Tunisia - Highway Project

RESTRICTED FILE t .py Report No. P-942 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA FOR A HIGHWAY PROJECT May 17, 1971   INTERNATIONAL BANK FOR RECONSTRIUCTION AND DEVELOPMENT RliPORT ANI) RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSEI) LOAN TO THE REPUBLIC OF TUNISIA FOR A HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $24 million to the Repuhlij of Tunisia for a highway project. PART I - HISTORICAL 2. The proposed project arises from preinvestment studies initiated and carried out with the assistance of the Bank Group. On the recommendation of a 1966 Bank economic mission a comprehensive survey of Tunisia's transport sector was undertaken in 1967-68 with financial assistance of the UNDP and the Bank as executing agency. On the basis of this study, the Bank identi- fied in December 1968 a high priority highway investment project consisting of the reconstruction of selected roads and bridges and the improvement of highway maintenance throughout the country. Since a considerable amount of engineering studies was required for this project, the Bank made an Engineer- ing Loan (S2-TUN) of $850,000 in 1969 to help finance its preparation. 3. The Bank Group's previous lending for transport in Tunisia consists of twqo loans for ports, one of $7.0 in 1964 and another of $8.5 million in l968, and a loan and a credit of together $17 million in 1968 for a railway project. Following the above-mentioned Engineering Loan, the proposed project wouldl be the Bank Group's first major operation in highways. 4. Negotiations for the proposed loan were held in Washington from April 15 to 23, 1971. The Tunisian delegation was headed by Mr. Hf. Souissi, Director of the Highway Department, Ministry of Public Worlks and Ihousing, and included Messrs. M. Sefaoui, Director of the Transportation Department, Ministry of Economic Affairs, T. Kalai, Assistant Director of Taxation, Ministry of Finance, Z. Mestiri from the Ministry of Planning and A. Badra from the Tunisian Embassy in Washington. 5. Following is a summary statement of loans and credits to Tunisia as of April 30, 1971:  -2- Loan or Amount (US$ Millionj Credit Number Year Borrower Purpose Bank IDA Undisbursed 29 1962 Republic of Tunisia Education 4.9 - 380 1964 Republic of Tunisia Port Development 7.0 - 449 1966 Societe Nationale Development d'Investissement Finance Co. 4.7 94 1966 Republic of Tunisia Education 13.0 3.9 484 1967 Republic of Tunisia Cooperative Farms 6.1 1.6 99 1967 Republic of Tunisia Cooperative Farms 3.1 .8 512 1967 Societe Nationale Development d'Investissement Finance Co. 10.0 1.8 573 1968 Office des Ports Port Development Nationaux Tunisiens 8.5 5.8 581 1969 SONFDE Water Supply 15.0 13.8 606 1969 SNCFT Railways 8.5 8.4 150 1969 Republic of Tunisia Railways 8.5 5.1 S2 1969 Republic of Tunisia Highway Engineering .8 .1 648 1969 Societe Nationale Development d'Investiseement Finance Co. 10.0 7.6 209 1970 Republic of Tunisia Water Supply 10.5 10.5 724 1971 STEC Gas Pipeline 7.5 7.5 238 1971 Republic of Tunisia Population 4.8* 4.8 Total (less cancellations) 78.1 44.8 of which has been repaid to Bank and others 2.4 Total now outstanding 75.7 Amount sold 1.6 of which has been repaid .6 1.0 Total now held by Bank and IDA 74.7 44.8 _ Total undisbursed 46.6 25.1 71.7 * Not yet effective 6. Implementation of the Second Education Project (Credit No. 94) has been satisfactory, but disbursements have somewhat lagged behind schedule. A recent mission has ascertained that an unused balance of $3.2 million will be available under this credit, resulting mainly from savings on construction and equipment expenditures. As an interim measure, the closing date (December 31, 1970) has now been postponed by seven months to permit the submission and  - 3 - processing of pending withdrawal requests and to examine the Government re- quest for utilization of the unused balance. I will in due course present to the Executive Directors recommendations regarding the utilization of these ftnds and a further postponement of the closing date. 7. A detailed account of the problems encountered in implementing the Cooperative Farm Project (Loan No. 484 and Credit No. 99) was contained in my memorandum to the Executive Directors of November 5, 1970 (R70-213). The Executive Directors approved amendments to the original Loan and Credit Agreements on November 17, 1970. These amendments became effective on March 24, 1971. and disbursements have been resumed. 