and post-evaluation. 3. Lending arrangements: CPSCL will get a loan of FRF 452.8 million, equivalent to US$80 million from the World Bank, with a guarantee from the GoT. The CPSCL will on-lend Bank funds to eligible beneficiaries at an interest rate of 7.5 as an average (see para. 12 of Annex 5 for more details) that will satisfy the financial targets covenanted under the proposed loan with a maturity of not more than 15 years, including a grace period of 1 year. 4. Subproject Financing: For eligible subprojects and microprojects, the Bank loan will mainly finance civil works according to the procurement and disbursement rules stated in Annex 6. Only information and solid waste collection equipment will be eligible for Bank financing in the category of goods. Any single eligible subproject will not exceed the amount of US$10 million. Any single eligible microproject will not exceed the amount of US$50,000. 5. Subloan approval and supervision: As in the MIP, the Bank will continue to review a selected number of subprojects as a means to supervise strengthening of CPSCL's technical capabilities. A selected number of subprojects will be subject to prior review by the Bank. Details are listed in Annex 6, Table B. Project Component "b" - Training, Technical Assistance, and Equipment to Strengthen CPSCL Management - US$1.4 million 6. The new investment program for LGs under preparation for 1997-2001 represents an increase of 54 percent over the previous five-year program. As a consequence, CPSCL's activities will expand, creating the need for recruitment, a training prograrn for the staff, and better office and computer equipment. Moreover, CPSCL needs improvement in the appraisal and supervision of subprojects and  Annex 2 Page 2 of 4 strategic evolution over the medium and long term. Therefore, technical assistance for the next five years will strengthen management capacities with the following program: 7. CPSCL plans to create local offices in some regions, selected for their proximity to the major communes. CPSCL's greater proximity to clients will improve communication. A study will help decide the best locations, the size of local offices, and organization schemes. New office supplies and furniture, computers and transport vehicles will be financed for US$0.7m. 8. A training program, planned for the five-year period at US$150,000, has the three-fold objective of (a) providing basic information about municipal management to the newly recruited staff, (b) improving capacities in administrative, financial, and technical management of subprojects for all staff, and (c) improving appraisal and management capacity with the use of new tools, involving software and/or organization schemes. 9. CPSCL has also planned to launch studies over the project implementation period with a coherent set of objectives. The first one will facilitate the functional procedures with a new accounting system, a better LG database, and improved data circulation and classification. The second study will aim at improving the appraisal and supervision of subprojects: the standardization of an appraisal document, the definition of average ratios, and the setting up of financial analysis could all improve the quality of the appraisal and lay the ground work for supervision and post-evaluation of the investment projects. One study will therefore propose the creation of a new unit for supervision and post-evaluation. On the other hand, CPSCL will launch a strategic study with the objective of preparing its medium-term financial evolution, including the possibility of its transformation into a bank. Project Component "c" - Technical Assistance and Equipment to Improve Management of LGs, DGCPL and DGAR - US$1.9 million 10. The two directorates directly involved in municipal development, the Directorate for Local Governments (DGCPL) and the Directorate for Rural Development (DGAR), will implement an institutional plan aimed at strengthening local governments with a special focus on communes and rural councils. This plan should increase management capacity at the decentralized level through better equipment and computerized systems. Central government would also be provided with better means to monitor local government efficiency. Details of the plan are as follows: (a) DGCPL will (i) launch a study aimed at generalizing cost accounting for all LGs, testing two different approaches at pilot communes; the study will propose the best solutions for communes according to their size, capacity and efficiency; (ii) study the possibility of a reform involving budgetary and accounting nomenclature; the study will include an analysis of the main existing constraints and propose reforms; (iii) extend the existing database to human resources and training efficiency; DGCPL will then closely follow the LGs' performance on personnel and adapt its recruitment policy according to data; (iv) pursue computerization of LGs with three kinds of operational software: financial management, cost accounting, and stock management; and (v) improve LGs' organization, based on pilot studies of three communes selected for size. (b) DGAR will (i) launch a study on the development of rural councils; its objectives will be to improve representativeness of the 165 rural councils and provide technical, administrative, and financial measures to improve efficiency; (ii) launch a study on the development of neighborhood committees (Comites de quartiers, or CQ); the study will assess the CQs' current efficiency and propose regulatory measures to develop their role; (iii) strengthen the rural councils through the purchase of office supplies and  Annex 2 Page 3 of 4 computers, training of rural council representatives, and preparation of planning documents; and (iv) implement a computerized master plan for the governorates and the DGAR. (c) Mol will launch a feasibility study for the creation of a Research Center to focus on decentralization and other measures needed to improve LGs' management; the Center will also facilitate exchange of information between LGs and universities and research centers, both national and international. The Center will be created for use by all the directorates of Mol, and proposals will be made for the most appropriate institutional framework. (d) DGCPL in coordination with the Ministry of Environement will launch advisory services and technical assistance to facilitate private sector participation in solid waste management. The proposed assistance will provide consultant services to (a) improve the regulatory, institutional, and procurement framework for private sector participation; (b) improve cost recovery system of investment and maintenance for landfills, transfer stations and collection of solid waste; and (c) prepare technical and environmental standards and authorizations for landfills and transfer stations, as required in Law 96-41 of June 10, 1996 on Solid Wastes. Component "d" - The Training Center Program for Local Governments - US$3.8 million 11. The Training Center will expand its activities based on the study of its strategic development completed in 1995. It will elaborate on areas already developed and will develop new training areas according to need. It will take appropriate measures to ensure quality of training, such as selection of appropriate trainers from the public and private sectors, follow-up actions, and monitoring of the trainers' team and trainers' training on new sectors, including community participation. Coordination with the communes will be essential and should be facilitated by the definition of training objectives by the Center and the communes. The training program is estimated at US$2.69m for the period 1997-2001. The proposed five-year program will require the construction of new training rooms and a conference room located on Training Center premises. 12. The total number of high-level staff in local and regional governments in 1997 is about 3,000. The Center is planning to organize training for 25,000 training days (see detail in the table) over the next five years, which amounts to an average of 1.7 days/year/person. Table 1: Training Program 1997 1998 1999 2000 2001 Total Training courses (number)' 74 80 85 86 84 409 Information seminars2 12 12 12 12 48 Beneficiaries 2623 2758 2787 2910 1256 12334 Number oftraining days 4836 5479 5537 5306 3768 24926 Training courses are 3 to 5 days long. 2Information seminars last one day. 13. The expanded program requires the Center to prepare a medium-term strategy to address the regulatory and financial frameworks of the LGs and improve their organization. Technical assistance will therefore be required for this study, as well as for the preparation of new activities and supervision of all actions. Total consultant costs are estimated at US$458,000 for the five years.  Annex 2 Page 4 of 4 Project Component "e" - Community Participation - US$0.2 million 14. The strategy of this component would be to prepare, under CPSCL responsibility, and implement microprojects to improve the local neighborhoods, the financing being provided under component (a). This mechanism could finance some 130 microprojects, located in about 130 neighborhoods distributed in about 30 communes, at a total level of 4 million dinars over the five years of the project. These microprojects will be undertaken as far as possible with community participation, thus each microproject would have a specific development objective in line with an identified local development need. Once approved, it would be financed in a simple and flexible manner with rapid disbursement. DGCPL would provide technical assistance to certain microprojects, municipalities and regions with a view to developing and evaluating the participatory approach. Microproject preparation and execution imply participation from the community and the extended municipal team (EME) consisting of representatives with required competencies from the regional and municipal technical departments, elected officials from the municipality and representatives from local NGOs. 15. Overall management responsibility would be under the authority of a committee set up by DGCPL, and comprising representatives of DGCPL, DGAR, the Training Center, the project coordinator, CPSCL, representatives of the regional CROP, and others as deemed appropriate. The national steering committee would monitor, facilitate and evaluate the overall implementation of the GCP component, and assist in overcoming obstacles. A unit within DGCPL would be responsible for preparing materials for the national committee, and ensuring the implementation of its reconmmendations. 16. Procedures and instruments of financial management are required at local level that are capable of handling mixed funds (public and privately contributed) and of taking account of community contributions in labor and kind. The system will be capable of identifying the total contribution to individual microprojects, both for purposes of evaluation and in order to assure local communities that their contributions are properly managed and accounted, and to ensure a clear point of contact for microproject implementors. 