Tunisia - Cooperative Farm Project

_ | t \ \ kJ 19 RESTRICTED Report No. TO-560b This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION COOPERATIVE FARM PROJECT TUNISIA January 19, 1967 Projects Department  CURRENCY EQUIVALENTS US $1 = 0.520 Dinars (520 Millimes) D 1 = 1,000 Millimes = US $1.923 D 1,000,000 = US $1,923,000 WEIGHTS AND MEASURES Metric System  T U N I S I A COOPERATIVE FARM PROJECT TABLE OF CONTENTS Page No. SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. I. INTRODUCTION . . . . . .*. . . . . . . .*. * . . . . . . . . . . 1 II. BACKGROUND INFORNATION . . . . . . . . .. . . . . . . . . III. THE PROJECT AREA . . . . . . . . . . . . . . . . . * * * * . *. 2 As General* ............. - e , o a a o a -o a e 9 ................a... 2 B. Land Tenure and Cooperatives. .g. . . .. e... 2 C. Mechanization. . . . . . . . . . . . . . . . . . . . . . . . 3 Do Livestock. . * . . e . . . e a a . . . . . . . . . . . . 3 E. Extension and Research ae*e@*g ee4.....* 4 F. Marketing. . . . . . . a . . . e . . e . . . . . 5 IV. THE PROJECT . o . . . . . . . . . . . o . .. . . . . . .e. .e.. 5 A. General Description. . . a . . . . . . . . * . . .* * . . a 5 B. Detailed Featureso . . . . . . a , . . . . , . . . . . . . . 6 C. Cost Estimates . . . . . . . . . . . . . . . . . . . a 7 D. Financing. . . . . . . . . . . . . . . . a . . . . . . . . 9 E. Operating Results. . . . . . . . . . . . . * * . . . . . . . 9 V. ORGANIZATION AND MANAGEMENT. . . . . . e. e e e. 11 VI* PROCUREMENT. . . . . . . . . . a . . . . . . . . . . . . . . 12 VII. ECONOMIC BENEFITS AND JUSTIFICATION. . . . . . . . . . . . . . . 13 VIII. CONCLUSIONS AND RECOMMENDATIONSo . . . . . . . . . . . . . . . . 13 This report is based on the findings of a mission in June 1966 to Tunisia composed of Messrs. P.C. Goffin, C.P. McMeekan (Consultant), A.M. van Nimmen, and G. de Brichambaut (FAO). It was prepared by Messrs. Goffin, McMeekan and van Nimmen.  ANNEXES 1. Land Tenure 2. Organization and Management of Cooperative Units 3, The Office des Terres Domaniales (OTD) 4. The Office National de Motoculture et de Mise en Valeur Agricole 5. Marketing and Prices 6. The Banque Nationale Agricole (BNA) 7. List of Goods 8. Cashflow Projection 9. Gross Receipts 10. Decree No. 67-2 of January 2, 1967 Concerning the Agricultural Coopera- tion Commission 11. Ministerial Circular of December 22, 1966 Setting up the Bureau of Control (Organization Chart of the Undersecretariat of State for Agri- culture) 12. Calculation of Economic Rate of Return MAP 1 MAP 2 MAP 3  T U N I S I A COOPERATIVE FARM PROJECT SUMMARY i. The Government of Tunisia has requested a loan/credit to help finance a cooperative farming project as part of its program of organizing agricultural and livestock production. ii. This program is essentially an exercise in agrarian reform whereby the benefits of the economies of scale are provided to the traditional sub- sistence level smallholder and to farm workers by integrating traditional smallholdings and State-owned land, farmed on a mechanized cereal cropping pattern, into large cooperative units. iii. The Project would establish new production cooperatives over a two-year period on about 160,000 ha in Northern Tunisia, the most productive zone of the country. It would also consolidate development of 213 existing cooperatives on 185,000 ha and provide additional capital inputs to State farms intended for eventual absorption into the cooperative movement. The new cooperative would introduce livestock as a major element in production. iv. The Project would be managed by a new organization, comprising a high-level National Commission having overall control and a management unit (Bureau of Control) with a direct chain of command from the Commission to the field level. v. The cooperatives would be financed by loans from the Banque Nationale Agricole (BNA) from funds derived from Government and the proposed loan/credit. BNA would act as financial agent of the Commission and would audit the cooperatives' accounts. vi. Investments financed under the Project would include farm build- ings, livestock buildings, farm machinery, irrigation equipment, tree crop establishment, range pasture improvement, soil and water conservation, livestock, management and technical assistance and feasibility studies. The total investment cost would be about US$32.5 million, of which 30 per cent would be for existing cooperatives, 62 per cent for new cooperatives and 8 per cent for State farms. The proposed Bank loan of US$12 million and an IDA credit of US$6 million would cover 55 per cent of the total investment cost. The foreign exchange component would amount to about 38 per cent of the total project cost. vii. The Project would move a large number of subsistence farmers to a cash economy status. The average annual net return to the economy would be about 10 per cent. viii. The Project is technically feasible and economically justified if executed as projected. The Project is suitable for a Bank loan of US$12 million, at the standard rate of interest and with a term of 18 years, including five years of grace, and for an IDA credit of US$6 million on normal IDA terms.  T U N I S I A COOPERATIVE FARM PROJECT I. INTRODUCTION 1. The Government of Tunisia has requested a Bank loan and an IDA credit to help finance the formation and development of Agricultural Units of Production (cooperatives) in Northern Tunisia. The Government proposes to establish cooperatives on some one million hectares of land comprising ex-colon farms and "traditional" smallholdings adjacent to the former. The total program is phased over about 10 years. The area involved lies in the Northern Governorates of Tunis, Bizerte, Beja, Djendouba, Le Kef and Nabeul (Map 1). 2. This report is based on the supporting documents of the loan/ credit application from the Government of Tunisia and on the findings of a mission in June 1966 to Tunisia composed of Messrs. P.C. Goffin, C.P. McMeekan (Consultant), A.M. van Nimmen and G. de Brichambaut (FAO). The FAO mission which visited Tunisia in October-November 1964t, and a Bank mission which visited Tunisia in October-November 1965 assisted the Govern- ment of Tunisia in the preparation of the Project. This report was prepared by Messrs. McMeekan, Goffin and van Nimmen. II. BACKGROUND INFORMATION 3. Agricultural production represents about 25 per cent of Tunisia's gross national product and agricultural products about 60-65 per cent of total exports. Over 50 per cent of the labor force is employed in agricul- ture. Population is 4.5 million with an annual rate of growth of about 2.5 per cent. Annual per capita income is about US$180. 4. The principal crops are hard and soft wheat, barley, olives, grapes, citrus, dates and other fruits and vegetables. The most important export crops are olives, grapes (wine), wheat, citrus and other fruits and vegetables. The annual growth rate of agricultural production is currently assessed at 2.4 per cent per year. Farming is practiced with varying degrees of intensity over four million hectares (9.8 million acres). This represents a little over one hectare (2.47 acres) of cultivated land per inhabitant, which is rather low. Over much of the country the scope for development is severely limited by natural conditions. While the northern area lends itself to a Mediterranean type of agriculture, the land gradually deteriorates through the central area to desertic conditions in the South. Rinfall varies from 1,000 mm to 400 mm from north to central Tunisia. 5. The northern area of Tunisia is served with an extensive network of paved roads and gravel feeder roads. The principal towns of the area are also connected by railroad.  - 2 - III. THE PROJECT AREA A. General 6. Northern Tunisia is the area with the best climate and soils. The Project traverses the large cereal and livestock sector of the country. It is rainfed. The cereal belt includes the Great Plains with 400 to 600 mm rainfall. Livestock are raised mainly in the more hilly and mountainous regions of higher rainfall. The production potential is good. B. Land Tenure and Cooperatives 7. Land is held under four main tenure systems: (1) Melkland of traditional smallholders operating largely on a subsistence level; (2) pi- vate (modern) farmland held in units of economic size and farmed by more sophisticated Tunisian farmers using modern techniques; (3) State land farmed on a large-scale, mechanized basis mainly for cereal production by the Office des Terres Domaniales (OTD); and (4) Cooperative Production Units (CPU's), the farming cooperatives. Most of the useable land in the project area is held by traditional smallholders, Extent of this and of the other forms of tenure are indicated in Annex 1. Annexes 2 and 3 give further details of the CPU's and the OTD, respectively. 8. Historically, cooperative farming was commenced in 1961. By the end of 1965, 213 cooperative units were farming about 185,000 ha with approximately 15,000 members. This growth of cooperatives, from 1962 to 1966, was as follows: ---------Number of Hectares-------- Year Cooperatives Members Melkland State Land Total 1962 15 530 4,804 3,661 8,h65 1963 80 6,057 41,406 2h,357 65,763 1964 51 3,288 20,944 18,855 39,799 1965 67 5,237 51,000 20,548 71,548 Total 213 15,112 118,154 67,421 185,575 9. Essentially, the planned change to production cooperatives repre- sents the Tunisian Government's approach to agrarian reform. The interest of this approach lies in the fact that it is the direct opposite of that adopted by many countries which commonly subdivide large land holdings into small, individual lots. The Tunisian program is to eliminate subsistence small- holdings through the cooperative system. 10. Cooperatives are founded around a nucleus "Colon Estate" (taken over by Government from former French or Italian settlers) by adding adjoining Melkland (traditional smallholdings) to bring each cooperati e  - 3 - unit up to about 1,000 ha. A key feature is the extension of the economies of scale to the traditional sector. The land is farmed mainly for cereal production (hard and soft wheat) with some forage and tree crops on suitable land. It is intended to integrate livestock production based on forage which will replace fallow in the present mixed cropping pattern. C. Mechanization 11. The ex-colon lands previously owned by expatriates were highly mechanized with tractors, implements, and combine harvesters. With the commencement of the cooperatives in 1961, the Government, with the assist- ance of U.S.AID, has modernized much of the old equipment. 12. Concurrent servicing facilities were not provided. During 196h/65 Government built 16 agricultural machinery workshops, 12 of which are in the project area. They are operated by a government agency, the Office National de Motoculture et de Mise en Valeur Agricole (Annex 4 and Map 2). 