8. As a result of flood damages in the fall of 1969 and the necessitv of giving priority to the repair of these damages, the Railroad Project (Loan No. 606 and Credit No. 150) is about one year behind schedule. The railroad company (SNCFT) has made efforts to reduce this delay, and sub- stantial. procurement contracts have been recently signed or are about to be signed. A matter of concern is the weak financial, position of SNCFT, due principally to loss of traffic because of the flood damages, delays in repairing these fully and non-payment of freight charges by the railroad company's largest client, a phosphate mining company. However, the Covern- ment is now implementing recovery programs for SNCFT and the phosphate company designed to restore their financial position. 9. Initial delays in the preparation of bidding documents and in the letting of contracts account for slow disbursements under the Second Port Project (Loan No. 573). A number of important contracts have now been awarded and a normal rate of disbursement can be expected hencefortlh. Disbursements under the First Water Supply Project (Loan No. 581) are now reaching a satisfactory rate. Implementation of the three Loans to Societe Nationale d'Investissement (Nos. 449, 512 and 648) is proceeding satisfacto- rily. Loan No. 724 to Societe Tunisienne de l'Electricite et du Gaz becanme effective on May 12, 1971. 10. In 1962, TFl invested $3.5 million ($2 million as a loan and $1.5 million as equity investment) in NPK-Engrais, a phosphate fertilizer company. In 1966, IFC macde an investment of D 300,000 (about $571,500) in the share cnpital of Societe Nationale d'Investissement (SMI), which) in 1970 was increased h)v $630,000 allowing IFC to maintain its 20 percent participation when SNI doubled its share capital.. In 1969, IFC made an investment of $9.9 million ($8 million as a loan and $1.9 million in share capital) in COFITOUR, a tourism development and holding company. 11. The Bank and IDA are presently considering, projects in fisheries and tourism infrastructure as well as a fourth loan to Societe Nationale d'Investissement. A report on a proposed loan and credit for an agricul- tural credit project will be presented to the Executive Directors in due course.  - 4 - PART II_- DESCRIPTION OF THE PROPOSED LOAN Borrower: Republic of Tunisia Amount: $24 million equivalent in various currencies PurEpse: To help finance improvement of 275 km. of roads, reconstruction of 51 bridges and culverts, re- surfacing and rehabilitation of 1,920 km. of roads and consulting services, as well as refunding of the $850,000 Engineering (project preparation) Loan. Amortization: In 30 years including a 5-year period of grace, through semi-annual installments beginning June 15, 1976 and ending December 15, 2000. Interest Ratd 7-1/4 percent per annum Commitment Charge : 3/4 of one percent per annum Estimated Economic Return on the Project: Above 16 percent PART III - THi PROJECT 12. An appraisal report entitled "Appraisal of a Highway Project, Tunisia", (PTR-75a) is attached. 13. Tunisia's road traffic has increased considerably over the past few years as a result of urban development, increased agricultural product- ion and a rapidly expanding tourism industry. The extent to which Tunisia's economic development is dependent on an efficient highway network was clear- ly demonstrated bv the heavy flood of late 1969 when both production and exports were considerably reduced because transport facilities had been bad- ly damaged. Reliable farm-to-market roads and an adequate primary road net- work which connects centers of production, consumption and export are re- quired to support and promote agricultural development. Similarly, develop- ment of tourism, the country's most important foreign exchange earner, relies to a large extent on the road system. 14. The highway network is fairly extensive and generally adequate in coverage and length. However, its design characteristics are insuffi- cient to cope with the growing traffic. Furthermore, an important backlog of periodic maintenance has accumulated as a result of inadequate budgetary allocations for this purpose. Finally, Tunisia's transport sector is cliaracterized by inadequate arrangements for overall coordination and form- ulation of policies, severe restrictions particularly on road transport an(1 an inappropriate taxation system.  -.5- 13. The proposed project consists of: (a) improvement of about 275 of primary and secondary roads serving the southern hinterland of Tunis and the coastal region of Hammamet, one of Tunisia's most important tourist areas; (b) reconstruction of 51 bridges and culverts, mainly in northern and central Tunisia; (c) resurfacing and rehabilitation of about 1,920 km. of paved roads throughout the country; and (d) consulting services for pre- investment studies for further road improvements and for assistance in con- struction supervision, implementation of the highway maintenance program, improvement of transport coordination and a study of road transport regula- tions and road user charges. 