17. This component will be executed as a first step over a period of two years in the Sousse and Kasserine govemorates and in two neighboring govemorates. An assessment will be made that will permit to start the second stage of execution, involving more govemorates, according to the results obtained. The component will include training and capacity strengthening activities for the EMEs and CROPs, and will be implemented under the responsibility of DGCPL. Table 2: Cost Summary Activity Total National currency Foreign currency Training 346,000 346,000 Appraisal and 150,000 100,000 50,000 documentation Microprojects 3,960,000 3,960,000 Total 4,456,000 4,406,000 50,000  Attachment to Annex 2 Page 1 of 2 TUNISIA: Second Municipal Development Project Communal Investment Program (PIC) 1. The PIC is a tripartite commitment among Mol, the communes and CPSCL defining the investment program of local governments for a five-year period corresponding to the Government plans. PIC Preparation 2. The PIC preparation is an opportunity for the communes and the central government to plan their investments for the medium term. Therefore, the preparation follow a two-step plan. First, the communes prepare their own program, and, second, all stakeholders check the feasibility of the PIC in regard to its overall coherence, its financing, and its implementation schedule. 3. During the first step, the communes identify their needs based on a detailed diagnosis of their current level of equipment and the priority they decide to give to various sectors. Then the communes estimate the cost of the selected investments, and, if necessary, their distribution per tranche and per year over the program implementation. They should also give a preliminary economic justification of their choice at this point. 4. The second step provides for the overall coherence of the PIC. The feasibility of the investments will be analyzed for each commune and compared with the program of the previous plan, as well as the capacity of the commune in terms of human resources and financing. 1997-2001 PIC 5. MOI and CPSCL consolidated the proposed PIC after the communes established their investment proposals in June 1996. Since the PIC is being part of the Ninth Plan, all the propositions related to the Ninth Plan were then submitted to the Government during the last quarter of 1996, with the Ministry of Economic development coordinating the discussions. The final decision on the Ninth Plan was reached in early 1997. The PIC by sector 6. The major sectors of the PIC are listed in the following table. Infrastructure, including roads, water, sewerage, and lighting, represents 35 percent of the proposed PIC. Infrastructure is even more important in the MDP 11, since the proposed project will not finance all the sectors listed in the table. It has been agreed that the proposed MDP II will finance infrastructure, green and recreational areas (except land acquisition), commercial facilities, neighborhood facilities, solid waste investments (landfills or goods), and rural council investments, up to an amount of US$213 million.  Attachment to Annex 2 Page 2 of 2 Table 4: Communal Investment Program PIC 1992-1996 PIC 1992-1996 PIC 1997-2001 Forecast Actual Forecast Infrastructure 163 230 210 Green and recreational areas 10 41 43 Sewerage programn 26 25 22 Commercial facilities 37 25 49 Sport and cultural equipment 61 72 52 Goods 35 52 43 Administrative buildings 16 18 31 Subtotal 322 438 450 Neighborhood upgrading 46 30 63 Landfills 13 0 42 Rural councils 0 0 25 Others * 19 17 77 Total 426 510 657 * Others include land acquisition, national program of sewerage for low-income neighborhood, and touristic zones protection. 7. The new PIC has a decreased investment component for infrastructure, compared to the previous PIC, even though infrastructure remains by far the most important sector. On the other hand, investment in green and recreational areas is expanding as compared to the previous PIC. Solid waste investments are planned for US$42 million for 1997-2001. Investments for rural councils were irnplemented for about US$12 million during the five previous year, and the next PIC plans to develop this line of investment, bringing it to US$25 million.  Annex 3 Tunisia - Second Municipal Development Project Estimated Project Costs Components Project Cost SummaryO % % Total (DT '000) (USS '000) Foreign Base Local Foreign Total Local Foreign Total Exchange Costs A. LGs'l Investments 135.111,3 77.910,1 213.021,4 135.111,3 77.910,1 213.021,4 37 97 B.lnmstlutlonaldevelopmentofCPSCL 745,2 619,9 1.365,0 745,2 619,9 1.365,0 45 1 C. Intltutlonal development of LGa and Mol DGCPL 699,0 261,0 960,0 699,0 261,0 960,0 27 Conmnunity participation progam 132,5 -67,5 200,0 132,5 67,5 200,0 34 DGAR 546,0 354,0 900,0 546,0 354,0 900,0 39 Training Center 3.062,2 751,8 3.813,9 3.062,2 751,8 3.813,9 20 2 Mol 36,0 24,0 60,0 36,0 24,0 60,0 40 - Subtotal nsitutional development of LOs and Mol 4.475,7 1.458,3 5.933,9 4.475,7 1.458,3 5.933,9 25 3 D. Advisory services for private sector - - - - - - - - 140.332,1 79.988,2 220.320,3 140.332,1 79.988,2 220.320,3 36 100 Physical Contingencies - - - - - - - - Price Contingencies 140.332,1 79.988,2 220.320,3 140.332,1 79.988,2 220.320,3 36 100 Local Government Investment Costs Detailed Costs (US$ '000) Breakdown of Totals Incl. Cont. Local Base Cost (Excl. Dudes & 97/98 98/99 99/00 00/01 01/02 Total For. Exch. Taxes) Taxes Total . Investment Cost A. Infrastructure Small infastructure 440,S 440,8 757,8 724,1 624,1 2.987,6 1.045,7 1.434,0 507,9 2.987,6 Roadsandpaverments 12.563,4 16.980,2 18.168,6 16.097,7 11.193,6 75.003,5 26.251,2 36.001,7 12.750,6 75.003,5 Public Electricity 2.156,5 2.717,5 3.315,5 2.425,7 1.391,7 12.006,9 4.202,4 5.763,3 2.041,2 12.006,9 PotableWater 282,5 329,1 202,2 115,6 71,0 1.000,4 350,1 480,2 170,1 1.000,4 Sewerage 2.190,2 3.030,3 2.318,6 946,2 522,5 9.007,8 3.152,7 4.323,7 1.531,3 9.007,8 Subtotal Inratructure 17.633,4 23.497,9 24.762,7 20.309,3 13.802,9 100.006,2 35.002,2 48.003,0 17.001,1 100.006,2 B. Development ad Rehabllitadon Greenspacesandenibellishment 4.004,1 3.038,6 4.000,0 4.136.3 2.829,1 18.008,1 5.402,4 9.544,3 3.061,4 18.008,1 C.ProductUve Projects 5.425,4 6.501,0 6.572,3 5.750,5 5.751,2 30.000,4 12.000,2 12.900,2 5.100,1 30.000,4 D.Goods Computerequipment 2.424,7 2.671,9 2.411,9 2.401,9 96,3 10.006,7 8.005,4 300,2 1.701,1 10.006,7 L PNRQP 9.000,0 9.000,0 9.000,0 9.000,0 9.000,0 45.000,0 13.500,0 23.850,0 7.650,0 45.000,0 F.Solld wate treatment nd dIsposal 2.000,0 2.000,0 2.000,0 2.000,0 2.000,0 10.000,0 4.000,0 4.300,0 1.700,0 10.000,0 Total 40.487,6 46.709,4 48.746,9 43.598,0 33.479,5 213.021,4 77.910,1 98.897,6 36.213,6 213.021,4  TUNISIA: SECOND MUNICIPAL DEVELOPMENT PROJECT Components by Financiers (US$ '000) Collectivitds CPSCL Aide Bilaterale BIRD Gouvernement Total Locales Central Amount % Amount % Amount % Amount % Amount % Amount % A. LocalGovernments' Investments 45.444,0 21,3 - 76.320,4 35,8 91.257,0 42,8 213.021,4 96,7 B. CPSCL's Institutional Developnment - - 685,0 50,2 - - 680,0 49,8 0,0 1.365,0 0,6 C. LGs' and Mol's Institutional Development DGCPL - - - 93,3 9,7 492,4 51,3 374,4 39,0 960,0 0,4 Conununity Participation Program - - - - 16,0 8,0 102,7 51,4 81,3 40,6 200,0 0,1 DGAR - - - - 107,8 12,0 569,6 63,3 222,6 24,7 900,0 0,4 Trining Center 1.262,3 33,1 - - 393,5 10,3 1.828,1 47,9 330,0 8,7 3.813,9 1,7 Ministry of Interior - - - - 38,4 64,0 7,2 12,0 14,4 24,0 60,0 Subtotal LGs' and MI's Institutional Development. 1.262,3 21,3 - 648,9 10,9 2.999,9 50,6 1.022,7 17,2 5.933,9 2,7 Total Disbursement 46.706,4 21,2 685,0 0,3 648,9 0,3 80.000,4 36,3 92.279,7 41,9 220.320,3 100,0 -~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~t  Annex 4 Tunisia - Second Municipal Development Project Cost Benefit Analysis Summary A. Economic Criteria for Subproject Selection 1. The investments financed under the proposed line of credit will have important economic benefits, which include: (a) improvement of public health and better quality of life through improved access to water distribution and sewerage in those small communities where the national utilities (SONEDE and ONAS) do not operate the network, and through the creation of green spaces within the communal boundaries; (b) modernization of urban services through the expansion and rehabilitation of power and road networks and the development of distribution systems; (c) improvement of environmental conditions through the consolidation of the solid waste collection system (quite developed in Tunisian urban centers) and the promotion of solid waste treatment and disposal. 2. In 1992, the CPSCL adopted a set of economic criteria for eligibility of projects that were agreed upon with the World Bank under the MIP. Such criteria differ according to the sector concerned. They can be summarized as follows: (a) for all eligible sectors and for all project dimensions, different mutually exclusive project alternatives need to be compared and the least-cost solution chosen. Environmental considerations need to be taken into consideration even if not quantified or quantifiable; (b) for each communal service a cost-recovery scheme for operation and maintenance needs to be agreed upon and submitted, with clear indication of the coverage of costs by the budget and by the users; (c) for revenue-generating activities, the financial internal rate of return needs to be calculated and be larger than 1 0 percent; (d) for subprojects larger than TD I million, a financial and an economic rate of return of 10 percent is required. 3. The Operational Manual defines in detail, by sector, which benefits are to be considered, the costs to be included in the calculation, and the methodology to be used. Drawing from the experience of the first four years of activity under these guidelines, such criteria have been found generally satisfactory; however, a few modifications are deemed necessary to ensure that (a) the financial and economic analysis of the project becomes a more useful means to plan and address investment priorities and technical design and effectively screen subproject quality; and (b) more attention is paid to cost recovery of O&M expenditures. 4. The following modifications will be introduced in the Operational Manual and in particular in the Practical Guidelines distributed to communes for the preparation of financing requests for the subproject indicated in para. 2 (c) and (d) above : (a) more careful estimate of demand must be carried out, taking in consideration the past trend for all significant variables; (b) sensitivity analysis is required for any financial and economic evaluation, and sensitive variables must be used as indicators and be monitored during supervision of projects; and (c) more attention must be paid to the market studies for revenue-generating activities.  