13. During 1966, negotiations were completed with U.S AID for finance totaling about US$1 million to assist in equipping and staffing these work- shops. U.S.AID has contracted four French-speaking Canadian agricultural engineers to set up the servicing organization, to supervise it and to train staff. The services of these workshops will be used by cooperatives at negotiated prices. D. Livestock 14. Most of the nation's one half million head of cattle and about 1.5 million sheep (one third) are in the project area. Production follows the traditional pattern of smallholder operation by stockowners, who see greater merit in numbers of animals than in per animal output. Animals are regarded as capital from which animal output is less important than the asset itself. Livestock thus tend to be scavengers subsisting on the fringe of a cropping economy. Tunisian farmers have not yet become good husband- men in a modern sense though this is not true of the small private, modern sector. 15. The establishment of cooperatives sets the stage for a completely new approach. The large output of forages (oats and vetches, beans, sorghum, alfalfa, etc.) under the new cropping system makes available suitable food in quantity for improved animal production. While cooperatives can sell and have sold these fodders to independent producers, this outlet has limited scope and suffers from the disadvantage that the cooperative does not derive the full potential. The use of forage within the cooperative is highly desirable not only to maximize returns, but to exploit fully the labor intensive character of livestock enterprises. Such use too provides a practical way of overcoming the husbandry weaknesses. Centralized animal production units under competent professional supervision using unskilled labor of members can achieve modern level production efficiency.  - 4 - 16. So far, cooperatives have not integrated livestock production in this way save in a few cases. Members have strongly resisted attempts to bring their livestock into the cooperative. This approach has not been pressed. Sufficient progress has been made, however, with purchased animals both on State and cooperative farms to show that this alternative is feasible. Accordingly, it is now being concentrated upon as a major feature of the Project. 17. Essentially a small herd of milking cows of local origin is acquired. This is increased in numbers by breeding up to the estimated capacity of the cooperative and graded up in quality by the use of imported sires through artificial insemination. Concurrently, fattening operations involving purchased calves and surplus homebred male calves are established. Calves are grown from four to five months to twelve to fifteen months for sale as meat. Older cattle may be purchased to add 50 to 100 kg liveweight prior to sale for slaughter. Smiliar sheep fattening operations are carried out. Most animals will be fed in centralized housing units. Some 14 cooperatives and many of the State farms are now operating along these lines. 18. The results obtained indicate that cooperative members can care for livestock efficiently when properly supervised and that the financial returns are high. The greatest bottleneck to more rapid implementation of the program is the lack of trained personnel and the lack of suitable sources of finance for livestock purchases. The Government intends to train additional people as rapidly as possible and to provide the necessary additional finance. E. Extension and Research 19. Extension services to cooperatives are provided by the Under- secretariat of State for Agriculture as part of its overall extension service obligation. The rate of staffing of the services to cooperatives is adequate. For each Governorate, one Regional Commissioner of Agriculture is in charge. This officer supervises cooperative unit teams consisting of five to six agricultural assistants headed by one professional agriculturist for each unit group of about 20 cooperatives. 20. The quality of the advisory and supervisory work is not good. Graduate level operators are young and inexperienced. Assistants are also young with lower level training. Both groups are keen and prepared to accept responsibility. The State farms are better off since OTD employs a number of expatriate agriculturists and animal husbandmen who do a very efficient job in both direct extension and in training local counterparts. The position of the cooperatives should improve when similar personnel become available to them as provided for as part of the Project (see para 43). 21. The authorities are aware of this general situation and are par- ticularly conscious of the lack of livestock technicians. The problem is being met in various ways. Two schools train men at senior and junior levels, respectively. Both concentrate on agriculture. One center for  animal production training operates with assistance from Germany. Its out- put could be stepped up to supply field needs of cooperatives. Overseas veterinary training of some 10 selected Tunisians is in progress. Similar overseas training in animal production should be organized. 22. On the research side an agricultural research station and a live- stock center are supported by Government. Both have accumulated data rang- ing back to former French administration times. Both are currently suffering from lack of experienced personnel. Work is not oriented sufficiently closely to current national needs. Thus, little attention is being devoted to fertilizer use to permit cooperatives to increase cereal yields. Animal studies are particularly academic and need to be reoriented toward more useful objectives. In particular, improved methods of utilizing available and new forage in a practical way need investigation. UNDP assistance is being sought to improve the overall agricultural and animal research situa- tion. F. Marketing 23. Prior to independence, export surpluses went mainly to France under special tariff and price conditions so that marketing presented no real problems. The French market virtually disappeared in 1964, creating serious difficulties particularly for wine and olives. Solution has been sought by both Governments and limited exports of agricultural products have been resumed. Export of hard wheat to world markets has continued at prices about 20 per cent below the official support price. 24. While the cooperatives are not currently involved in wine produc- tion, they could be so, should State farms producing grapes be absorbed. However, this appears unlikely. Most of the cooperative production under the Project would be wheat and animal products, the bulk of which can be absorbed by the local market. There is an expanding market for milk and dairy production capable of absorbing the output planned. Currently, the equivalent of 70,000 tons of milk is imported annually. Currently also, Tunisia is an importer of meat. The outlook for olives and olive oil is uncertain, dependent upon the conclusion of negotiations with France and the Common Market countries (Annex 5). IV. THE PROJECT A. General Description 25. The Project is a part of a ten-year national program to integrate and develop about one million hectares of State and smallholder land into a cooperative farming system in the northern zone of Tunisia, and has three main parts: (1) the consolidation of the 213 cooperatives on about 185,000 ha established prior to 1966; (2) the establishment during the period Sep- tember 1966 to September 1968 of new cooperatives on about 160,000 ha, each  - 6 - on about 1,000 ha; and (3) the maintaining of productivity on State (OTD) farms during their pre-cooperative stage. The Project would be implemented substantially over a four-year period. It would cost a total of about US$32.5 million involving a foreign exchange component of US$12.4 million (about 38 per cent). 26. The Project is about half the size requested by the Government. Scaling down is justifiable on the score of organization and managerial difficulties (Section V) and was agreed to by government representatives during appraisal. Even the reduced scale involves greater annual rate of progress in cooperative formation than achieved during the past five years. 27. The Project is geared to the production of hard and soft wheat as the major cash crop supplemented by forage crops and livestock. Replacement of fallow by forage crop production for utilization by animals represents a significant change in the traditional land-use pattern in the project area. Livestock production would be implemented by the establishment of centralized animal units for milk production and/or the fattening of sheep and cattle (paras 15-18). The Project would make provision for the pro- duction of tree crops (olives, almonds, citrus and other fruits) on selected areas of some cooperatives. Some vegetable production would occur on limited irrigated areas on suitable cooperatives. B. Detailed Features Existing Cooperatives 28. The 213 existing cooperatives, many of which have been hastily established, and few (para 16) of which have yet been organized to embrace livestock production, require additional inputs to bring them into full productivity. Farm machinery and small-scale irrigation equipment to pump underground water for sprinkler irrigation are required. The major need, however, is for farm buildings, largely for centralized livestock production and for a revolving capital fund for livestock purchases for fattening. Provision is also made for the establishment of tree crops and the regener- ation of range pasture land. The total estimated cost is US$9.8 million, or about 30 per cent of the total project cost (para 33). New Cooperatives 29. These average about 1,000 ha, including a central core of State (OTD) farmland with a variable proportion of smallholder land (about 60 per cent). The cooperative would take over the buildings and much of the equipment of the State unit, but would require considerable additional capital inputs. These include farm machinery for large-scale mechanized grain production and harvesting, forage harvesting equipment, small-scale pumping and sprinkler irrigation facilities, farm buildings, including centralized livestock production units, as well as finance for tree crop establishment and the regeneration of range pasture land. Finance would also be provided for livestock purchases, including some imported males of dairy breeds for grading-up of local stock.  - 7 - 30. In addition to capital inputs of this type, technical assistance for supervision and management would be necessary, along with finance for feasibility studies by contracted consultants. Personnel provided under technical assistance (para 43) would service all cooperatives. However, the total estimated cost of establishing the new cooperatives would be about US$20 million, or about 62 per cent of the total project cost (para 33). 