16. The construction and maintenance program would be executed by the Highway Department of the Ministry of Public Works. A special unit will be created within that Department, assisted by consultants, for con- struction programming and supervision. As regards the maintenance program, agreement was reached during negotiations on a reorganization and strength- ening of the Department's highway maintenance services, also to be assisted by consultants. The provision of adequate budgetary allocations for the expanded highway maintenance program was also agreed upon. 17. An important objective of the project is the improvement of coordination and policy formulation in the transport sector. To this ef- fect wider responsibilities, particularly with regard to investment pro- gramming, will be conferred on the Transportation Department of the Ministry of Economic Affairs. Moreover, agreement was reached during negotiations on the modification of current transport regulations which often are obsolete and restrict efficiency, and on a further review by 1974 of the then exist- ing regulation of the road transport industry. Finally, a study will be made of the present road user taxation system with a view to simplifying and rationalizing this system. Consultants will assist the government in implementing this work. 18. The estimated total cost of the project is $41.7 million. The proposed loan of $24 million would cover its foreign exchange component and refinance the $850,000 Engineering Loan under which the project was prepared. The project will yield substantial savings in highway user costs. Its internal economic return is estimated to be above 16 percent; the highway improvement program as a whole would have an aggregate economic return of about 21 percent, the bridge reconstruction program 16 percent and the resurfacing and rehabilitation program about 20 percent. 19. Construction works will be executed by contractors selected through international competitive bidding among prequalified firms in accordance with Bank/IDA guidelines. Two partly government-owned construct- ion companies are expected to participate in prequalification and bidding. During loan negotiations, agreement was reached on arrangements which will ensure that these companies will participate under the same conditions as any other construction company.  -6- PART IV - LEGAL INSTRUMENTS AND AUTHORITY 20. The draft Loan Agreement between the Bank and the Republic of Tunisia, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank and the text of a Resolution approving the proposed Loan are being distributed to the Executive Directors separately. IThe Loan Agreement substantially conforms to the pattern of agreements used for highway projects. Its effectiveness is dependent upon the Borrower entering into a contract satisfactory to the Bank with consult- ants for the purpose of assisting the special unit to be established within the Highway Department. (Section 8.01) PART V - THE ECONOMY 21. The latest economic report on Tunisia dated May 4, 1970 (EMA-22a) was distributed to the Executive Directors on May 5, 1970, and an updating memorandum was issued on March 3, 1971. An economic mission which spent four weeks in Tunisia in March, is now preparing its report. A basic data sheet is annexed. 22. Tunisia's economic development during 1970 has, on the whole, been less favorable than had been forecast. GDP at constant prices, which at the beginning of 1970 was expected to rise by 7.2 percent, grew by not more than 3.5 percent. Agricultural production stagnated as a good grain harvest was offset by poor olive and wine crops. Output in most other sectors also fell short of expectations partly because of disruptions caused by the disastrous floods in September/October 1969. Domestic demand, on the other hand, continued to rise faster than real output. Private and public consump- tion increased by 9 percent. The combination of low production and buoyant demand put pressure on prices and led to a 7 percent increase in imports. As exports grew only slowly, the current account deficit in the balance of payments rose by $15 million to an estimated $110 million. But the deficit was more than covered by increased foreign aid, and reserves continued to rise moderately. 