Annex 4 Page 2 of 12 B. Local Fmance System B1. Sector Background 5. Tunisian communes receive current revenues from taxes, other own sources, and transfers, which they use to finance current expenditures on salaries, operating costs, and interest payments. The excess of revenues over expenditures is used to reimburse the principal of outstanding loans and to autofinance, along with loans and subsidies (from CPSCL and the ministries), capital investments. Table 1 shows this flow of funds for five years (1992, 1995, 1997, 1999 and 2001). Of interest to this project are the following facts: (a) Tunisian communes financed about 80 percent of their current expenditures from their own current revenues (1-14) in 1992-1995 and are projected to increase this self-financing to 95 percent by 2001; (b) while repayments (16) are projected to rise to 16 percent of current revenues by 2001, gross savings (3) remain above these repayments in all years; and (c) contributions to reserve which buildup financial assets are above drawdowns in all years. 6. Taken together, these figures indicate a good repayment capability. They do not, however, allow us to see whether Tunisian communes are well managed or whether they deliver the appropriate level of services in their limited fields of action (street maintenance, parks, lighting, garbage removal). It is important to recall that in quite a few communes, water and sewerage services are provided by national agencies (SONEDE, ONAS) and that public transit is also offered by the central government, although a limited number of communes -- generally the small communes in rural areas -- need to finance all of these services on the basis of their own resources.  Annex 4 Page 3 of 12 Table 1: Flow of Funds to Tunisian Communes 1992, 1995, 1997, 1999, 2001 Millions of Tunisian Dinars r=7.5 % 1992 1995 1997 1999 2001 1. Current resources 172.0 204.8 231.8 272.0 320.6 2. - Current expenditures 130.5 163.3 189.4 216.6 246.0 3. =Gross savings 41.5 41.4 42.4 55.4 74.6 4. - Capital reimbursement 4.2 12.8 15.2 21.4 29.0 5. =Net savings 37.3 28.6 27.2 34.0 45.6 6. + Subsidies 12.0 35.9 30.4 41.8 26.0 7. + Reserves drawdown* 30.4 36.6 20.2 7.0 7.3 8. + Various receipts 8.3 6.7 17.8 24.5 15.4 9. = Nonborrowed investment resources 88.0 107.8 95.6 107.3 94.3 10. + Loans 10.2 29.0 36.9 50.6 31.8 11. =Investment funds 98.2 136.8 132.5 157.9 126.1 12. - Realized investment 56.6 99.8 108.5 153.1 96.3 13. = Contribution to reserves (+ financial activities) 41.6 36.9 24.0 4.8 29.8 Memory items 14. FCCL current subsidies 62.5 70.2 70.9 79.2 88.6 15. Interest reimbursement 2.0 5.7 12.7 18.8 24.6 16. Debt repayment (15 + 4) 6.2 18.5 27.9 40.2 53.6 Ratios 17. Debt repaymnent/current revenues 0.36 0.9 0.12 0.15 0.17 (16/1) 18. Current expenditures/own current 1.19 1.21 1.18 1.12 1.06 revenues (2/[1-14]) 19. Current expenditures excluding debt 1.14 1.08 1.0 0.91 0.83 repayment/own current revenues ([2-16]/[1-14]) Notes: r = rate of interest of CPSCL loans to LGs. (14) is included in (1) and (15) in (2). * + FCCL investment funds in 1997, 1999, and 2001. Sources: 1992 and 1995 Evolution desfinances municipales, 25/10/1996, CPSCL. 1997, 1999 and 2001 Projection desfinances municipales, 27/02/97, CPSCL.  Annex 4 Page 4 of 12 B2. Local Taxation 7. The main sources of communal revenues are presented in Table 2. Since 1990, one sees an increase in the importance of own revenues from 59.3 to 67.5 percent, explained by an increase in TCL (5 percent) and indirect tax (3 percent) revenues and accompanied by a reduction in the importance of FCCL transfers. Direct taxes (a) Taxe locative (TL): This tax rate is set nationally at 20 percent. It is collected on housing units only. The tax rolls are prepared by the LGs based on rents for rental properties and comparable values for owner-occupied housing. New buildings are exempt for 5 years. Religious and public buildings, hospitals and private schools, agricultural and unbuilt land are exempt. The recovery rate of year t receipts/year t tax roll is 35-40 percent but all years' receipts/year t tax roll is 55 percent due to arrears; (b) Taxe sur les etablissements a caractere industriel, commercial or professionnel called Taxe des collectivites locales) (TCL): This tax is payable by individuals who pay income tax on profits or professional income, partnerships, and corporations. It is usually collected at the rate of 2/10 of 1 percent on local gross business income, with small businesses paying an amount linked to their income tax payment. It is subject to a maximum of TD 20,000 per business, which is deductible from the income statement. Multi-establishment businesses are supposed to report information to allow the distribution of the TCL on an origin basis. But since many do not, the tax is paid to the CU where the head office is located, advantaging large cities (e.g., Tunis). (c) Taxe h6teliere (TH): This is a tax on gross hotel income, set at 2 percent with 1 percent paid to CU and 1 percent to the Fonds touristique of the central government. (d) Taxe sur les terrains non-bdtis (TNB): This tax is set at 6/10 of 1 percent of the value of the land. Other revenues (e) Market fees: There are combinations of various fees collected on various kinds of markets (regular or seasonal; wholesale or retail). Rates are set by decrees. For wholesale markets, the overall tax rate is either 3 percent (food products) or 5 percent. Two thirds of these receipts are obtained by farming out the tax collection activities. (f) Electricity tax: This is a tax collected and set centrally. It also allows STEG to cover expenses by municipal governments. The rate is 2 millimes (a millime is 1/1000 of a dinar) per kilowatt/hour. (g) Road tax: These are fees levied mainly with respect to building activities (storage on public roads, underground work, etc.), public access, and advertising. (h) Slaughtering tax: Except for religious occasions, animals must be slaughtered in municipal slaughterhouses that charge various fees. (i) Various taxes: These includes, among others: - the entertainment tax levied on gross receipts at rates varying from 3 to 18 percent;  Annex 4 Page 5 of 12 - drinking establishment fees. Reform of the local taxation 8. The direct taxes will be modified in 1997 with the law promulgated February 7, 1997. The main changes are: (a) TIB (Taxe sur les immeubles bdtis, TL previously) : As of 1997, national values (four size ranges) set by decree for covered m2 will be used by communes to set the tax roll. The 20 percent tax rate will be replaced by four tax rates (8, 10, 12, and 14 percent) applied by communes by zone (classified according to the availability of six services: garbage collection, street lighting, covered roadway, covered sidewalk, sanitary sewers, rainwater sewers and other services). (b) TCL (Taxe sur les eablissements a caractere industriel, commercial ou professionel): As of 1997, business will be required to indicate the m2 of each establishment. The TCL will be distributed according to these M2. Values set by decree and varying according to the type of structure will be applied to these m2 and multiplied by 5 percent to set the minimum TCL (i.e., TIB rate x this value). The maximum TCL will be raised by decree from 20,000 to 50,000, while the tax rate remains unchanged. (c) TH: As of 1997, m2 will be used to allocate it for multi-establishment chains. (d) TNB: As of 1997, the rate is reduced to 3/10 of 1 percent, and when market value is not available, a tax amount per m2, set by decree, will be used. 9. The two key changes are the TL tax roll and the TCL maximum. The changes in the TL tax roll will reduce inequities between owner-occupied and rented accommodations, simplify tax administration and make it uniform across communes, and permit the use of the TL in an equalization scheme. The increase in the TCL maximum is a step toward eliminating a ceiling on the tax, which is not justified. In real terms, it adjusts the 20-year old maximum to inflation.  Annex 4 Page 6 of 12 Table 2: Sources of Current Communal Revenues, 1990-1996 Source Years 1990 1992 1994 1995 1996 MTD % MTD % NfID % MTD % MTD % Direct taxes TCL 10.4 8.3 19.2 11.2 24.2 12.4 26.2 12.8 28.7 13.0 TH 4.8 3.8 5.8 3.4 8.4 4.3 8.1 3.9 8.8 4.0 Other 0.6 0.4 1.2 0.6 1.6 0.8 2.0 1.0 2.0 0.9 Total direct 30.4 24.3 44.9 26.1 54.1 27.7 57.7 28.2 64.2 29.2 Other revenues Miscellaneous 1.9 1.5 1.5 0.8 0.9 0.5 1.2 0.6 1.1 0.5 Services 5.9 4.7 9.1 5.5 11.6 5.9 13.1 6.4 14.2 6.4 hidirect taxes 23.0 18.4 34.1 19.8 41.4 21.2 44.2 21.5 49.6 22.5 Total own revenues 74.1 59.3 109.5 63.1 128.9 68.1 134.6 65.7 148.7 67.5 FCCL 50.8 40.7 62.5 36.3 66.3 31.9 70.2 34.3 71.5 32.5 Total revenues 124.9 100.0 172.0 100.0 195.2 100.0 204.8 100.0 220.2 100.0 Note: May not add up to 100 percent due to rounding Source: CPSCL document. B3. Transfers to Local Governments 10. There are two kind of transfers to Tunisian communes: current (Titre 1) and capital (Titre 2). Current transfers are received from FCCL; capital transfers are received from CPSCL, which in turn receives some resources from FCCL and from various ministries. CPSCL passes them on to the communes according to subsidy rates established by decree. This annex focuses on current transfers, in particular: (a) size and funding of FCCL; (b) distribution of the FCCL among various bodies; (c) allocation among communes; and (d) allocation among regions, describing the system and issues. (a) Size andfunding of FCCL. FCCL was created in 1975 and until 1986 the total amount was indexed to the main Tunisia taxes. Since 1987, the total amount has been set annually in the budget. FCCL grew at an annual rate of 14.8 percent rate from 1981 to 1986 and at 5.5 percent from 1987 to 1994. As a result, the share of FCCL in total communal revenues has been decreasing since 1990. The debate in Tunisia has been between MOI which wants FCCL to be reindexed (to overall tax receipts), and other departments which favor the budgetary approach. Missing from the debate have been questions such as the appropriate responsibilities of communes and thus the resources required, what resources should be raised by local taxes, and what role transfers should play. Such an approach does not necessarily lead to indexing. Given the limited responsibilities of Tunisian communes and their local nature, political and economic accountability would be increased if they were financed by local resources. Transfers are more appropriate in the Tunisian context to help the poorer communes, that is, those which have a low fiscal potential. As to the total amount of FCCL subsidies, indexing to one or two specific central government taxes reduces the center's incentives to increase revenues from these taxes since part of its efforts are not rewarded. Indexing to all taxes assumes a constant ratio of central to local needs so that if responsibilities  Annex 4 Page 7 of 12 are unchanging the indexing is unlikely to be appropriate, given increasing real income and thus increasing demand for different kinds of public services. Ideally, transfers would be fixed for a multi-year period (5- 7 years, for example), with a formula guaranteeing a floor from year to year (say 95 percent in t of t-I transfers). (b) Distribution of the FCCL among various bodies. Twenty-five percent of FCCL goes to a central reserve and 75 percent to communes and regions. The 25 percent reserve is allocated annually by decree. The