31. Some 106 new cooperatives were established late in 1966 on about 123,000 ha, of which about 91,000 were Melkland, and 32,000 State land; of this total,however, some 20,000 ha are wasteland, leaving only 103,000 ha of cultivable land. This first tranche of new cooperatives under the Project has approximately 8,600 members. No capital inputs for this tranche have yet been authorized pending the result of the loan/credit application; in the meantime, the machinery from the Office de Motoculture (ON) is being used over the whole of the new cooperatives. State (OTD) Farms 32. It is intended to absorb most State (OTD) farms into the coopera- tive system as and when this becomes administratively and financially feasible. In the interim, during what might be termed the "pre-cooperative phase", it is highly desirable to maintain efficient production on the 300,000 ha of such land in the project area. Even more important, it is desirable to extend forage crop and livestock production on all State farms so that they may be better prepared for eventual transfer to the cooperative system. Currently, the State farms are well managed by OTD whose operations as a whole are profitable (Annex 3 and Map 3). However, much machinery is old. Capital for replacement would be provided under the Project. The total estimated cost is about US$2.7 million, or about eight per cent of the total project cost (para 33). C. Cost Estimates 33. The total investment cost to the Project and the proposed extent of Bank participation are as summarized on the next page:  - 8 - Cost Estimates and Bank Financing --------------Project Cost------------- Of Which Proposed Dinars Equivalent to Foreign Bank/IDA (millions) US$ Millions Exchange Financing* ....(US$ millions)... A. Existing Cooperatives Buildings 1.4 2.7 0.4 2.1 Farm machinery 0.7 1.3 1.0 1.1 Irrigation equipment 0.7 1.3 0.5 1.0 Tree crops 0.9 1.7 -- -- Pasture -/ 0.6 1.2 -- -- Cattle purchase 0.5 1.0 -- Sheep purchase 0.3 0.6 -- -- Subtotal 5.1 9.8 1.9 4.2 B. New Cooperatives Buildings 1.0 1.8 0.3 1.4 Farm machinery 4.1 7.9 6.0 6.3 Irrigation equipment 1.6 3.0 1.2 2.4 Tree crops 1/ 1.0 1.8 -- -- Pasture 0.9 1.7 -- -- Sheep purchase 0.2 0.5 __ __ Cattle purchase ) ( 0.7 -- -- Imported bulls of ) 0.4 ( dairy breeds ) ( 0.1 0.1 0.1 Water & soil conser- vation 0.4 0.8 -- -- TechnicaL,services 3/ 0.4 0.9 0.4 0.7 Studies 4/ 0.5 0.9 0.5 0.7 Subtotal 10.5 20.1 8.5 11.6 C. State Farms Farm machinery 1.4 2.7 2.0 2.2 Total 17.0 32.5 12.4 18.0 Percentage -- 100 38.3 55.2 1/ Mainly planting material. 2/ Regeneration of existing pasture land. 3/ Salaries and other costs of expatriate and local supervisory staff. JT/ Feasibility studies prepared by consultants. * The Bank/IDA would finance 80 per cent of the total cost of all items involving foreign exchange.  -9- D. Financing 3h. All funds required for the Project would be channeled through the Banque Nationale Agricole (BNA) (Annex 6). These funds will be passed on to the cooperatives and the State (OTD) farms at a uniform interest rate of six per cent per annum, according to the following terms: 1) For cooperatives: average term of 13 years (never exceed- ing 17 years), with a grace period normally of four years (and never exceeding five years). 2) For State (OTD) farms: maximum term of five years with no grace period. Of the interest charged, two per cent will be kept by BNA to cover operating expenses and to build up a fund for meeting bad debts. This commrission is considered sufficient in view of the fact that BNA will only bear 15 per cent of the risk of nonrepayment of debts in the case of loans to coopera- tives and none of the risk in the case of loans to the State (OTD) farms. Grants to be provided to the cooperatives for water and soil conservation activities (see para 38) will be also channeled through BNA. 35. It is proposed that a loan/credit be made available to the Govern- ment in the amount of US$18 million, sufficient to cover some 55 per cent of the total project cost. It is proposed that US$6 million should be an IDA credit, on normal IDA terms, and that US$12 million should be a Bank loan at the standard rate of interest for a term of 18 years, including five years of grace. Disbursement of the loan/credit would be against documentation comprising (1) invoices relating to all imported items in the list of goods; and (2) documentation of local currency costs of items in the list of goods which have been incurred by BNA. In all cases, dis- bursements would amount to 80 per cent of the cost of each item in the list of goods (Annex 7 and para 33). 36. It is possible that the Govermment would be assisted by U.S.AID in financing a revolving fund, in BNA, totaling about D 1.5 million, to finance livestock purchases for fattening operations on a continuing basis. U.S.AID officials both in Tunisia and Washington are currently working on this possibility. E. Operating Results 37. Analysis of the financial accounts of the production units as of August 31, 1964, shows that out of 95 cooperatives then in existence, 28 were making a profit and 67 a loss. Total losses for the fiscal year 1963/64 amounted to D 84,663. At August 31, 1965, of the existing 146 cooperatives, 103 were making a profit and 43 a loss for the fiscal year 1964/65. Profits totaled D 360,546. Some of these accounts are not completely reliable, because of the inefficient bookkeeping methods used. However, the accounts do indicate a satisfactory rate of performance in view of the short period  - 10 - since establishment, A major weakness apparent is that the volume of short- term debt has grown substantially. At December 31, 1965, it amounted to D 1,888,613 as against a total of D 1,977,337 for the long-term and medium- term debt. It is clear that part of the expenditures for capital investment has been financed with short-term money, both from BNA and from suppliers' credits. The borrower has therefore decided to review the financial posi- tion and prospects of all existing cooperatives, case by case, before the end of 1968. The object of this will be: 1) if necessary, to adjust the terms of any existing loans as appropriate, for instance by conversion of some short-term debts into longer-term debts; and 2) where the existing cooperative is not considered like'ly to become profitable within a reasonable period, to draw up, and then arrange the implementation of,a revised plan to make it profitable. In cases where it does not prove possible to draw up a revised plan to make a particular cooperative profitable within a reasonable period, that coop- erative will not receive additional capital inputs under the Project. 38. Financially, the need to provide work for more members than required by farming operations has been a severe burden on the cooperatives which have had to accept loans from the Government to employ surp'2us labor in specified water and soil conservation activities unrelated to production. This cost should not therefore be a cooperative responsibility and the Government has agreed that in future it would cover such activities with direct grants, channeled through BNA. 39. Subsidy elements (ranging from 10 to 50 per cent of the cost of capital inputs) and variable interest rates (ranging from 1.5 to 6 per cent) that are presently in existence are also undesirable, since they do not allow the real development costs to be appreciated by the cooperatives. The Government has therefore proposed that subsidy elements should be withdrawn from capital inputs and that the standard interest rate specified in paragraph 34 should be used in the Project. 40. The cashflow projection for a typical cooperative of 1,000 ha, taking into account the terms of the loans to be made available, and the elimination of subsidies on capital inputs, is given in Annex 8. Estimated gross receipts for such a cooperative are given in Annex 9. The cooperative members will be moved from subsistence farming to the monetary economy. Their net income will reach about D 40 in the first few years and will rise to D 250 at full development.  - 11 - V. ORGANIZATION AND MANAGEMENT 41. The organization and management of the production cooperatives at the time of appraisal is explained in Annex 2. It was not satisfactory at that time and is the key problem for this Project. The Government has since taken some major steps to improve the situation, including the estab- lishment of a high-level policy-making National Commission for Agricultural Cooperation (Annex 10), the setting up of an executive Bureau of Control with exclusive responsibility for supervising the management of the cooper- atives (Annex 11) and the appointment of BNA as sole financial agent of the Government for the Project. The remodeled organizational arrangements for the sulpervision of the management of cooperatives is shown diagramatically in the chart of Annex 11. 42. The National Commission was set up by Presidential Decree of January 2, 1967. It has overall control of policy for all the cooperatives and its members represent all the major interested parties. In particular, it has the responsibility of deciding the pace of formation of new cooper- atives (which will be within the agreed definition of the Project) and to decide the needs of the cooperatives, as well as the means for putting the cooperative development program into effect. 43. The Bureau of Control has been established within the Under- secretariat of State for Agriculture in accordance with a Ministerial Circular of December 22, 1966. The Bureau has exclusive responsibility, under the Commission, for supervising the management of cooperatives and should be an effective coordinator of all the various services presently being provided to them. Arrangements have been made for the appointment in the near future of managerial and technical experts satisfactory to the Bank and IDA. These experts, who are expected to be recruited abroad and to have Tunisian counterparts, would be contracted for about four years and would comprise one senior agricultural production economist, four assistant production economists and four animal production spec-ialists. 44. The Bureau will be specifically charged with reviewing the feasibility reports prepared on new cooperatives by consultants (see Annex 2, para 4). Only after accepting the cooperatives' potential economic viability on the basis of this report will the Bureau recommend the necessary financing to BNA, who will only be able to make loans to cooperatives after such a recommendation has been received. The Bureau will then be responsible for the organizing of the new cooperatives. 