23. Tunisia's economic development over the last few years had been affected by unfavorable weather conditions, severe marketing cotlstraints especially for exports, and a number of organizational difficulties which resulted in slow production growth, inadequate public savings, increasing inflationary pressures, and a high external debt burden. These factors have contributed to recent political changes and led to a serious search for a more successful set of economic policies. These efforts culminated in a new economic strategy, presented by the Prime Minister last November, which aims at accelerating the growth of production and exports by reducing direct government interference in economic decisions, encouraging private initiative and entrepreneurship, and by relying more extensively on market forces as guide for investment and production. More specifically, the  - 7 - Covernment has stated its intention to give priority to increasing agri- cultural output, and to the promotion of labor intensive small and medium scale industrial enterprises. Productivity and export orientation will be the principal criteria for investment allocation. Workcers' emigration will be encouraged as an outlet for surplus labor, while efforts to control the increase in population will be intensified. 24. IHowever, mulch remains to be done to carry out the structural re- forms envisazed by the Covernment. Institutional changes will have to be mad(e and the responsibilities of government agencies, banks, and enterprises need to he newly defined in order to establish a more efficient economic system. Adequate export incentives will have to be given andl more liberal exchange regulations are required. In additioni, there is urgent needl for a reappraisal of sectoral policies. The Fourth Plan, which will sooni be prepared, could play a leading role in the implementation of the necessatry econonmic reforms. 25. Tunisia's external debt burden is high. In 1970, about 22 per- cent of gross foreign exchange earnings had to be spent on servicing external debt obligations, most of it for public and publicly-guaranteed debt. Tle structure of external debt, however, has been improved in recent vears by reducing the amount of new short and medium-term borrowing. Never- tleless, payments on present debts will remain large in coming years, and( while there is scope for some additional borrowing on conventional terms, Ttnisia will continue to depend to a large extent on the availability of aid on concessional terms. PART VI - COMIPLIANCE WIThI ARTICLES OF ACREETTENT 26. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECONNENI)ATION 27. I recommend( that the Executive Directors approve the proposed loan. Robert S. McNamara President May 17, 1971   ANINEX TTUNISIA BASIC DATA Area 164,000 square kilometers 63,380 square miles Population (mid-1970 estimate) 5.1 million Annuial Rate of Growth (1965-1970) 2.8 percenX rensity 31.0 per km Gross Domestic Product (1970) 1/ P 565.1 million Per Capita. (1970) 1/ US$ 211 Annual Rate of Growth (19(65-1970) 2/ 0.6 percent per capita Industrial Origin of GDP (1966 Prices) Annual Growth Percent Sharcs 1965-1970(%) 21 1970 Agriculture -3.9 l.9 Miining, !Water and Power 18.6 8.9 Manuifacturing 5.1 15.3 Construction and Public works 2.0 8.y Transport and Communications 1.3 8.3 Services 2.7 25.5 Government 'Wages and Salaries 7.4 18.4 GDP at Factor Cost 3.4 100.0 Expenditure on GDP (Current Prices) ]'rivate Consumption 3.9 63.8 PLblic Consurmption 10.6 19.9 Gross Investment 1.2 22.2 lExports on Goods and NFi 8 .7 292.- 7 less: Imports of Goods and NFS 2.2 -28.6 Expenditure on GDP 5-9 100.0 Gross Domestic Savings 9.8 16.3 Resource Gap as % of Investment (1970) 26.8 Money, Credit and Prices Annual Growth End-1970 1965-19700() (D. million) MIoney 3)upply 9.0 198.8 Time and Saving Deposits 11.7 56.0 Bank Credit to Government, Net 2.9 91.1 Bank Credit to non-Government Sectors 12.5 271.6 Consumer Price Index (1962 = 100) 2.9 134.7 Wholesale Price Index (1962 = 100) 3.1 148.o   General Government Operations Annual Growth 1970 1965-1970 (%) (D. million) Current Revenue 9.8 196.1 Current Expenditure 11.2 173.8 Current Surplus 22.3 Gross Fixed Capital Formation -0.7 45.7 Other Capital Expenditure 6.8 24.9 Overall Deficit 2.2 48.3 Domestic Financing, Net -22.0 3.0 External Financing, Net 6.6 45.3 Balance of Payments Exports of Goods and Services 10.2 171.4 Imports of Goods and Services 4.2 229.4 Current Account Deficit -58.o Net Public Capital 50.8 Net Private Capital 1X.2 Change in Reserves -7.0 Net Foreign Assets (End-1970) -o.6 External Debt 1970 Public Debt outstanding at Yearts End ($ million) 760.0 Debt Service Ratio (%) 22 IMF Position (US$ million) December 31, 1970 Quota 35.0 Drawings outstanding 19.5 Bank/IDA Position (US$ million) Bank loans (less cancellations) 70.1 Repayments 2.3 Total loans outstanding 67.8 IDA credits (less cancellations) Ox.o Total Bank/IDA 107.8 of which disbursed 44. undisbursed 63.4 Rate of exchange 1 US$ = 0.525 Dinar (D) 2/ At current factor cost and at the official rate of exchange. 2./ 1970 compared to 3-year averages centered on 1965 to remove the effect of exceptionally good weather on agriculture in 1965. May 17, 1971