percentages in 1995 were: Tunis commune, 14.7 percent; Tunis district, 3.4 percent; Tunis region, 2.1 percent (total for Tunis 20.2); CPSCL, 2.1 percent, regional capitals, 8.4 percent; ONAS, 27.9 percent; civil protection, 11.4 percent. Communes receive 86 percent and regions 14 percent of the 75 percent. Three issues can be noted: Tunis receives special treatment, most likely because as the national capital it has higher equipment and infrastructure needs and its tax base is reduced. In the second case, grants in lieu of taxes for all central government buildings would be appropriate. More generally, it is not clear how the list is made up. Third and most important, the distribution of funds between communes and regions according to a 86/14 ratio is also not clear, since the population breakdown is 61/39 and the water service coverage is 94 and 24 percent respectively. Perhaps this is Justified given regional expenditure by the central government, but consolidated data do not exist. (c) Allocation among communes. The total amount for communes is allocated according to three criteria: their population (45 percent), their tax effort (45 percent), and on a equal basis (10 percent) with tax effort measured as a three-year average of TL receipts. Simulation work by both Tunisia authorities and the Bank shows that this formula is pro-rich. As shown in Table 2, ordering communes by their tax potential (TL + TCL + TH) shows that the top quintile has 85.9 percent of that potential and receives 70.2 percent of FCCL transfers while the bottom quintile has 0.6 percent of the potential and 3.9 percent of FCCL transfers. An assessment of the distribution of FCCL transfers and the distribution of equipment services at the regional level (the only data available) showed that FCCL transfers are lower in those regions where potable water connections per inhabitant are lower or where the percentage of households owning a washing machine (chosen as a wealth indicator) is the lowest. Even if a more thorough analysis is required to asses in detail the level of distortion within the transfer system, there does not seem to be any economic rationale for such a transfer system, since two of the main reasons for central-local transfers are (i) to modify specific behavior of communes (such as water treatment) to take into account externalities (efficiency), and (ii) to equalize resources across communes (equity). If, on the contrary, the distribution of own revenues, is deemed appropriate then local tax rates should be raised to allow communes to raise the current tax + FCCL revenues, thus increasing their autonomy. (d) Allocation among regions. The total amount is allocated on an equal basis (15 percent) and according to the noncommunal population (85 percent). There appears to be a wide disparity in the level of development of regions. Thus, the use of population as a parameter needs to be better justified. Changes sought 11. Given the facts and issues described above, a policy dialogue was initiated with GoT on the allocation of transfers among communes, on the relative importance of communes and rural areas, and on distribution between these areas. The need for a reform of the system of transfers, and in particular of the rules regulating FCCL, is explained by three factors. First, transfers to communes account for the greatest share of the FCCL (63 percent). Second, the existing distribution mechanism is not well founded and is already the object of discussion in Tunisia. Third, this change will increase the borrowing capability of the poorer communes, allowing them better access to CPSCL loans. Such a reform may target the introduction in the distribution formula of an equalization component with a weight of at least 1/3, calculated using three  Annex 4 Page 8 of 12 tax bases, (TL, TH, and TCL), and using a target linked to the average base of all communes. The new formula for the distribution of the FCCL could be implemented over a 5-7 year transition period. 12. There could be justification for a tax effort component in the transfer system if transfer recipients were: (a) undervaluing the tax role, (b) setting their tax rates too low, or (c) not making the appropriate tax effort. In Tunisia (b) and (c) do not fully apply since tax rates are set centrally and taxes are collected by central government offices under the Ministry of Finance. In the latter case, communes can decide to better equip government offices or provide more accurate and updated information on urban developments to improve the tax collection rate but cannot force an efficiency improvement. As to (a), the reforn of local taxation requires that a new census be carried out to determine the new tax roll and updates are foreseen every five years. 13. The results of Table 3 show what the distribution of FCCL transfers would be if only equalization was used. Table 3: Distribution of FCCL to Tunisian Communes by Quintiles, Actual and Simulated, 1995 % Distribution 1 2 3 4 5 1. Current FCCL transfers 3.9 5.3 7.5 13.0 70.2 2. Population 3.5 6.7 10.1 17.8 62.2 3. Simulated FCCL transfers (100 % equalization) 6.5 10.7 16.8 25.7 40.3 4. Tax base 0.6 1.6 3.1 8.8 85.9 TD per capita 1. Current FCCL (1) 14 11 10 10 16 3. Simulated FCCL (3) 20 19 18 16 7 Note: Quintiles were created by ordering communes from the lowest to the highest tax base. Tax base is the sum of potential TL and realized TCL and TH. Results are for a sample of 238 out of 253 communes. The equalization target in the simulation (3) is TD 22 per capita. Source: Les transferts aux communes tunisiennes: une note, October 1996, tables 3 and 10. 14. The simulation presented here depicts only an extreme scenario. Several other possibilities were analyzed and submitted to GoT. The final transfer formula will be agreed upon among the concerned parties after more detailed analysis is carried out. A draft FCCL reform is expected to be submitted to the Parliament by December 1997 (see para. 24 of PAD).  Annex 4 Page 9 of 12 B4. Fiscal Impact of the MIP and MDP II (proposed project) 15. The MIP and MDP II will have a fiscal impact on Tunisian communes through both increased expenditures on debt repayment and increased revenues generated by new investments. 16. Expenditure impact: When borrowing from CPSCL, Tunisia communes undertake to repay their loans, usually over 15 years. This results in expenditures on capital and interest that can crowd out other expenditures depending on the relative ratio of increase in repayments and revenues over time. An analysis of such an impact was carried out over the MIP/Eighth plan (1992-1996) and MDP 11/Ninth plan (1997-2001) using actual expenditures for 1992-1995, expectations for 1996, and projections for 1997-2001. During the Eighth Plan, as shown in Table 1, the share of current revenues (Titre 4) paid out in repayment rises from 3.4 percent in 1993 to 10.5 percent in 1996, thus reducing the availability of funds for other current expenditures (wages and salaries, others) or savings used to finance the communal share of investments. Table 4: Fiscal Impact on Expenditures of MIP, 1992-1996 (in TD) 1992 1994 1996 1. Total Current Revenues 172,039,862 195,224,169 220,232,897 Titre 1 2. Repayment expenditures (3+4) 6,253,015 16,151,911 23,185,688 3. Interest 2,019,656 5,482,846 7,810,572 4. Capital 4,233,359 10,669,065 15,375,116 5. Repayment / revenues 3.4 8.3 10.5 (percent) (2/1) Sources: (1, 3, 4): CPSCL, 1992 and 1994, Evolution desfinances communales, 25/10/1996. 1996, Projection desfinances municipales, October 1996. 17. As shown in Table 5, during the Ninth Plan the importance of repayment is forecasted to increase from 12 percent of current revenues to 16.7 percent over the 1997-2001 period. This is probably a lower bound estimate given the growth assumptions used, which are higher for three of the four main revenues sources than recent growth rates: Projected growth rates Observed growth rates (1997-2001) (1992-1995) (in percent) TIB (ex Taxe locative) 11 5 TCL 12 12 Taxes indirectes 12 10 FCCL 7 5 Note: Annual growth rates. Sources: 1992-1995, our calculation using CPSCL, Evolution desfinances communales (25/10/1996). 1997-2001, Projection desfinances municipales, October 1996.  Annex 4 Page 10 of 12 18. While the local tax reform to be implemented in 1997 should increase TCL and TL revenues in that year and, given collection lags, also in 1998, these are one-time structural improvements that do not seem to justify the optimism for the TL. As to the increase in FCCL, even using past growth is probably optimistic given the often- stated desire by non-MI civil servants to see this amount diminish in real terms. 19. As a result, a repayment/revenue ratio of 18-20 percent by 2001 is not an implausible outcome. This is still sustainable given the high savings ratio of Tunisian communes, which results from good control of current expenditures but is on the high side and would constrain investments in the Tenth plan. It is therefore important to carefully monitor the post-reform (1997-1998) evolution of autonomous revenues and eventually to foster a mid-PIC review of these various revenue sources through a dialogue with Tunisian authorities. Table 5: Fiscal Impact on Expenditures of MDP II, 1997-2001 (in TD million) 1997 1999 2001 Interest rates used (percent) 7.5% 7.5% 7.5% 1. Total current revenues 231.8 272.0 320.6 Titre I 2. Repayment expenditures 27.9 40.2 53.6 (3+4) 3. Interest 12.7 18.8 24.6 4. Capital 15.2 21.4 29.0 5. Repayment / revenues 12.0 14.7 16.7 (percent) (2/1) Source: (1, 3, 4): 1996, Projection desfinances municipales, October 1996. 20. Revenue impact: CPSCL loans can be classified into three broad groups. They are: (i) recreational loans, i.e., parks; (ii) infrastructure loans, i.e., roads, lighting; (iii) private facilities, i.e., market, slaughterhouses. The first kind of loan will not generate revenues directly or indirectly but can lead to an increase in the welfare of the citizens of a commune. The second kind of loan will not generate revenues directly but can generate revenues indirectly by, for example, allowing a commune to attract private investment and thus to obtain TCL revenues. 