45. In regard to the supervision of the management of existing coop- eratives and of the new cooperatives once established, the Bureau would actually delegate the execution of some tasks to existing organisms. But the Bureau would retain the responsibility to see that this execution is carried out according to its directives and standards. Furthermore, it is understood that in future no public or semipublic bodies will be permitted to issue directives concerning the functions of the cooperatives except  - 12 - through, or under the authority of, the Bureau. The Bureau will only make recommendations to BNA to finance those cooperatives that meet the Bureau's standards of management, whose farm plans, budgets and investment plans have been approved by the Bureau, whose financial records are kept in accordance with the Bureau's standards and that are following the technical advice given out by, or under the authority of, the Bureau. 46. The Bureau will be responsible for carrying out the reviews of the financial positions and potentials of the existing cooperatives (see para 37). It will also be responsible for putting into effect any recommen- dations made by BNA for improving bookkeeping methods in the cooperatives, which recommendations will be made as a part of the independent auditing services to be provided by BNA. 47. To enable BNA to carry out its role effectively arrangements are being made to appoint one agricultural credit specialist satisfactory to the Bank and IDA and to appoint three qualified accountants to work exclu- sively on cooperative accounts. It is expected that the credit specialist will be recruited abroad and will have a Tunisian counterpart. 48. It is thought that the above arrangements, if strictly followed, will lead to improved management of the cooperatives themselves. The management situation should be closely watched by supervision missions during the implementation of the Project, however, and the whole position should be reviewed after one year's operations. VI. PROCUREMENT 49. The Government has an official tender system which provides for competitive bidding. Foreign as well as domestic suppliers may submit proposals. The calling of tenders is advertised in the large newspapers of Tunis. A number of well-known international firms in agricultural machinery and equipment are represented in Tunisia and are required to provide after-sales service. These local trade channels are used for procurement, and importations are normally under dealer licenses. Eval- uation of tenders for items financed under the loan/credit would be decided on sound economic criteria, but with a preferential margin allowed to local producers of up to 15 per cent. 50. A decree dated July 19, 1965, imposed restrictions on the import of tractors in order to protect a new assembly plant in Tunisia. Assurances have been obtained that the Government will exempt all tractors purchased under the Project from the provisions of this decree, and will announce this exemption in all tendering documents and related advertisements.  - 13 - VII, ECONOMIC BENEFITS AND JUSTIFICATION 51. Proposed investments on the 185,000 ha of existing cooperatives should help to lift the gross receipts of these cooperatives from the present level of D 19 per ha to approximately D 50 per ha (see Annex 9). Of this, 60 per cent would be derived from wheat and olives and 37 per cent from animal products. Present net annual income on these cooperatives can be estimated at D 12 per ha and will rise to approximately D 27 per ha when the cooperatives are at full development, i.e. after 17 years of operations. Yearly added value resulting from the presently envisaged investments in the existing cooperatives will then amount to some D 2.8 million. 52. The proposed investments in new cooperatives would also lead to annual gross receipts of some D 50 per ha, similar in nature to the gross receipts from the investment in already existing cooperatives. Considering that present net annual income before creating these cooperatives can be estimated at D 9 per ha and that it will rise to approximately D 27 per ha when the cooperatives are at full development, yearly added value resulting from this part of the Project will amount to about D 2.9 million. 53. The investment in the new cooperatives would yield an annual rate of return to the economy of about 10 per cent over a lifetime of 24 years (see Annex 12). 5h. The farm machinery investments in the State lands will generate a satisfactory rate of return in line with the existing returns to mechanized cereal farming on these lands. The total investments under this heading represent a small part of the Project and of the total investment require- ments of an on-going, profitable organization (see Annex 3). 55. By the investment in the agricultural cooperatives, the coopera- tive members will be moved from subsistence farming to the monetary economy. Their net income will reach about D 40 in the first few years and will rise to about D 250 when production reaches full development. This additional purchasing power would stimulate the national economy. The Project is economically justified. VIII. CONCLUSIONS AND RECOMMENDATIONS 56. The development of production cooperatives has become the estab- lished policy of the Government of Tunisia in seeking more efficient land- use. Appraisal has indicated that the new system is capable of raising the low production of traditional land to a much higher level, of expanding export earnings and of increasing the per capita income of the Tunisian farmer. 57. Attention should be drawn to the fact that with this Project, the Bank and IDA would be entering a new field--that of production cooperatives. Participation in the Project would be noted by countries interested in this  - 14 - approach to agrarian reform either because of its ideological connotations or its promise as an alternative to perpetuating the economic and sociolog- ical inefficiency of subsistence-level smallholdings. The Bank and IDA might therefore be faced with further requests for financing of a similar type in even more difficult circumstances. 58. Moreover, the weak incentives which characterize the functioning of production cooperatives must be recognized. Historically, this defect appears to have been a major reason for their relatively poor performance. In practice, it has proved difficult to incorporate effective alternatives to the incentive motive provided by private ownership and operation. This makes successful performance of such an enterprise highly dependent on organization, management and supervision. 59. However, the Bank and IDA should be aware that in the case of Tunisia, it has no alternative in the existing political climate if it wishes to contribute significantly to the performance of the agricultural sector of the economy. The Government is firmly committed to production cooperatives. It is determined to make the system work and it is encourag- ing that it has proved most amenable to suggestions made by the various Bank missions that have reviewed the Project. The Bank/IDA mission has formed the distinct impression that the existing senior administrators regard the current concepts as "evolutionary" rather than "static." Par- ticipation by the Bank and IDA could well stimulate changes in a useful direction. 60. If executed as outlined in this report, the Project is technically feasible and economically justified. During the past two years, the Tunisian cooperatives have made progress toward better management and are prepared to strengthen their financial base, to have qualified personnel and to take further measures to increase the efficiency of labor use. The Tunisian Government has recently taken steps to improve the supervision of the management of the cooperatives which should assist the improvement of the management itself. 61. The Project is suitable for a Bank loan of US$12 million, at the standard rate of interest and with a term of 18 years, including five years of grace, and for an IDA credit of US$6 million, on normal IDA terms. January 19, 1967  ANNEX 1 COOPERATIVE FARM PROJECT Land Tenure After nationalization of foreign property in May 1964, the presept status of land tenure in Northern Tunisia is estimated to be as follows: Agricultural Surface in Northerm Zone--1965 (in 1,000 ha) Traditional agriculture 1,132 State land 313 Modern (private) agriculture 150 Cooperative Production Units 185 Irrigation land outside CPU's 20 Total agricultural land 1,800 The traditional agriculture contains mostly small and scattered holdings, farmed in the traditional, that is, more primitive, way with low productivity. According to the original development program, this land should be transferred by 1973 to cooperatives. In the last four years, about 120,000 ha have been transferred. As holdings are small, scattered and in many cases no firm title or even ownership is established, the transfer in itself proves to be a very complicated and lengthy operation. The State land, under the "Office des Terres Domaniales" (see Annex 3), is largely land taken from French and Italian settlers, but also consists of some previous public habous land (nontransferable land, the revenues of which were used as a gift for public charities); the latter might be of lower quality than the old colon land. A large part of this State land, which contains some of the best large-scale farm areas, was originally scheduled to be transferred by 1970 to serve as nucleus for the formation of cooperatives out of State land plus traditional or private land. VJhether this scheme of transfers will be realized as quickly as planned is doubtful. The agricultural operations on the State lands have been running fairly well and have assured an important part of the total Tunisian agricultural production. More recent measures indicate that some State land might also be sold to private farmers. 1/ SOURCE: Undersecretariat of State for Agriculture, Tunisia.  ANNEX 1 Page 2 Modern (private) agriculture consists of the larger and in general well-cultivated Tunisian holdings. In the program for agricultural develop- ment this category is supposed to remain unchanged. This, in general, is an important sector in Tunisian agriculture and further expansion either from rent or ownership of traditional land or from buying State property could be possible. Support of this sector, as well] as support of State and cooperative agriculture, might be useful to give Tunisian agriculture the necessary flexibility. The Cooperative Production Units (CPU's), numbered 213 on 185,000 ha by the end of 1965 and are supposed to increase rapidly till a large part of the traditional agriculture and most of the State land has been organized in this way. The annual increase in acreage of CPU's for the next five years, as foreseen in the Tunisian agricultural development plan, varies from 150,000 ha to 180,000 ha a year. For 1966 alone this would be equal to the program executed in the four preceding years. As explained in this report this too ambitious tempo has been scaled down for the years 1966 and 1967 to about 160,000 ha for the two years taken together and will be reviewed thereafter. Irrigated land in the Medjerda Valley Authority forms most of a limited section of irrigated agriculture, outside the production coopera- tives. A slow and rather regular increase till a maximum of 90,000 ha in 1974 is expected. So far the growth has been about 5,000 ha a year and the subsequent increase planned may also prove to be too ambitious. Summarizing, the agricultural program plans a transfer from State land and traditional (that is small and backward) agriculture to cooperative agriculture, maintaining a limited private sector and developing a limited area of irrigated agriculture. Land tenure structure is completely changed under the CPU. Here farm units of about 700-1,200 ha are formed, consisting of a nucleus of State-land (so far about 40%--usually an old colon farm) to which various traditional holdings are attached so as to farm one well marked unit for farming. The State land remains State property for the first five years when it is rented to the cooperative, and after this may be sold to the members of the cooperative to increase their shareholding and with it the profit-sharing and income capacity of these members. Traditional land is attached and holders lose individual ownership, but receive a proportionate share in the cooperative instead. Small private moderm farmers can be included and then also receive a share for their land. A landowner within the designated area of the cooperative can decline membership and in that case either sell or rent his property to the cooperative. Larger private owners are not obliged to become part of the cooperative, but may decide so if they wish. The basic principle is that individual landownership is transformed in share ownership and that the individual characteristic of a holding disappears as it becomes part of the overall cultivation plan for  ANNEX 1 Page 3 the cooperative. Shares in the cooperative can be transferred to other members or members-to-be of the cooperative or can be sold back to the cooperative. The prices at which shares are or will be transferred are not indicated in any of the regulations, but appear to be determined at the moment of the transaction by each individual cooperative. For his share, the farmer-landowner now receives the right to work at the cooperative as far as work is available, at fixed rates, and to share proportionately in the profit of the cooperative after deduction of the amount paid out for work, and a contribution to legal reserves. In practice, however, the transfer of some private holdings into the cooperative has not been realized, which means that the cooperative farm unit is in places broken up by other landholdings. Even in the older Medierda Valley, land consolidation and transfer is still a problem. The transfer problem should be more manageable with the reduction in scope of the Project (see para 26 of the main report). In the Medjerda organization some of the cooperatives have been organized differently and after consolidation and reallocation the members have an individual plot to take care of, with obvious advantages of incen- tive for good farming. Although the various decrees do not say so, a realistic appraisal of the situation might in the future lead to the same kind of owmership in the CPU's which would then become a kind of service cooperative with possible extended powers for directives for production. The other forms of land tenure in State land and larger modern private holdings will be maintained.  ANNEX 2 COOPERATIVE FARM PROJECT Organization and Management of Cooperative Units* The cooperatives included in the Project were, or will be, estab- lished in accordance with Law 63-19 of 1963 which replaced the old Protec- torate Law of 1934 on agricultural cooperatives. The new law is different from most cooperative laws, as it leaves out the usual definition of a voluntary organization of people to obtain a certain goal as a basic description of a cooperative. Law 63-19 states the function of the coop- eratives as ccamon utilization by farmers of all technical and economic means to facilitate their agricultural production and to get the benefits from the results of their activities. The CPU (Cooperative Production Unit) is, next to the service cooperative, one of the two forms recognized in the Law. There are three kinds of CPU's foreseen in the Law: the production cooperatives for the North, the ones for animal production and the cooperatives for mixed farming. Only the first group is dealt with in the Project. The statutes of each cooperative have to follow certain prescribed rules and must be approved by the Secretariat of State for the Plan and the National Economy which, through the Undersecretariats for Agriculture and Finance, is in charge of the financial and technical supervision of the cooperatives. The constitution of a CPU originates at the Undersecretariats for Agriculture and Finance after consultation with a Regional Commission for Cooperatives. Future members (small farmers and agricultural labor) also have to be consulted. Beforehand, the Undersecretariat for Agriculture has investigated the size, location, land tenure, cultivation plan, economic prospects (to reach a minimum income of D 250 per member family), etc., by employing consultants to prepare a feasibility study based mainly on eco- logical and economic considerations. Once the area has been established, small farmers within these boundaries have the option to become members of the cooperative, or to exchange their parcel for a lot outside the cooperative. Larger landowners can sell or rent their farms to the cooperative (see also Annex 1). The cooperative therefore has three kinds of land: (a) the nucleus, property of the State and rented to the cooperative for five years; (b) land bought or rented from landowners who did or could not join the cooperative; (c) land brought in by members (usually small plots from one half to ten hectares) for which they have to give up title and receive a proportionate share in the capital of the cooperative. * Prior to the recent changes in the arrangements for the supervision of the management of the cooperative (see Section V of the main report).  ANNEX 2 Page 2 The results or profits of the cooperative are divided (after various rules on reserves, etc.) among members on the basis of two criteria: labor and shares. During the year, members receive an advance on the profit in the form of established wages (350 millimes per day for general labor, 400 for tractor driver, 500 for combine driver, 600 for technical director) for their actual work in the cooperative. Membership in the cooperative without contributing labor is excluded. Management is split into an administrative and a financial part. The administrative function belongs to a board of at least three members as elected by the total membership. This board selects its president among their own group. The board also nominates a technical director (usually a rather young man who received a year's training at the National School for Cooperatives) who also receives a land share to be a full member of the cooperative. This director is also the accountant and administers small expenses, pays salaries and advances on labor. For larger expenses, usually per check on the BNA, he needs the approval and signature of the Regional Director of Cooperatives. The latter also is responsible for the annual accounts and balance sheets of the cooperatives. The CPU's themselves are grouped in Local Cooperative Units (LCU's) (including also service cooperatives in the same area); these LCU's are again grouped in a Regional Union of Cooperatives per Governorate. Under this construction the overall supervision and direction of the CPU's is quite complicated. The Undersecretariats of Agriculture and Finance all have a say, not only in the constitution, but also in the oper- ation of the cooperatives. The Undersecretariat of Agriculture nominates a regional agriculturist for each Governorate as a kind of technical super- visor and consultant for the cooperatives. But this man can also receive directions from the Governor (as nominated by the President) and the local delegates. At the same time the Regional Union of Cooperatives has a Manager of Cooperatives, nominated by the Board of the Regional Union of Cooperatives, upon approval of the Undersecretariat of Finance, who also can give directives to the cooperatives and exercise control over their finances. The shortcomings in the actual organization and management are obvious when visiting the cooperatives in the field. Expert studies are made and detailed plans are worked out in the Undersecretariat of Agricul- ture, but the implementation of all this work remains difficult. Delays in credits, supplies, spare parts are problems in the field, but the central planning moves on and does not seem to take delays, shortfalls and other handicaps into account. Directives can and are given by so many authorities that the execution of them must be confusing. The young directors of the cooperatives are school graduates who have little practical experience and find it difficult to provide competent leadership.  ANNEX 2 Page :R Yet there is a tremendous determination to make the program work, noticeable with all the people involved in these cooperatives. This,combined with the real potential for further development, justifies supporting the gradual transfer from traditional to modern agriculture. It is also clear that, with the present problems, the rapid expan- sion, proposed under the original program, will have to slow down to enable an adjustment of the existing situation and to develop the capable manpower know-how and experience on how to run further CPU's effectively. The key problem for this program is not financing, but organization and management.  ANNEX 3 COOPERATIVE FARM PROJECT The Office des Terres Domaniales (OTD) Purpose The Office des Terres Domaniales (OTD) is a public institution established by a Decree of September 30, 1961, with the purpose of continu- ing agricultural production and providing efficient management on most of the lands previously owned by foreign settlers. The aim of the Government by setting up OTD was to maintain as much as possible the high productivity prevailing on the ex-colon lands which constitute the most fertile agricultural soil in the country. In the long-run, however, the majority of the State lands in the northern region of Tunisia will gradually be attached to smallholder plots to form the nuclei of agricultural production units. The jurisdiction of OTD over these lands will thus be relinquished little by little over a period of several years, forecasted--according to the Tunisian development plan--to end around 1972. At present, OTD is still managing approximately 394,000 ha of agricultural land, 313,000 ha (or 78%) of which are located in Northern Tunisia. Organization and Management OTD is administered by a Board of Directors composed of 10 members under the chairmanship of the Undersecretary of State for Agri- culture. Members of the Board comprise four representatives of the Govern- ment, the President of BNA, the Director of the Office de Motoculture, a representative of the Neo-Destour, two trade-unionists and the Director of OTD. Responsibility for the management of OTD lies with the Director, the latter being appointed by the Government. Coordination of the work and centralization of the accounts is undertaken in the Head Office at Tunis. This office is equipped with a staff of administrative, technical and financial personnel which deals with problems related to land registration, acquisition of equipment and bookkeeping. The territory covered by OTD is divided into 16 regions, ten of which are located in Northern Tunisia (see Map 3). Each region is headed by a Regional Director with a personnel staff organized along the same lines as the one in the Head Office. Each region is in turn composed of a certain number of sectors depending on the number of hectares as well as on the number of farms included in the region. At the head of a sector stands a Sector Supervisor, who is responsible for all farm operations within his sector and who is assisted on the larger farms by a farm manager.  