21. The third kind of loan should generate revenues directly, as either market fees or rent fees or both. To generate these revenues, projects must be completed. Therefore, it is not possible to estimate the total impact of the MIP, since it is not completed. Nor is it possible to estimate the future impact of the MDP II. TD (000) Produits des marches A Revenus de location A 1992 1995 % 1992 1995 % Completed projects 10,937 11,703 7.0 685 851 29.0 Ongoing projects 2,718 3,745 37.0 1,283 1,687 31.0 All communes 23,862 27,703 16.0 7,162 8,522 19.0  Annex 4 Page 11 of 12 In both cases, communes with completed projects have a lower growth in revenues than those with ongoing projects and for produits du march&, this also holds for a comparison with all communes. Thus, this preliminary and incomplete evidence does not yield the expected impact. C. Enabling the Private Sector to Participate in the Management of Public Services - Legal Framework Analysis Institutional framework 22. The main responsibilities in environmental protection depend on two ministries, the Ministry of Environment (MoE), as clearly defined in Decree 93-303 of February 1, 1993, and the Ministry of Interior (Mol), as defined in Decree 75-342 of May 30, 1975. Two entities under MoE also play an important role: (a) the National Agency for Environmental Protection (ANPE) can intervene in any case of environmental degradation and should be consulted for any contract related to solid waste management (SWM). The communes therefore face a double control, originating in Mol and ANPE; and (b) the National Sewerage Office (ONAS) is specifically in charge of wastewater management, leaving unclear the distribution of responsibility between ONAS and the communes, especially with regard to ownership of the works. Putting ONAS in charge of SWM would have the following negative consequences: while it would facilitate some operational work, it would limit private sector involvement and create a new administrative layer. 23. The distribution of competencies in SWM among the three central administration units is unclear, as are their respective roles in authorizing commune investments such as landfills. Assigning the responsibility of issuing legal permits and providing fiscal incentives to ANPE could facilitate the organization of SWM nationwide. 24. Two important laws, the organic law of the communes of May 1975, and the recent Solid Waste Law of June 1996, state clearly that the communes are in charge of SWM. These laws allow the communes to get together to form partnerships, which could create some economies of scale for SW investment, and, if given financial autonomy, could favor private sector participation. However, it is not clear whether such partnerships would be merely management units or would have the same responsibilities as the communes themselves. In the first case, private sector participation would be limited. 25. The regions are also local governments that must directly manage solid waste for the population living outside of communes; the common rule is again direct management. The legal documents should be amended to allow the LGs more flexibility for their own SWM, for LGs, and to promote private contracting. The public accounting rules allow LGs to make multiyear contracts (up to 5 years) with the private sector, as long as authorized expenditures are recorded in the budget of the commune. Still, the time limit of such contracts should be increased to allow a good rate of return on investments. The increased time limit should be announced in a regulatory provision. Legal framework for private sector participation 26. Contracting with the private sector. Overall, the regulatory framework for procurement for public contracting is satisfactory. However, this framework creates a severe constraint for private sector participation since the existing procurement is not compatible with the regulations needed for private sector participation. For instance, the contractant is responsible for a precise commitment under procurement rules whereas the private firm contracting with the commune has a more general responsibility. Moreover,  Annex 4 Page 12 of 12 some covenants are not appropriate for contracting public services: the length of contracts cannot exceed five years, which does not allow proper investments by the private sector; the need for prior review of contracts by the National Procurement Commission could also be a stumbling block. 27. A new law is required to regulate contracting of any infrastructure and public service. This law should define (a) the rules of contracting based on an open bidding that allows more flexibility at the launching of the bids than is currently permitted, and (b) the content of the contract, such as its length, the prerogatives of the public entity, and the ownership of the works at the end of the contract. 28. Fiscal environment. The general fiscal framework in Tunisia is satisfactory and should not constitute a bottleneck. Private investment could be encouraged through waivers on the limits for asset depreciation and through fiscal incentives, as permitted by the existing law. The law offers the possibility of these incentives in the VAT system for solid waste collection and treatment when these services are managed directly by local governments. An amendment to this law should extend these incentives to any case and particularly to contracts with the private sector. The fiscal regime would then remain neutral with regard to the choice of public service management. 29. Legal form of business enterprises. Tunisian law provides many possibilities for facilitating private sector involvement in the management of public utilities, among them general partnership, limited partnership, joint venture, de facto partnership, joint stock company, and limited liability corporation. Another form of joint stock company is the semipublic company, in which the ownership of assets is shared between private and public sectors partners. This framework could gather in one entity the public institutions, the private operator, the investors, and the banks financing the project. However, the regulatory system would need to be amended for greater flexibility, and the public institutions should be able to play their supervisory role. Finally, the private investors should be able to sell their shares. 30. Land law. Private contractors generally want to have the use the land for a certain period without owning it, with clearly defined rights. Although long-term leases (baux amphythotiques) would permit private investment on facilities such as landfills even on public land, this solution raises some legal difficulties, since such leases are no longer recognized under Civil Law. Legal framework for solid waste 31. The law of June 10, 1996 on Solid Waste has three aspects: (a) limitation of solid waste production, (b) recycling or reuse of solid waste, and (c) stocking in landfills of ultimate solid waste. All implementing regulations should be enacted quickly for better transparency and to permit its implementation. In particular, the publication of standards should compromise between the need for and cost of environmental protection. The law is not explicit on financial propositions for solid waste management. 32. The above-listed recommendations are proposals that GOT could include in the plan to be approved before the first request for landfill financing is made to the Bank, in the event the management of the landfill or transfer station is contracted out to the private sector  Annex 5 Tunisia - Second Municipal Development Project Financial Aspects of Caisse des prets et de soutien des collectivites locales (CPSCL) CPSCL's Present Financial Situation and Performance 1. Key figures of CPSCL's 1992 to 1996 financial statements are summarized below; detailed statements are attached. For comparison, the covenants of the ongoing First Municipal Development Project (No. 3507-TUN) are also mentioned. 1992 1993 1994 1995 1996 Actual Actual Actual Actual Prelim. Disbursements to Local Gvts. (TDm): Loan Disbursements 11.5 35.7 42.7 30.0 45.6 Transfer of Gvt. Subsidies 2.9 11.0 25.8 24.7 22.8 Key figures of Financial Statements (TDm): Loans to Local Gvts. 111.5 136.3 174.2 191.4 223.1 Total Assets 123.1 155.1 188.0 220.9 249.9 Equity 86.6 89.1 91.4 94.4 96.7 Total Revenue 3.5 5.3 6.8 9.2 10.7 Net Income 0.2 2.2 3.0 2.9 2.8 Earnings Performance: Net Income/Total Assets 1.6% 1.8% 1.4% 1.2% Covenant 1.0% 1.0% 1.0% 1.0% Administ. Expenses/Total Assets 0.35% 0.33% 0.38% 0.36% Return on Equity 2.5% 3.4% 3.2% 2.9% Liquidity Indicators: Debt Service Coverage (times) 4.8 4.4 4.0 2.5 Covenant 1.5 1.5 1.5 1.5 Loan Disbursements financed by Internal Cash Generation 26.0% 20.8% 46.9% 31.6% Covenant 20.0% 30.0% 35.0% 35.0% Arrears (TDm) 4.9 2.5 3.2 4.3 Capital Structure: Equity / Total Balance Sheet 70.3% 57.5% 48.6% 42.7% 38.7% Long Term Debt / Total Balance Sheet 16.3% 26.5% 44.5% 50.0% 55.9%  Annex 5 Page 2 of 6 CPSCL's Volume of Operations and Capital Structure 2. CPSCL was restructured in 1992 under the ongoing First Municipal Development Project, by Decree 92-688 of April 16, 1992, with an equity of TD 89m. Thanks to this generous equity endowment its capital structure has remained very solid throughout the period of the Eighth Plan (1992 - 1996). At the end of 1996, equity amounted to TD 97m. Although decreasing in relative terms due to the growth of CPSCL's lending portfolio, this equity still represented a comfortable 39 percent of the balance sheet total. 3. Since 1992, CPSCL has obtained loans from US AID, Italy and the Caisse fran,aise de developpement (CFD), in addition to the Bank's First Municipal Development Loan of US$ 75m. Total long-term debt increased from TD 20m at the end of 1992 to TD 140m at the end of 1996. 4. CPSCL's loan disbursements to local governments over the period of the Eighth Plan have been about TD 166m. CPSCL's loan portfolio grew from TD I 12m at the end of 1992 to TD 223m at the end of 1996. During the same period CPSCL's loans were cofinanced by Government subsidies of TD 87m from the Title 2 budget funds and through the Fonds commun des collectivites locales (FCCL). Interest Rates and Earnings Performance 5. Following a period of low interest rates (2 percent) on CPSCL's loans to local governments prior to 1992, the rate for infrastructure and commercial projects approved since 1992 has been 6.5 percent and the one for supplies financing 4 percent, as covenanted under the ongoing project. Because of the pre-1992 loans with substantially lower rates, the average interest revenue from 1994 to 1996 has been only 4.1 percent. 6. Revenues, mostly interest on the loans to local governments, increased from TD 3.5m for 1992 to TD 10.7m for 1996, in line with the growing portfolio and due to the substantial interest increases under the ongoing project. Net income grew from about break-even in 1992 to TD 2.8m for 1996. 7. The average cost of borrowed funds has been 5.3 percent over the last three years. In spite of this cost being higher than the average interest revenue from the loan portfolio, and due to CPSCL's large equity, the average net income-to-assets ratio for 1994-1996 has been 1.5 percent. However, the return on equity for the years 1993 to 1996 was only between 2.5 and 3.4 percent. These returns have not been sufficient to protect CPSCL's equity from erosion by inflation of about 5 percent. Quality of Loan Portfolio 8. While before the restructuring of CPSCL in 1992 collection of debt service was very weak, at present most local governments service CPSCL's loans regularly. CPSCL has been rather successful collecting arrears including long overdue amounts, using the leverage of new loan and subsidy approvals. Collection is now exceeding 95% of the annuities due by the local governments. Given that leverage, CPSCL is confident that eventually it will collect all outstanding amounts. Nevertheless, there are about 25 - 30 communes en difficultes with a tendency to accumulate arrears whose debt service capacity is being closely monitored by CPSCL. At the end of 1996, there were arrears to CPSCL of TD 4.4m, including TD 2.2m stemming from the current year 1996, but also TD 0.5m from 1992 and before.  