ANNEX 3 Page 2 Farm machinery owned by OTD is presently inadequate, but in order to increase its productivity, it is rotated between farms and during plow- ing, planting and harvesting season, used as long as 21 hours a day. For lower echelon maintenance work OTD runs a few workshops at the regional level and some supplementary shops taken over from the colons on the larger farms. Including management, staff at the regional offices, sector super- visors, technical agents and mechanics, OTD has a total personnel payroll of 415 people, 36 of which are foreign expatriates. Financial Situation Separate budgets are drawn up by the Regional Directors and sent to the Head Office where they are consolidated into the OTD budget and approved by the Board of Directors. The Secretary of State for the Plan and the National Economy gives a final approval to the proposed budget. Current expenditures are financed by OTD from its accumulated reserves or, occasionally, from special governmental loans. For capital investments OTD can, furthermore, turn toward BNA, foreign aid givers or suppliers' credit as sources of finance. As shown in the balance sheets attached below, the profits of OTD which in 1962 amounted to D 237,904, were as high as D 3,183,682 in 1965. The accounts of OTD are controlled by an independent auditor appointed by the Secretary of State for the Plan and the National Economy.  ANNEX 3 TABLE 1 COOPERATIVE FARM PROJECT OFFICE DES TERRES DOMANIALES Comparative Balance Sheets (in Dinars) Situations as at December 31. 1962 1963 1964 1965 ASSETS Fixed Assets Land 121,039 276,399 521,318 841,098 Buildings, Machinery, Vehicles 213,349 1,430,410 ,1i43,294 1,208,237 Total Fixed Assets 334,388 1,706,809 1,664,612 2,049,335 Investments - 5,000 8,000 312,280 Current Assets Stocks, receivables 1,127,634 1,716,869 2,743,344 5,823,209 Cash 272,388 1,424,609 859,065 461,305 Total Current Assets 1,400,022 3,141,478 3,602,409 6,284,514 Total Assets 1,734,410 4,853,287 5,275,021 8,646,129 LIABILITIES Capital and Reserves Capital 500,000 2,120,000 2,956,927 4,198,570 Amortization Reserve 400,000 600,000 217,700 217,700 Total Capital and Reserves 900,000 2,720,000 3,174,627 4,416,270 Long Term Loans 151,772 628,936 503,674 309,975 Current Liabilities 444,734 429,972 h03,614 736,202 Surplus 1962 237,904 237,904 - - 1963 836,475 - _ 1964 1,193,106 - 1965 3,183,682 Total Liabilities 1,734,410 4,853,287 5,275,021 8,646,129 -~ , _=  ANNEX 3 TABLE 2 COOPERATIVE FARM PROJECT OFFICE DES TERRES DOMANIALES Income Statements (in Dinars) Situations as at December 31. 1962 1963 1964 1965 A. REVENUES Rent 151,350 99,274 121,087 340, 052 Agricultural Produce Wheat and vegetables 842,362 1,134,751 1,698,349 2,247,563 Oil and olives 414,196 389,953 910,763 1,256,341 Dates and fruit 153,788 86,028 190,859 431,965 Other 132.646 559,077 399,840 889,251 Total Agricultural Produce 1,542,992 2,169,809 3,199,811 4,825,120 Other __174,153 287,688 243,769 139 288 Total Revenues 1,868,495 2,556,771 3,564,667 5,304,460 B. OPERATING EXPENSES Wages and salaries 700,578 677,592 1,271,470 2,306,810 Fuel 247,889 173,268 258,859 541,698 Spare parts 109,017 139,967 193,371 573,443 Fertilizer 134,311 143,673 227,457 625,847 Depreciation 448,005 410,555 519,380 472,610 Other 237,561 236,644 413,669 883,026 Total Operating Expenses 1,877,361 1,781,699 2,884,206 5,403,434 C. CHANGE IN STOCKS 246,769 61,403 512,645 3,282,656 D. OPERATING RESULTS (A+C-B) 237,904 836,475 1,193,106 3,183,682  ANNEX h COOPERATIVE FARM PROJECT The Office National de Motoculture et de Mise en Valeur Agricole Purpose The "Office National de Motoculture et de N4ise en Valeur Agricole" was created by a law dated July 21, 1959. It is a semi-public organization which functions primarily as an equipment rental agency, performing soil conservation and reclamation as well as cultivation work for the Government, the cooperative production units and the private sector. The Office also does its own repair work. This is performed in the field for preventive maintenance and minor repair works and in a central shop in Tunis for major repairs. In this context the organization has a responsi- bility for on-the-job training of mechanics and drivers. It has also served as a distributing agency for fertilizer, but the latter activity is on the decline. Finally, the Office is responsible for the management of 16 repair shops which are being equipped by a loan from U.S. AID. Eight of these shops will be specialized in maintenance and minor repairs; the other eight will perform maintenance only. Spread all over the agricultural regions of Tunisia (see Map 2 ), the shops will be used to repair the agricultural machinery of the Office, but they will also provide repair services on a commercial basis to the cooperative farms and to the private sector. Twelve of these shops are located in the project area and will be within a distance of not more than 30 km. from any cooperative unit, They wiU start operation in the beginning of 1967. It is the intention of the Government to eventually transfer the management of the shops from the Office to the Regional Unions of Cooperatives. Organization and Management The Office is managed by a Director and has a total staff of around 400, including some 25 officers. Although functioning within the Under- Secretariat of State for Agriculture, it is an autonomous organization which finances itself with the revenue from its operations. The management seems to be competent, and the work done so far seems satisfactory. In the frame- work of the U.S. AID loan, four Canadian engineers will be hired as technical assistants to set up the new repair shops. The Office will not have a monopoly for repairs, but will compete with private repair shops. An agreement is being worked out between the Office and the cooperatives concerning the tariffs or scale of charges. Financial Situation The attached summary income statements show that of all activities undertaken by the Office, the work performed for the Government in connection awith soil conservation and reclamation constitutes the greatest source of profits. Total profits of the organization have increased from D. 21,078 in 1963 to D. 49,508 in 1965.  ANNEX 4 TABLE 1 COOPERATIVE FARM PROJECT OFFICE NATIONAL DE MOTOCULTURE ET DE MISE EN VALEUR AGRICOLE Income Statements (in Dinars) 1963 1964 1965 A. REVENUES Cultivation work 40,277 41,806 73,922 Soil conservation 455,175 538,542 629,824 Fertilizer operations 170,118 524,724 240,595 Workshops 122,534 167,106 165,277 Adninistration 13,322 15,653 5,699 Total Revenues 801,426 1,287,831 1,115,317 B. EXPENDITURES Cultivation work Wages and salaries 11,534 9,706 10,138 Goods and services 31,184 40,884 49,903 Depreciation 8,792 2,426 4,980 Other 1,217 1,284 2,241 Total 52,727 54,300 67,262 Soil conservation Wages and salaries 45,742 50,575 51,073 Goods and services 102,322 138,596 146,249 Depreciation 124,176 138,849 220,367 Other 7,757 8,743 8,570 Total 279,997 336,763 426,259 Fertilizer operations Goods and services 161,000 485,884 233,456 Other 5,095 19,746 3,383 Total 166,095 5o5,630 236,839 Workshops Wages and salaries 40,482 54,622 61,088 Goods and services 69,807 85,422 97,630 Depreciation 22,762 17,753 11,872 Other 14,1814 8,229 7,960 Total 137,235 166,026 178,550 Administration Wages and salaries 44,312 50,529 50,426 Goods and services 16,626 15,471 18,173 Depreciation 62,315 92,163 11,036 Other 21,457 20,775 27,222 Total 11414710 178,9141 106.857 Total Expenditures 780,764 1,241,660 1,015,767 C. PROFITS (OR LOSSES) ON PREVIOUS YEARS 416 650 (-50,042) D. PROFITS (A + C - B) 21,078 46,821 49,508  ANNEX 5 COOPERATIVE FARM PROJECT Marketing and Prices At the time of the French, farmers marketing was no specific problem for the project area. The modern farms mostly produced staples like hard wheat, soft wheat and barley, some wine and olives, whereas the large area of traditional farming mostly produced for their own subsistence. Apart from the wine, the staple crops were largely consumed locally and whatever surplus remained available was assured of a market in France, mostly at specially favorable prices, sometimes duty-free, or at least at preferred tariffs. Wine was also sold at a special high price to France, where it was mostly used for mixing with other wines. In 1963, there already was some change in position because of the Common Market regulations which led to lower prices for hard wheat, but after the break with France in May 1964, the position changed completely as the automatic outlet at privileged prices in the French market vanished overnight. At the moment, this has only seriously affected wine, a product which is not included in the Project. The exportable surplus of other crops is sold in the French market or elsewhere at world market prices and some- times in barter trade with Eastern Europe. It should be realized, however, that hard wheat exports are at prices below the official support price of D. 42 per ton as paid by the Office des Cereales to the farmers. The following table shows the main agricultural exports of Tunisia over the last few years: Export of Main Agricultural Commodities 1960-1965 (quantity in 1,000 tons, unit value in dinars per ton) ----1960-- 1961--- ----1962--- ----1963--- ----1964--- ---1965--- Qt. U.V. Qt. U.V. Qt. U.V. Qt. U.V. Qt. U.V. Qt. U.V, Hard wheat 116.0 44 33.0 47 29.0 48 116.0 31 90.0 30 8.8 38 Wine 135.0 55 133.0 60 125.0 61 167.0 61 149.0 59 72.3 38.3 Olive oil 24.0 239 44.0 217 54.0 236 29.0 342 51.0 234 46.3 292 Citrus 38.0 42 42.0 44 38.0 47 31.0 58 44.0 50 46.0 56 Dates & other fruits 4.0 179 1.4 240 3.8 206 3.7 119 4.0 242 5.6 272 Prese-ved f!'!;ts & ugs. 7.8 130 7.5 132 10.7 111 12.5 146 18.0 141 17.2 133 COiRCE: Rapport sur le Budget Economique de l'Annee 1966, Secrebariat d',tat au Plan et a l'Economie Nationale, September 1965.  