Annex 5 Page 3 of 6 CPSCL's Growth and Future Financial Performance 9. Key figures of financial projections covering the years of the Ninth Development Plan (1997 to 2001) are shown below; detailed statements are attached. 1997 1998 1999 2000 2001 Forecast Forecast Forecast Forecast Forecast Disbursements to Local Gvts. (TDm): Loan Disbursements 46.0 49.0 52.0 54.0 56.0 Transfer of Gvt. Subsidies 27.5 33.0 40.0 51.0 61.4 Key figures of Financial Statements (TDm): Portfolio of Loans to Local Gvts. 253.2 280.5 306.8 331.6 355.6 Total Assets 280.9 311.5 341.5 370.8 398.3 Equity 99.4 102.7 107.1 112.3 118.2 Total Revenue 12.5 14.3 16.7 18.9 21.5 Net Income 2.6 3.3 4.4 5.2 5.9 Earnings Performance: Net Income/Total Assets 1.0% 1.1% 1.4% 1.5% 1.5% Covenant 1.0% 1.0% 1.5% 1.5% 1.5% Administ. Expenses/Total Assets 0.41% 0.40% 0.42% 0.43% 0.44% Return on Equity 2.7% 3.2% 4.2% 4.7% 5.2% Liquidity Indicators: Debt Service Coverage (times) 3.2 3.6 3.9 3.9 2.2 Covenant 1.5 1.5 1.5 1.5 1.5 Loan Disbursements financed by Internal Cash Generation 38.6% 39.5% 59.3% 47.6% 40.2% Covenant 35.0% 35.0% 40.0% 40.0% 40.0% Arrears (TDm) 7.5 8.5 9.5 10.5 11.0 Capital Structure: Equity / Total Balance Sheet 35.4% 32.9% 31.3% 30.3% 29.7% Long Term Debt / Total Balance Sheet 58.6% 60.2% 60.3% 61.7% 64.4% Volume of CPSCL's Operations 10. CPSCL's lending to local governments durning the Ninth Plan (1997 - 2001) would amount to TD 257m (including disbursements on some loans still approved under the previous PIC). This would be financed by CPSCL's net cash generation of TD 107m (composed of net income before interest of TD 77m, working capital decrease of TD 6m, and debt service to lenders of TD 101m, and including repayment of loans by local governments of TD 125m), by the proposed Bank loan of US$ 75m to CPSCL, as well as cofinancing from the CFD in two successive loans of FF 200m (TD 40m) each. The mentioned cash generation of TD 107m would correspond to 40 percent of disbursements to local governments.  Annex 5 Page 4 of 6 11. CPSCL's loans to municipal projects will be cofinanced by TD 213m of Govermment subsidies channeled through CPSCL, coming essentially from the FCCL (TD 99m) and Title 2 of the Government's annual budget (TD 97m). Interest Rates 12. In order to reach a more satisfactory financial performance in the future, and more specifically, to protect its equity position from being eroded by inflation and reaching a positive return on equity in real terms, CPSCL will have to again adjust its interest rates on all new loans to local governments from the present 6.5 percent for infrastructure and commercial projects, and 4 percent on certain loans for supplies. The most viable and politically acceptable interest rate structure for the period of the 9th Plan appears to be 7.5% for infrastructure projects (about two thirds of CPSCL's lending volume), 8.5% for commercial projects, and 6% for the mentioned supplies. This would result in a 2 - 3 percent average interest rate in real terms for newly approved loans, assuming inflation of about or slightly below 5%. The average revenue from the new portfolio would also be above the average cost of CPSCL's borrowing plus its administrative expenses. However, the average interest rate (5,3 % for the 9th Plan) from the overall loan portfolio would exceed average borrowing cost (5,5 %) only after 1999, given the lower interest rates on the loans approved before 1997. Eamings Performance 13. Based on the above interest rate structure CPSCL's annual revenue would grow from TD 12m for 1997 to TD 21m for 2001; total revenue over this period should reach TD 84m. Borrowing costs would amount to TD 54m, with an average rate of 5.5 percent, As CPSCL is still in its initial phase of operations, administrative expenses would increase from TD 1.lIm to TD 1.7m per year, growing less rapidly, however, than the lending volume and revenue, and remaining at a level slightly below 0.5 percent of total assets. 14. Net income would grow from TD 2.6m for 1997 to TD 5.9m for the year 2001. The net income/total assets ratio would reach 1.5 i-=rcent from the year 2000 on. Return on equity would improve to 5 percent by the year 2001, slightly exceeding inflation. Improvement would come gradually over the Ninth Plan period as the new loans with adjusted interest rates would increase their weight in the portfolio. Capital Structure 15. CPSCL's capital structure would remain very satisfactory throughout the Ninth Plan period. At the end of 2001, the portfolio of loans to local governments would reach TD 356m. Long-term debt, mostly to the Bank and CFD, would increase from 59 percent to 64 percent of the balance sheet total, which for a financial institution is very acceptable, to reach TD 256m by the end of 2001. Equity would reach TD 11 8m and -- although growing less quickly than the portfolio and the long-term debt -- would still remain more than adequate, i.e., about 30 percent of the balance sheet total, and would likely remain adequate even through the Tenth Plan period (2002 - 2006). Sensitivity Analysis 16. The most sensitive variable is the interest rate charged by CPSCL to the local governments over the period of the Ninth Plan. As explained above, the base case assumption is that CPSCL would increase its rates to 7.5% for infrastructure projects, 8.5% for commercial projects, and 6% for the mentioned  Annex 5 Page 5 of 6 supplies throughout the period 1997 - 2001. This would result in the following key financial figures and ratios: 1997 1996 1999 2000 2001 Forecast Forecast Forecast Forecast Forecast Total Revenue 12.5 14.3 16.7 18.9 21.5 Net Income 2.6 3.3 4.4 5.2 5.9 Net Income/Total Assets 1.0% 1.1% 1.4% 1.5% 1.5% Return on Equity 2.7% 3.2% 4.2% 4.7% 5.2% 17. In case CPSCL would continue to charge the rates in effect in 1996, i.e., 6.5 percent for loans related to infrastructure and commercial projects and 4 percent for supplier financed loans, the following would result: 1997 1998 1999 2000 2001 Forecast Forecast Forecast Forecast Forecast Total Revenue 12.5 13.8 15.8 17.5 19.6 Net Income 2.6 2.7 3.4 3.7 4.0 Net Income/Total Assets 1.0% 0.9% 1.0% 1.0% 1.0% Return on Equity 2.7% 2.7% 3.3% 3.5% 3.6% 18. In this scenario neither the net income/total assets ratio nor the return on equity would significantly improve from the present low levels. It shows that CPSCL cannot continue to apply the present interest rates but should adopt the rates of the first scenario to gradually reach an acceptable financial performance. Financial Performance Indicators/Conditionality 19. The following covenants have been agreed regarding CPSCL's financial performance: (1) a net income/total assets ratio of at least 1.0 percent through 1998, and at least 1.5 percent starting 1999; (2) a rate of return on equity of 3 percent by 1998, of 4 percent by 1999 and 2000, and of 5 percent by 2001; (3) debt service coverage of 1.5 times; and (4) internal cash generation to finance at least 35 percent of CPSCL's loan disbursements through 1998, and 40 percent starting 1999. In addition, the figures and ratios shown in the table of para. 9 above have been agreed as perforrnance indicators. Accountinz and Auditing Arrangements 20. Although CPSCL is a financial institution it is not a bank, and therefore is not under the supervision of the Central Bank. It applies the rules of the Tunisian Plan comptable national, which is based on generally accepted accounting principles, but it does not have to use banking sector accounting and prudential rules. Given its favorable collection performance in recent years, CPSCL has not yet adopted the policy of making provision for arrears. 21. In order to assist in the strengthening of CPSCL, the institutional study proposed under the project would explore when and how CPSCL should adopt the accounting principles and prudential rules applicable to the banking sector, how it should phase in provisions for arrears, introduce periodic portfolio risk analysis, and monitor its capital adequacy. Specific guidelines would be proposed, to be agreed with  Annex 5 Page 6 of 6 the Central Bank. Such rules and ratios may be different from those for commercial banks, as CPSCL will not seek deposits by the general public and not operate in the short and long-term capital markets. 22. CPSCL's auditors are an acceptable firm. Its financial statements, as well as the project accounts of the First Municipal Development Project (kept by CPSCL), the related special account (kept by the Central Bank), and SOEs submitted to the Bank for disbursement have been audited by this firm for several years, through 1995. The auditors' opinions have been unqualified, except for the need to formally confirm the share capital of CPSCL. A law is being drafted to achieve this. Similar audit arrangements would be used for the proposed second project.  Attachment to Annex 5 Page 1 of 3 TUNISIA - Second Municipal Development Project CPSCL - Audited FinMancial Statements 1992-1996 (in millions of current Tunisian dinars) 1992 1993 1994 1995 1996 Actual Actual Actual Actual Prelim. INCOME STATEMENTS: Interest on loans to local governments 3.4 4.8 5.9 7.6 9.0 Interest on investments 0.1 0.5 0.9 0.9 1.4 Other revenue 0.0 0.0 0.0 0.7 0.3 Total Revenue 35 5.3 6.8 9.2 10.7 Borrowing expenses 1.3 2.6 3.1 5.4 6.8 Administrative expenses 0.1 0.5 0.6 0.9 0.9 Other expenses 1.9 0.0 0.0 0.0 0.2 Total expenses 3.4 3.1 3.8 6.3 7.9 Net Income 0.2 2.2 3.0 2.9 2.8 SOURCES AND USES OF FUNDS: Sources: Net Income 0.2 2.2 3.0 2.9 2.8 plus Non-cash charges 0.0 0.0 0.1 0.1 0.1 plus Borrowing expenses 1.3 2.6 3.1 5.4 6.8 Internal Cash Generation 1.5 4.8 6.2 8.4 9.6 minus Working Capital Increase 1.5 2.1 0.6 11.7 -4.5 minus Debt Service to Lenders 4.1 4.7 5.2 8.5 9.3 plus Recovery of loans from local gvts 3.1 7.5 7.3 13.2 14.1 Net Internal Cash Generation -1.0 5.5 7.8 1.4 18.8 State subsidies for transfer to local gvts 13.1 15.3 17.1 17.8 18.5 Borrowing 2.3 25.7 44.7 29.8 31.7 Other sources 0.2 0.3 -0.8 5.8 -0.5 Total Sources 14.6 46.8 68.8 54.8 68.6 Uses: Loans to local governments 11.5 35.7 42.7 30.0 45.6 Transfer of subsidies to local gvts 2.9 11.0 25.8 24.7 22.8 Capital expenditures 0.2 0.2 0.2 0.1 0.1 Total Uses 14.6 46.8 68.8 54.8 68.6 BALANCE SHEETS: Assets: Fixed Assets, net 0.2 0.3 0.4 0.4 0.4 Loans to local governments 111.5 136.3 174.2 191.4 223.1 Cash & banks 2.1 5.8 6.9 19.6 15.2 Other assets 9.4 12.7 6.5 9.4 11.2 Total Assets 123.1 155.1 188.0 220.9 249.9 Liabilities & Equity: Equity 86.6 89.1 91.4 94.4 96.7 State subsidies for local gvts. 10.2 14.5 5.7 4.5 0.1 Long term debt 20.1 41.1 83.7 110.4 139.6 Current liabilities 6.3 10.4 7.2 11.6 13.5 Total Liabilities & Equity 123.1 155.1 188.0 220.9 249.9  Attachment to Annex 5 Page 2 of 3 TUNISIA - Second Municipal Development Project CPSCL - Projected Financial Statements 1997-2001 (in millions of current Tunisian dinars) 1997 1998 1999 2000 2001 Forecast Forecast Forecast Forecast Forecast INCOME STATEMENTS: Interest on loans to local governments 11.5 13.2 15.5 17.6 19.9 