ANNEX 5 Page 2 I'iarketing of the CPU production does not seem to present any major problem. In five years time the total annual increase in cereal production from the already existing and newly created cooperatives will only amount to some 30,000 tons. Allowing for small increases in production in other parts of the country, total wheat production in Tunisia will only increase by about 2 percent a year. The Development Plan expects wheat production in 1968 to cover not only the increase in domestic consumption, but also to maintain exports of hard wheat and to eliminate imports of soft wheat, now amounting to about 150,000 tons. This seems too ambitious, and probably a part of wheat consumption will still have to be imported in the coming years. Similar arguments apply to the milk and meat production. The large quantities of cattle and dairy products which are presently imported (in 1964 for D. 0.7 million and D. 1.4 million respectively) could easily be produced domestically at an economical price. After ten years of operation the milk production from the already existing and newly envisaged cooperatives will only be equal to the amount of milk presently being imported in Tunisia. Wool production, on the other hand, will be sold on the local market for the traditional, cottage-type industry as wTell as for the recently Government established production of carpets. Problems might arise in the future with respect to the marketing of fruits and vegetables, which will have to be sold largely abroad, either fresh or in processed form. To find a profitable market for these products, sales will have to overcome various handicaps. Internal production and transportation costs, as well as processing costs, are rather high: produc- tion costs because of less than optimum yields and quality, transportation costs because internal transport appears to be too rmuch monopolized and pro- cessing costs because materials for processing are expensive and also because in various cases maximum efficiency in processing is not attained. The importance of fruits and vegetables in the total income resulting from the project is negligible. In some cases, however, a relatively small but unmarketable surplus of high value fruit and vegetable crops could jeopardize the profitability of a given coop. Particular attention should be given to this problem, especially by the recommended management unit to be set up in the Undersecretariat of State for Agriculture. With regard to olive oil no major marketing problems seem to exist in the short period. Export receipts will, however, be somewhat lower than before, as Tunisian oil export now has to face the EEC tariff of 17 percent in its main market -- France --, instead of the previously existing rate of 9 percent. Long-term prospects depend on the hitherto uncertain status of Tunisian relations to the Common Nsarket. Negotiations on some form of associa- tion have been started in July 1965, and are presently being continued. Italian opposition to concessions, in particular for fruits and vegetables, seem to be rather strong, and even if satisfactory solutions could be found for many problems it would take at least two years before Tunisia would have an easier access to, these important markets.  ANNEx 5 Page 3 Officials in Tunisia are aware of some of the marketing problems. Studies are being made and technical assistance has been asked on how to develop and expand exports for agricultural products. The Association of Tunisian Exporters is developing activities in the market expansion. Apart from these activities, trade political problems and some basic internal problems of productivity, cost and quality will have to be tackled. On the domestic scene the CPU's will use the existing "Cooperative Centrale des Agriculteurs de Tunisie" (CCAT) and the Regional Union of Cooperatives for the marketing of most of their products. CCAT is a servicing cooperative which was created several years ago with local agencies and storage facilities. It sells the cereal crop to the Office des Cereales, the Government agency which is the sole buyer of cereals. To maintain adequate quality and supply of dairy products to the city of Tunis, the Government has set up a dairycorporation (STIL) under the contro' of the BNAe This organization purchases milk from producers at agreed pricos "at the factory", collection and transport being the responsibility of the producers. While most of the meat of the country is slaughtered and sold at local village killing and selling centers, an arrangement similar to that for milk has been developed for the meat trade of Tunis. A Government established company (Ellouhoume) took over a very old privately-owned large city slaughter- house after independence. It operates this in collaboration with local butchers, buying stock of all types from producers, slaughtering, processing and selling the product to retail butchers. With regard to prices the high special prices received in the French market now are a thing of the past and in most cases sharp competitive world market prices will prevail. For hard wheat there is quite clearly a gap between the internal ex-farm price of D. 42/t. and the present world market f.o.b. price of around D. 30-38/t. The wine price will also drop almost certainly to about half the previous level and a recent plan document estimated that the average price per ton for 1966 will drop to D. 29 compared to about D. 60 in 1961-1964. The prices for other products are highly uncertain. In its calculation of revenues of the Plan for the Development of Agriculture certain price levels, in general close to the 1964 prices, have been assumed. As far as exports are concerned these figures are just a guess. Competition could force down prices; on the other hand, a favorable future association with the Common Market might support price levels.  ANNEX 6 COOPERATIVE FARM PROJECT The Banque Nationale Agricole (BNA) Background The Banque Nationale Agricole de Tunisie (BNA) was established on June 1, 1959, by the Government to centralize and coordinate in one insti- tution the agricultural credit activities scattered in several public and private organizations operating in Tunisia under the French protectorate. In its desire to eventually separate the subsidy and assistance type of intervention to agriculture from regular methods of financing, the Government has accepted that the new Agricultural Credit Bank should be operated by a businessmanlike management. The BNA was, therefore, given the legal status of a private corporation. Purposes The primary objective of the DNA is to promote agricultural develop- ment through the issue of short-, medium- and long-term loans, and more generally to carry on all the normal banking and financial operations, including commercial loans. It can also participate in industrial enter- prises by taking direct equity investments. Ownership The BNA capital is composed of nominative shares of D. 10 each, distributed as follows: Tunisian Government D. 200,000 Office des Cereales Legum- ineuses Alimentaires et Autres Produits Agricoles (Gov't. Marketing Board) D. 109,920 Private Tunisian share- holders (farmers) D. 90,080 Total D. 400,000 Organization and Mianagement The BNA organization consists of the Head Office and 24 agencies spread all over the country, with a density decreasing from North to South. Total personnel on Say 31, 1966, amounted to 387 as against 333 on October 30, 1965, and 318 in December 1964. The Agricultural Credit Department in the Head Office has a staff of over 50. The BNA is administered by a Board of Directors with extensive power. The Board is composed at present of eleven members, five of which are  ANNEX 6 Page 2 appointed by the Government and six by the General Assembly. Of the latter' group two represent private farmers and four represent a series of semi- public institutions which deal with agricultural matters. The members hold office for six years and can be re-elected, The Board of Directors appoints among its members a chairman who is also the chief executive (President Directeur General). Having the same president since its establishment the BNA has had continuity in management. It has gradually increased and improved the quality of its staff. The present system of accounting provides an effective control of expenditures. The BNA, however, is studying with the help of consultants the possibilities of modifying and mechanizing their present system in order to cope with the increased operations and to enable more up-to-date data to be readily available to management. Internal auditing is the responsibility of the controller. His department consists of five units and effects periodic visits to the agencies in the field. External auditing is presently carried out by two auditors appointed by the General Assembly. The BNA is also subject to inspection and control by the Government. A financial controller appointed by the Undersecretary of Finance attends all Board meetings. PowJers The General Assembly of the shareholders has general sovereign powers on the corporation. It appoints and discharges members of the Board and decides on all matters exceeding the Board's competence: approval of the balance sheet and the profit-and-loss account, merger or dissolution of the corporation, changes in capital structure, etc. Resources The lending resources of the BNA are made up by capital which is mostly government subscribed, deposits, one loan and funds administered by the BNA. 12. Its share capital of D. 400,000 is fully paid and its reserves and non-distributed profits as of December 1965 were respectively of D. 171l,008 and D. 38,820. Sight and short-term deposits, since 1960, have started at D. 2,800,000 and have been increasing year by year to reach D. 17,125,000 in 1963; they declined to D. 14,584,000 in December 1965. The share of semi- governmental agencies together with the time deposits of US AID account for about 60 percent of these deposits. The rates of interest paid to depositors are ruled by the Central Bank of Tunisia. For sight deposits the rate is maximum 1.25 percent to private depositors, and 1.75 percent to governmental and autonomous  ANNEX 6 Page 3 governmental agencies and cooperatives; for term deposits, the rate varies from 2 percent to 3.5 percent according to the period of notification (three to twelve months) and to the amount deposited (D. 1 to D. 5,000). There is no limit to the borrowing power of the Bank. Since its establishment, it has contracted only one loan from the Development Loan Fund (DLF) with the government's guarantee. The loan of-US $5,000,000 at 4 percent interest was granted on June 27, 1961. These resources are backed up by rediscount facilities at the Central Bank of Tunisia by a quota of up to D. 1.2 million. In specific cases these facilities may be used, with the Central Bank agreement, to finance a medium term loan up to 5 years, renewable every 3 months. Several funds have been entrusted to BNA by the Tunisian Government for specific end-use lending operations or in the framework of the law on agricultural development (May 1963). Some other funds are set up to cope with emergency situations or to assist farmers in traditional areas. A fund is to be set up within BNA for this present Project. Use of Resources Investment. BNA's own resources are used for short-term loans and partly for equity investment. At March 31, 1966, their participations amounted to D. 213,357. Short-term loans. The largest part of short-term credit comes from the current accounts and deposits representing about 70 percent (D. 11.5 million) of the total money available at short term. Out of the total amount of short-term loans granted in 1965 (D. 22.5 million) only D. 4.5 million or 20 percent went to agriculture, while about D. 18 million or 80 percent has been granted to commerce and industry. Medium- and long-term loans are normally financed on special funds with the Government's guarantee to cover risks of defaults. No long-term loans are granted on BNA funds. Besides the funds, the only medium-term loans granted by the BNA to agriculture are those which can be rediscounted with the Central Bank. Risk and Guarantee The BNA's risk is total for the short-term and limited according to fund specifications for medium-term loans. The guarantees requested are the same for the loans issued on both BNA's own resources and on Government funds. For short-term credit the guarantees are: Ci) Lien on crops; (ii) insurance certificate (fire and hail risks) in favour of BNA; (iii) delegation of payment for produce delivered to the marketing boards through which all products are practically channeled.  ANME 6 Page 4 For medium- and long-term loans the guarantees are: (i) lien on livestock and farm equipment; (ii) a mortgage on the land is also required. This last guarantee, however, is more nominal than real. There is a lot of work that has to be accomplished before all land is registered, identified and given a title of property; and even with a title deed, it would in the present Tunisian climate of opinion be difficult if not improbable for a Bank to sell the land. The real guarantee, therefore, depends on the profitability of the production units, and on how well these units are managed. These two elements become essential in assessing the risk. Lending Procedures The loan applications from farmers or cooperatives are received by the field agencies, which are supposed to check the statements and eventually visit the farmer or the cooperative. But provisions vary slightly between farmers and cooperatives. For farmers, comments may be requested by the local credit committees, before their application is submitted to the Head Office in Tunis, while for cooperatives an approval of the demand for credit is required by the Regional Manager of Cooperatives and the agricultural extension member of the govermor- ate. For loans under this Project, a recommendation has to be made by the Bureau of Control. In the agricultural credit section at the Head Office, the appraisal covers the following parts: for the farmers it examines the validity of the titles to the land, the securities he can offer and its credit-worthiness while for the cooperatives, the economics of the applicant's scheme including an evaluation of present and projected income are analysed with the assistance of delegates from the Undersecretariats of Agriculture and Finance. In order to ensure proper utilization of the short-term loans, cash payments are usually made in tlhree installments according to an agreed schedule, set up between the cooperatives, the Undersecretariat of Agri- culture and the BHIA. The medium and long-term loans, on the other hand, are whenever possible disbursed by direct payments to the suppliers. Lending Operations Details of the number and amount of agricultural and commercial loans made in the 1959-1965 period are given in the attached tables. In 1959-60 the loans granted to agricultural cooperatives and farmers were 13 percent of the total loans granted by BNA; those increased to 27 percent in 1965 due to the increasing share of credit to cooperatives. BNA financing to agriculture out of its own resources and deposits represented  ANNEX 6 Page 5 in 1965, 20 percent of the total loans granted and the balance, 7 percent, was financed through the special funds. Repayments of loans are satisfactory. Bank's Income For the short-term operations and the DLF loan, the bank derives its income from the margin between interest paid and interest received. For the various funds entrusted to its administration, the BNA receives a fixed renumeration of about 2 percent. Further, the BNA obtains dividends on its investments and various remunerations on operations of liquidation of former credit institutions. Although no precise income and expenditure statements are available on operations made on behalf of the government and on agricultural loans, an estimate indicated that with a 2 percent remuneration on the funds, expendi- tures to carry out these operations are covered. Financial Situation Confronted with the low interest rates in agriculture fixed by the law-i (1.5 - 6 percent), and on the other hand desiring to make both ends meet, the BNA expanded from the very beginning in the commercial credit field and restricted its agricultural credit to short-term operations which allow a 6 percent interest rate. In order to maintain its low interest rate policy to agriculture and also not to bring BNA in a permanent deficit, the Government has set up funds to be administered by the BNA - paying a commission of about 2 percent to cover administrative costs and some of the risks. Within this framework, the BNA has managed rather satisfactorily and has shown a profit and built up some reserves. Profits have been sufficient to enable the payment of a 5 percent dividend to the shareholders, and to build up reserves. These reserves may appear adequate for past ordinary operations, but should be increased if the bank develops its lending activities without any government guarantee. Con- densed balance sheets and profit-and-loss accounts as of December 31, 1960, to December 31, 1965, are given later.  COOPERATIVE FARM PROJECT BANQUE NATIONALE AGRICULE Comparative Balance Sheets (in Dinars) Situations as at December 31. Assets 1960 1961 1962 1963 1964 1965 Cash in hand - Central Bank Postal checks 410,210 222,688 681,191 808,261 1,353,998 470,583 Banks and correspondents 369,812 477,554 1,366,349 4,952,301 741,050 1,168,785 Government Development bonds 4,140,201 5,177,270 9,189,642 13,867,145 13,553,924 18,222,429 and Portfolio Current accounts 518,720 1,198,804 2,046,855 1,964,040 3,525,064 2,634,124 Guaranteed advances 170,744 411,954 81,780 462,529 369,090 394,011 Miscellaneous advances and 51,078 92,474 187,329 245,782 382,449 655,364 accounts receivable Investments 10,640 32,370 85,240 143,907 154,907 206,407 Suspense accounts and 266,269 229,948 1,086,773 1,938,928 1,729,122 1,685,416 miscellaneous Fixed assets 26,561 279,595 292,306 311,667 312,417 355,243 Guarantee Deposits - 757 851 1,065 1,095 1,124 Sub-total 5,964,235 8,123,414 15,018,316 24,695,625 22,123,116 25,793,486 Loans on Special Funds Special agricultural fund 981,142 1,229,814 1,437,454 1,516,319 1,423,308 1,305,044 Refinancing of debts 225,157 379,198 347,913 289,475 252,389 218,192 Medjerda board 35,565 26,613 22,359 19,839 - - DLF - - 148,394 505,429 1,755,336 1,652,950 Cereal campaign 1962/63 _ - 1,476,466 1,132,874 1,007,205 944,053 Farming Cooperatives - - 19,771 368,143 465,086 Cereal campaign 1963/64 - - 216,267 209,522 Special fund for agricultural - - - - - 1,231,204 deve'lopment - Sub-total 1,241,864 1,635,625 3,432,586 3,483,707 5,022,648 6,026,051 Total 7,206,099 9,759,039 18,450,902 28,179,332 27,145,764 31,819,537 Government credits to cover 4,688,721 4,754,411 4,580,491 4,370,079 4,015,060 3,825,279 Grand Total 11,894,820 14,513,450 23,031,393 32,549,411 31,160,824 35,644,816  Liabilit ies 1960 1961 1962 1963 1964 1965 Der-osits anr current ;ccrunts 2,721,909 3,477,254 7,948,536 14,810,502 11,455,255 11,414,233 Banks and corres9oncents 9 2,490 1,375,706 2,307,837 1,797,836 1,503,427 1,800,688 Bills demosited for collection 75,276 132,364 197,364 312,303 293,613 717,301 Sundry creditors 361,033 394,661 571,247 855,011 1,066,024 1,548,272 Dividends to be paid - 33,617 36,074 28,004 39,588 50,454 Bonds and term deposits 76,784 139,312 603,002 2,314,719 1,491,006 3,169,880 Suspense accounts and misc. 761,052 1,713,664 2,214,660 2,208,912 2,690,196 3,662,437 Payment received against current.commitments 261.743 443.738 592.079 729.205 814.294 837.828 Sub-total 5,250,277 7,710,316 14,470,799 23,056,492 19,353,403 23,201,093 Special Funds Government agricultural special fund 1,054,304 1,154,304 1,664,287 1,671,789 1,678,429 1,698,651 Government advance for debt refinancing 400,000 360,000 320,000 320,000 320,000 320,000 Special fund Medjerda board 39,423 30,668 26,414 26,414 - - Special fund for assistance to wine growing industry _ - 150,000 150,000 150,000 150,000 DLF _ - 75,590 247,239 2,229,224 2,382,396 Funds for cereal loans 1962/63 - - 1,161,000 1,161,000 1,161,000 1,161,000 Srecial fund for promoting servicing cooperatives - - 850,000 700,000 660,000 Funds for cereal loans 1963/64 - - - 218,380 213,742 Special funds for develo?ment of agriculture - - - - 500.000 1.037.828 Sub-total 1,493,727 1,544,972 3,397,291 4,426,442 6,957,033 7,623,617 Owned Resources Capital 400,000 400,000 400,000 400,000 400,000 400,000 Reserves - 67,232 147,274 268,998 366,989 471,008 Social fund - - - 35,000 85,000 Profits carried forward - 36,519 35,538 27,400 33,339 38,820 Profits (before distribution) 62.095 - - Sub-total 462,095 503,751 582,812 696,398 835,328 994,828 Government credit accounts to collect 4,688.721 4.754.411 4.580.491 4,370.079 4o015o060 3.825.279 Grand total 11,894,820 14,513,450 23,031,393 32,549,411 31,160,824 35,644,817 m =2: (D \  COOPERATIVE FA.RM PROJECT BANEUZ NATIONALE AGRICOLE Comoarative Statement of Income and Exoenditures 1960 1961 1962 1963 1964 1965 A. Income Intere-.t and commission received and other income 354,690 423,967 480,843 588,199 652,950 698,381 B. Exrenditures Interest and discount oaid; Administration ex',enditures 277,989 341,421 380,005 453,725 493,132 517,992 -- DeDreciation 14.6o5 - - _ Total 292,594 341,421 380,005 453,725 493,132 517,992 C. Net Income (A-B) 62,o96 82,546 100,838 134,474 159,818 180,389 D. Balance carried forward - 28,102 35,631 35,539 27,400 33,339 E. Disposable Income (C + D) 62,096 110,648 136,469 170,013 187,218 213,728 F. Distribution of Disnosable Income Dividend 20,000 20,000 20,000 20,000 20,000 20,000 __ Legal Reserve 3,105 4,128 5,041 6,724 7,990 9,019 -- Extraordinary Reserve 10,000 50,000 75,000 115,000 90,000 95,000 Social Fund - - - 35,000 50