Interest on investments 1.0 1.1 1.2 1.4 1.5 Other revenue 0.0 0.0 0.0 0.0 0.0 Total Revenue 12.5 14.3 16.7 18.9 21.5 Borrowing expenses 8.7 9.7 10.7 11.9 13.4 Administrative expenses 1.2 1.4 1.7 1.8 2.2 Other expenses 0.0 0.0 0.0 0.0 0.0 Total expenses 9.9 11.1 12.4 13.8 15.6 Net Income 2.6 3.2 4.4 5.1 5.9 SOURCES AND USES OF FUNDS: Sources: Net Income 2.6 3.2 4.4 5.1 5.9 plus Non-cash charges 0.1 0.2 0.3 0.3 0.5 plus Borrowing expenses 8.7 9.7 10.7 11.9 13.4 Internal Cash Generation 11.5 13.1 15.4 17.4 19.8 minus Working Capital Increase -4.3 -2.5 -8.5 1.5 8.3 minus Debt Service to Lenders 14.1 20.0 21.0 22.2 23.7 plus Recovery of loans from local gvt.s 15.9 21.9 26.0 29.3 32.2 Net Internal Cash Generation 17.6 17.6 28.8 23.0 19.9 State subsidies for transfer to local gvt.s 20.0 30.0 37.0 48.0 61.4 Borrowing 28.4 32.4 27.3 32.2 36.7 Other sources 7.6 3.0 0.0 3.0 0.0 Total Sources 73.6 83.0 93.1 106.2 118.1 Uses: Loans to local governments 46.0 49.0 52.0 54.0 56.0 Transfer of subsidies to local gvt.s 27.5 33.0 40.0 51.0 61.4 Capital expenditures 0.1 1.0 1.1 1.2 0.7 Total Uses 73.6 83.0 93.1 106.2 118.1 BALANCE SHEETS: Assets: Fixed Assets, net 0.4 1.2 2.0 2.8 3.0 Loans to local governments 253.2 280.5 306.8 331.6 355.6 Cash & banks 15.3 17.1 19.2 21.9 24.5 Other assets 11.9 12.8 13.6 14.5 15.3 Total Assets 280.9 311.5 341.5 370.8 398.3 Liabilities & Equity: Equity 99.4 102.6 107.0 112.1 118.0 State subsidies for local gvts. 0.1 0.1 -2.9 -2.9 -2.9 Long term debt 164.5 187.5 205.9 228.9 256.4 Current liabilities 16.8 21.2 31.5 32.7 26.8 Total Liabilities & Equity 280.9 311.5 341.5 370.8 398.3  Attachment to Annex 5 Page 3 of 3 TUNISIA - Second Municipal Development Project CPSCL - Financing of Local Governments' Projects (CPSCL Decision of July 9, 1992 LOCAL GOVT. SELF- CPSCL PROJECTS FINANCING CPSCL LOAN SUBSIDY Streets, sewerage, street lighting 30% 37% 33% Waste dumps, potable water 20% 35% 45% Rehabilitation, parks 37% 41% 22% Gardens, green areas 30% 37% 33% Acquisition of real estate 50% 50% Purchase of supplies 28% 72% Commercial projects 40% 60% Rehabilitation of low-income Depending on the financial capacity of the local govt. neighborhoods Sport installations 18% 18% Subsidies of at least 64% directly from Govt. Ministries Admin and technical buildings 50% 50%   Annex 6 Tunisia - Second Municipal Development Project Procurement and Disbursement Arrangements Procurement 1. The Loan will finance the procurement of goods (including computer equipment and accessories, etc.) and civil works for infrastructure subprojects and microprojects submitted by the municipalities. Given that subprojects have not been pre-appraised, estimates for the breakdown of project expenditures by procurement categories may vary. Procurement under the Loan will be carried out in accordance with the Bank's "Guidelines, Procurement under IBRD Loans and IDA Credits" dated January 1995 and revised in January and August 1996. The Bank's standard bidding documents will be used for all procurement under ICB. The CPSCL standard bidding documents will be used to the extent possible for procurement under NCB. 2. Civil Works: In the MIP, approximately 50 percent of all subprojects were valued less than US$102,000 equivalent with slightly more than 400 of the total 1,130 subprojects valued less than US$15,000 equivalent. Based on the experience with the MIP, subprojects in the pipelines are relatively small and dispersed over many cities and towns across the country, and are implemented by different municipalities. Grouping the contracts into large packages to attract international bidders would not be feasible. International Competitive Bidding (ICB) will apply for all contracts exceeding US$3 million. It is expected that two contracts valued at approximately US$4.5 million equivalent each will be awarded under ICB for landfill subprojects. Works contracts below US$3 million will be awarded following NCB procedures acceptable to the Bank. NCB procedures have been reviewed by the Bank and, with some agreed upon modifications, have been judged to be acceptable. For contracts below US$150,000, competitive quotations shall be obtained from usually at least three domestic contractors. For contracts which are US$30,000 equivalent or below, aiming at implementing microprojects, advertisement within the govemorates following the community participation method would be used to ensure the utilization of local manpower. Strong efforts would be made to identify and encourage local contractors, including advertisements and publicity, coordination with other Government agencies, etc. 3. Goods: All contracts for goods costing US$500,000 or more will be awarded following ICB procedures. Contracts below US$500,000 will be awarded following NCB procedures acceptable to the Bank. Contracts costing less than US$100,000 may be awarded through national shopping after receiving competitive quotations from usually at least three suppliers. The shopping procedures shall be in accordance with the provisions of paragraphs 3.5 and 3.6 of the Guidelines. 4. Consultants' services: Consultant activities for both the Line of Credit to CPSCL and Technical Assistance to Mol will mainly consist of both technical assistance and training for CPSCL, Training Center, and other administration units, and various studies. Consultant services will be contracted on terms and conditions in accordance with the "Guidelines for the selection and employment of consultants by World Bank Borrowers - January 1997." Consultant selection will be based on quality and cost. Other procedures for the selection of consultants can be used as follows: (a) selection under a fixed budget for computerization of CPSCL and Mol, (b) single source selection for assistance of training advisers under component "d", and "e" of the project, and (c) individual consultants under component "d" and "e"of the project. 5. Review of Contracts: All contracts for civil works costing US$3 million and above, goods valued at US$500,000 and above, consultant contracts awarded to firms valued at US$100,000 and above (US$50,000 for individuals consultants) and sole source contracts, as well as the first two bid evaluations and contracts under each of the works and goods, irrespective of the cost, procured under national competitive bidding, and, thereafter, each contract for works procured under the same method and estimated to cost the equivalent of US$1 million and above, will be subject to prior Bank review. All other contracts will be subject to random post review during supervision by Bank staff. This is acceptable given that local procurement procedures have  Annex 6 Page 2 of 3 been judged to be acceptable to the Bank and prior satisfactory experience with CPSCL under previous Bank projects. 6. Procurement Monitoring and Supervision: Responsibility for procurement of infrastructure investment subprojects will lie with the municipalities or their designated agencies. CPSCL will have a monitoring function by reviewing the procurement methods and planning, bidding documents and the evaluation of bids. CPSCL also submits to the Bank the procurement for prior review. Disbursement 7. TThe proceeds of the Bank loan will be disbursed against: (a) 100 percent of subloan paid, not to exceed 60 percent of the cost of eligible subprojects and 70 percent of the cost of microprojects (line of credit of US$76 million); (b) 100% of foreign expenditures for goods, and 100% of local ex-factory costs and 80% of local expenditures, for items procured locally; and (c) 100% of expenditures for consultants' services, technical assistance and training for CPSCL, Training Center, and central administration units. 8. Disbursements against civil works contracts exceeding US$1 million equivalent, goods contracts exceeding US$500,000, and consultants' contracts exceeding US$100,000 for firms and US$50,000 for individuals, will be fully documented. The financial management system has been reviewed by the Bank and it has been judged to be acceptable. In addition, continued efforts by CPSCL to expand and improve their system is ongoing. For all other expenditures, disbursement could be made against Statement of Expenditures (SOEs). Supporting documents for SOEs will not be submitted to the Bank, but will be retained by CPSCL and made available to Bank staff during supervision. CPSCL will record the contracts as agreed with the Bank so that the Bank can monitor them for prior or ex-post review as needed. Table A: Project Costs by Procurement Arrangements (in US$ million equivalent) Total Cost (including Expenditure Category Procurement Method contingencies) ICB NCB Other N.B.F. 1. Line of Credit to CPSCL Civil works and goods for 10.0 174.0 29.0' - 213.0 municipalities (2.1) (63.2) (11.0) (76.3) 2. Civil Works for Mol - 0.3 - - 0.3 (0.0) (0.0) 3. Goods: for Mol 0.5 0.6 b _ (0.2) (0.3) ) 1.8 for CPSCL - 0.7 b ) (0.8) (0.3) 4. Services: for Mol - - 4.6' - (2.6) ) 5.2 for CPSCL - - 0.6' - ) (2.9) (0.3) TOTAL 10.0 174.8 35.5 - 220.0 (2.1) (63.4) (14.5) (80.0) Note: Mol includes DGCPL, DGAR and the Training Center N.B.F. =Not Bank-financed. Figures in parenthesis are the amounts to be financed by the Bank loan. a National shopping for civil works contracts below US$ 150,000 equivalent and community participation for civil works contracts below US$30,000 equivalent. b National shopping for goods contracts below US$ 100,000 equivalent. c In accordance with Consultants' Guidelines, 1997.  Annex 6 Page 3 of 3 Table B: Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Procurement Contracts Subject to Category (Threshold) Method Prior Review 1. Civil Works 150,000 or below National Shopping Post-review 150,000 to 3 million NCB 1 million and above, and first two contracts Above 3 million ICB All 2. Goods 100,000 or below National Shopping Post-review 100,000 to 500,000 NCB First two contracts Above 500,000 ICB All 3. Services 100,000 and above for All firms 50,000 and above for All individuals 4. Miscellaneous n.a. n.a. n.a. Table C: Allocation of Loan Proceeds Expenditure Category Amount in Financing Percentage French Francs and US$million Line of credit to CPSCL 431,900,000 100% of total amount paid under each (76.3) subloan, up to 60% of subproject costs and 70 % of microproject costs Goods for: ) 100% of foreign expenditures (a) Mol 2,500,000 ) 100% of local expenditures (ex-factory (0.5) ) cost) (b) CPSCL 1,900,000 ) 80% of other local expenditures (0.3) Services and training for: (a) Mol 14,600,000 ) 100% (2.6) (b) CPSCL 1,900,000 ) (0.3) Unallocated TOTAL 452,800,000 (80)   Annex 7 Tunisia - Second Municipal Development Project Project Processing Budget and Schedule A. Project Budget (US$000) Planned Actual (At negotiations stage) Bank Budget: 340 316.8 B. Project Schedule Planned Actual (At negotiations stage) Time taken to prepare the project (months) First Bank mission (identification) 6/20/1996 6/20/1996 Appraisal mission departure 2/17/1997 2/17/1997 Negotiations 4/07/1997 4/07/1997 Planned Date of Effectiveness 11/15/1997 Prepared by: CPSCL, PIU, Training Center, DGCPL and DGAR Preparation assistance: French and Italian Trust Funds Bank staff who worked on the project included: Laura Raimondo, Maryse Gautier, Hartwin Nickel, Alan Ham (MN IPI), Mauro Chiesa (CCFD2), Maurice Gress, Helene Talon (MN 1DR), Allan Rotman, Keith Rennie, Ben Achour (EMTEN), Claudia Pardinias (LEGMN), Thu-Ha Nguyen, Geraldine Prefontaine (LOAEL), Francois Vaillancourt, Bernard Tagournet, Jean-Claude Sallier (consultants). Peer reviewers were: Sonia Hammam (TWURD), Vincent Gouarne (TWUWS). The MN 1 Private Sector Development, Finance and Infrastructure Division Chief is Mr. Amir Al-Khafaji.   Annex 8 Tunisia - Second Municipal Development Project Documents in the Project File* A. Project Implementation Plan B. Bank Staff Assessments B1. Evaluation des sous projets: synthese des recommandations B2. Aspects environnementaux pour le premier et deuxieme projet de developpement municipal B.3 Participation du secteur prive B.4 Composante approche participative B.5 Outline of the technical assistance requirements for solid waste management (issues on private sector participation) C. Others Ci. Les transferts aux communes tunisiennes: une note (consultant report) C2. Local government finances in Tunisia: A note (consultant report) C3. CPSCL appraisal and supervision of sub-projects (consultant report) C4. Pour une participation accrue du secteur prive a la gestion des services publics: etude du cadre juridique tunisien (consultant report) C5. Deuxime projet de developpement municipal. Appui Institutionnel. Rapport de preparation. (report prepared by Tunisian authorities and consultants) C6. Bilan du projet GESCOME (consultant report) C7. Note sur lafiscalit6fonciere en Tunisie (consultant report) C8. Local govemment finances in Tunisia: A note (consultant report) C8. Commentaires sur la note d'orientation du FCCL (consultant report) *Including electronic files.   Status of Bank Group Operations in Tunisia IBRD Loans and IDA Credits in the Operations Portfolio Difference Original Amount in US$ Millions Between actual Loan or Fiscal and expected Project ID Credit No. Year Borrower Purpose IBRD IDA Cancellations Undisbursed Disbursements a/ Number of Closed Loans/credits: 100 TN-PE-5727 L32170 1990 GOVERNMENT RESEARCH & EXTENSION 17.00 0.00 0.00 3.05 3.05 TN-PE-5738 L33080 1991 GOV. OF TUNISIA HOSPITAL MGT. & FIN. 30.00 0.00 0.00 16.34 16.14 TN-PE-5717 L33070 1991 GOV. OF TUNISIA A POPULATION & FAMILY 26.00 0.00 0.00 5.14 5.14 TN-PE-5726 L34560 1992 GOVT. OF TUNISIA HIGHER EDUCATION 75.00 0.00 0.00 52.27 41.42 TN-PE-5735 L34180 1992 STEG GAS INFRASTRUCTURE D 60.00 0.00 0.00 1.99 1.99 TN-PE-5725 L36010 1993 GOVERNMENT SECOND FORESTRY DEVE 69.00 0.00 0.00 59.03 5.23 TN-PE-5687 L35070 1993 GOVT. OF TUNISIA MUNICIPAL SECTOR INV 75.00 0.00 0.00 .48 -31.77 TN-PE-5733 L36910 1994 GOVT. DEV.OF MTS NW REGION 27.50 0.00 0.00 18.36 .94 TN-PE-5748 L36790 1994 BANKS OF TUNISIA PRIVATE INVESTMENT 7.00 0.00 0.00 .45 -6.55 TN-PE-5748 L36780 1994 BANKS OF TUNISIA PRIVATE INVESTMENT 6.00 0.00 0.00 1.15 -4.85 TN-PE-5748 L36770 1994 BANKS OF TUNISIA PRIVATE INVESTMENT 10.00 0.00 0.00 .04 -9.96 TN-PE-5748 L36740 1994 BANKS OF TUNISIA PRIVATE INVESTMENT 8.00 0.00 0.00 3.01 -4.99 TN-PE-5748 L36730 1994 BANKS OF TUNISIA PRIVATE INVESTMENT 12.00 0.00 0.00 9.00 -3.00 TN-PE-5748 L36710 1994 BANKS OF TUNISIA PRIVATE INVESTMENT 50.00 0.00 0.00 21.77 -1.08 TN-PE-5721 L36610 1994 GOVERNMENT AGRICULTURAL SEC INV 120.00 0.00 0.00 64.54 27.04 04 TN-PE-5720 L38920 1995 BNA RURAL FINANCE 65.00 0.00 0.00 45.42 10.42 CD TN-PE-5749 L38400 1995 GOV'T OF TUNISIA RURAL ROADS 51.50 0.00 0.00 33.88 -8.91 TN-PE-5743 L37860 1995 GOV. OF TUNISIA SECONDARY EDUCATION 98.30 0.00 0.00 75.79 10.09 TN-PE-5680 L37830 1995 GOVERNMENT/SONEDE WATER SUPPLY AND SEW 29.00 0.00 0.00 23.20 -5.80 TN-PE-5680 L37820 1995 GOVERNMENT/SONEDE WATER SUPPLY AND SEW 29.00 0.00 0.00 19.40 .37 TN-PE-40208 L40370 1996 GOT IND. SUPPORT INSTITU 38.70 0.00 0.00 35.33 1.45 TN-PE-5745 L40360 1996 GOVT. OF TUNISIA 2ND EMPL. & TRG. 60.00 0.00 0.00 59.40 .90 TN-PE-42287 L40691 1997 GOT ECAL I 37.50 0.00 0.00 34.25 0.00 Total 1,001.50 0.00 0.00 583.30 Active Loans Closed Loans Total Total Disbursed (IBRD and IDA): 411.59 2,661.18 3,072.77 of which has been repaid: 5.17 1,465.20 1,470.37 Total now held by IBRD and IDA: 996.32 1,199.83 2,196.15 Amount sold 0.00 39.56 39.56 Of which repaid : 0.00 39.56 39.56 Total Undisbursed : 583.30 3.86 587.16 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. b. Rating of 1-4: see OD 13.05. Annex D2. Preparation of Implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system will be used (HS - highly Satisfactory, S - satisfactory, U = unsatisfactory, HU - highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994. c. Following the FY94 ARPP, "Implementation Progress' will be reported here.  Annex 9 Page 2 of 2 Tunisia STATEMENTOF IFC's Committed and Disbursed Portfolio As of 3 1-Mar-97 In Millions US Dollars Committed Disbursed --IFC IFFC--- FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1973 Sousse-Nord 0.00 .04 0.00 0.00 0.00 .04 0.00 0.00 1975 Sousse-Nord 0.00 .59 0.00 0.00 0.00 .59 0.00 0.00 1986 Adwya .15 0.00 0.00 0.00 .15 0.00 0.00 0.00 1986 SITEX 0.00 2.15 0.00 0.00 0.00 2.15 0.00 0.00 1991 Adwya 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991 SOMOTEX 3.01 0.00 0.00 0.00 3.01 0.00 0.00 0.00 1992 Miniere Bougrine 0.00 2.23 0.00 0.00 0.00 2.23 0.00 0.00 1992 SITEX 2.19 0.00 0.00 0.00 2.19 0.00 0.00 0.00 1993 Ideal Sanitaire 0.00 1.02 0.00 0.00 0.00 1.02 0.00 0.00 1994 Miniere Bougrine 0.00 -.05 0.00 0.00 0.00 -.05 0.00 0.00 1995 Maghreb IM 0.00 .33 0.00 0.00 0.00 .33 0.00 0.00 Bank Pending Commitments 1997 * AMINEX: 0.00 3.05 0.00 0.00 TUNISIA 1995 * TUNINVEST 0.00 6.25 0.00 0.00 INT'L 1995 * TUNINVST 0.00 .07 0.00 0.00 GESTION  Annex 10 T unisia at a glance M. East Lower- POVERTY and SOCIAL & North middle- --- . ---- . Tunisia Africa income Development diamond Populaliori mid-1995 fimillion5S) 9,0 273 1.154 Life expoctancy GNP per capita 1995 (USS) 1.860 1.780 1.700 GNP 1995 (billions USS) 16.7 486 1.961 Average annual growth, 1950-96 Populatioln %) 1.8 2,7 1,4 GNP Labor forre (%) 3,0 3,3 1.8 per Gross Most recent estimate (latestyearavailablesince 1969) capita enrollment Poverty: headcounl index (% of popltation) 7 Urban population (% of holal populatlon) 61 56 56 Life expeclancy at birth (years) 68 66 67 Infant mortality (per 1,000 lIve births) 32 49 3i Child malnutrition (% of chikiren tnder 5) 8 .. .. Access to safe water Access to safe water (% of popalationi) 69 82 78 Illiteracy (% of population age 15+) 32 39 .. Gross primary enrollment (% of school-age population) 120 97 104 -Tunsia Male 126 104 . 106 Lower-middle-income group Female 115 90 t10 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1986 1994 1995 Economic ratios' GDP (billionis US$) 4.3 8,3 15,7 17.6 Gross domestic investment/GDP 28.0 26,6 24,9 24.7 Openness of economy Expor1s ot goods and non-fartor services/GDP 31.0 32,6 44.7 44.8 Gross domestic savings/GDP 23.2 20,4 21.9 21.1 Gross national savings/GOP 23,5 19,4 21,6 20.4 Current account balance/GDP -4,9 -7.1 -3.2 -4.2 Savings Investment Interest paymentslGDP 0,8 3,0 2,9 Total debUGDP 25.6 59.0 58.7 54,2 Total debt service/exports 7.0 24,7 18 5 18,0 Present valuo of debtGDP .. .. 40.9 .. Present value of debt/exports *- 101,8 Indebtedness 1975-84 1985-95 1994 1995 1996-04 (average anntual growth) -Tunmsia GDP 5j1 3.9 3.3 2,2 5.2 Lower-middle-income group GNP per capita 2.4 1,8 1,6 1,4 3.6 Exports o goods and nifs 5,2 7.1 13,0 1,2 7,0 STRUCTURE of the ECONOMY 1976 1985 1994 1996 (% of GDP) Growth rates of output and Investment 4%) Agriculture 21,0 17,3 14,4 13,1 45 Industry 29,4 34,1 33,4 33.3 30- Manufacturing 10,3 13,5 21,0 216 1 Services 49,7 48,6 52,1 53,8 o * _ __ _s s Private consumption 62,2 62,1 62,0 63,1 -15 General government consumption 14,6 17,0 16,5 16,9 Imports of goods and non-factor services 32,9 38,7 47,9 48,7 -001 *ODP 1975-84 1985-96 1994 1995 (average annual growth) Growth rates of exports and imports 4%) Agriculture 1,1 3,2 -10,0 -9,9 15 Industry 7,0 4,3 3,3 5,3 Manufacturing 9,7 7,5 3,4 8,8 10 Services 5,8 3,8 5,4 5,2 o Private consumption 6,7 3,2 3,1 3,0 s 90 92 93 94 95 General government consumption 6,5 3,3 4,2 3,0 Gross domestic investment 5,4 5,2 -11,5 4,4 -10 Imports of goods and non-factor services 8,0 6,1 3,5 3,3 -Expors -impors Gross national product 5,2 4,1 3,5 3,0 _ Note: 1995 data are preliminary estimates. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.  Annex 10 Page 2 of 2 Tunisia PRICES and GOVERNMENT FINANCE 1975 1985 1994 1996 Inflation 1%) Domestic prices (% change) 10 Consumer prices 9,5 7,3 4,6 6,3 Implicit GDP deflator 5,0 4,9 4,4 5,3 9 4 Govemment finance 2 (% of GDP) 0 Current revenue .. 30,8 27,6 26,3 90 91 92 93 94 95 Current budget balance .. 6,6 2,8 1,9 Overall surplus/deficit .. -4,9 -2.7 -4,2 -GDP def. -CPI TRADE (millions US$) 1975 1985 1994 1996 Export and import levels (mill. US$) Total exports (fob) 859,1 1.729,2 4.643,0 5.469,6 8.000- Fuel 374,3 723,3 436,6 462,0 0 W0 Other agriculture 37,5 96,6 274.9 243,4 6.000 Manufactures 331,8 876,8 3.887,0 4.700,8 5.oDo Total imports (cit) 1.423,9 2.740,6 6.564,5 7.718,3 4I000 Food 225,0 333,4 536,0 814.7 3.0900ir i Fuel and energy 140,0 369,6 465,6 496,4 2.000 Capital goods 429,6 603,0 1.432,6 1.515,9 1-000 Export price index (1987=100) .. 98 127 143 es 9 r 92 93 94 ss Import price index (1987=100) .. 89 124 137 E 92l93 94ts Terms of trade (1987=100) .. 110 103 104 1Exports o mports BALANCE of PAYMENTS 1975 1985 1994 1995 (millions US$) Current account balance to GDP ratio (%) Exports of goods and non-factor services 1.344 2.700 6.887 7.954 0 o - j Imports of goods and non-factor services 1.425 3.207 7.209 8.561 1 1 8 1 92 93 94 95 Resource balance -81 -507 -322 -607 Net factor income -136 -352 -1.020 -976 .2 B Net current transfers 135 270 688 753 Current account balance, -4 before official transfers -82 -589 -654 -830 Financing items (net) 195 476 1.009 849 Changes in net reserves 17 113 -355 -19 -U Memo: Reserves including gold (mill. US$) 398 294 1.544 1.689 |-8 Conversion rate (locallUS$) 0,402 0,835 1,010 0,95 1 1 EXTERNAL DEBT and RESOURCE FLOWS 1975 1986 1994 1995 (millions US$) Composition of total debt, 1995 (mill. USS) Total debt outstanding and disbursed 1.109 4.884 9.407 10.194 G A IBRD 110 558 1.715 1.717 836 1717 IDA 55 65 52 49 B Total debt service 103 746 1.455 1.561 F 49 c IBRD 15 88 297 332 1972 303 IDA 1 1 3 2 Composition of net resource flows Official grants 49 30 83 71 Official creditors 104 210 272 98 D Private creditors 20 109 -117 486 1808 Foreign direct investment 45 108 194 295 Portfolio equity 0 0 0 0 World Bank program E Commitments 37 169 304 117 A- IBRD 3509 E- Bilateral Disbursements 40 109 189 138 B-IDA D -Othermultilateral F-Private Principal repayments 7 48 175 205 c - IMF G - Short-term Net flows 32 61 13 -67 Interest payments 8 41 124 129 __1 Net transfers 24 20 -111 -196 MN1CO 5/15/97  IBRD 23566R1 MEDi7ERRANEAN SEA- . T U N I S I A 37 - . Taborbe Boerg..ribo 37, SECOND MUNICIPAL DEVELOPMENT PROJECT BNJA M(dee eedeubo~~ bo = ~~~~~~~~~~~~~~~~~~Nalbe.1 GOVERNORATE DENSITIES: SILIA GEI-Fahs Inhab tonts/ k lometers squared