Tunisia - SOGITEX Textile Rehabilitation Project

Document of y - Sn. , The World Bank + i FOR OFFICIAL USE ONLY Report No. 3369-TUN TUNISIA SOGITEX TEXTILE REHABILITATION PROJECT STAFF APPRAISAL REPORT May 7, 1981 Industrial Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Except where indicated otherwise, all figures are quoted in Tunisian Dinars (TD) and U.S. Dollars (US$). The following rate of exchange has been used: US$1 = TD O.4 TD 1 = US$2.5 WEIGHTS AND MEASURES 1 41illigram (mg) = 0.001 Grams = 0.015 Grains 1 Gram 0.0353 Ounces 1 Kilogram (kg) = 2.2046 Pounds 1 Metric Ton (mt) 1,000 Kilograms = 2,204.6 Pounds 1 Centimeter (cm) = 0.39 Inches 1 Meter (m) 2 = 1.0936 Yards = 39.37 Inches 1 Square Meter (m ) = 1.2 Square Yards = 10.76 Square Feet 1 Hectare (ha) = 10,000 Square Meters = 2.47 Acres 1 Kilometer (km) = 0.621 Miles Nm (Meter Yarn Count) = Measure of Yarn Fineness Indicating the Number of 1000-meter lengths per Kilogram of Weight PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AT = Advanced Technology BDET = Banque de Developpement Economique de Tunisie BOD = Biological Oxygen Demand CIF = Cost, Insurance, Freight CNEI = Centre National d-Etudes Industrielles Co2 = Carbon Dioxide CT = Conventional Technology Decibel = Unit Measure of Noise Level EEC = European Economic Community EOEs = Export-oriented Enterprises FBI = France, Benelux and Italy FENATEX = Federation of Tunisian Textile Manufacturers FOB = Free on Board GDP = Gross Domestic Product Holding = SOGITEX Holding Company hpy = Hours per Year kVA = Kilo Volt Amperes 15 = Linear Meters m = Cubic Meters MFA = Multi-Fiber Agreement O-E = Open-end p.a. = Per annum PCT = Pre-conventional Technology SITER = Societe des Industries Textiles Reunies SITEX = Societe Industrielle des Textiles SOGITEX Holding = Societe Generale des Industries Textiles SOMOTEX = Societe Monastirienne des Textiles Swift = Swift Textiles S.A. of Zug, Switzerland as represented by Swift S.A. of Paris, France TA = Technical Assistance TISSMOK = Societe de Tissage de Moknine tpy = Tons Per Year FISCAL YEAR Government: of Tunisia: January 1 - December 31 The SOGITEX Group: January 1 - December 31  TUNISIA FOR OFFICIAL USE ONLY APPRAISAL OF SOGITEX TEXTILE REHABILITAT1ON PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION ................... 1 II. THE MANUFACTURING SECTOR AND THE TEXTILE INDUSTRY .... ........ 2 A. Manufacturing Sector ................................... 2 B. The Textile Industry ................................... 3 III. PROJECT SPONSOR: SOCIETE INDUSTRIELLE DES TEXTILES, SITEX ... 5 A. Organization and Management ............................. 5 B. Role of SOGITEX Holding ................................. 6 C. Production Facilities ................................... 6 D. Current Modernization Program ........................... 9 E. Past Financial Performance and Anticipated Future Without the Project ................. .. .................. 10 F. SITER, SOMOTEX and TISSMOK Operations and Financial Results ................................................. 12 1. Operations .......................................... 12 2. Financial Results ................................... 14 IV. THE TEXTILE MARKET AND MARKETING ............................. 15 A. The Export Market for Tunisian Textiles .... ............. 15 B. Export Marketing of Textiles ............................ 16 C. The Domestic Market for Tunisian'Textiles .... ........... 23 1. Historical Development .............................. 23 2. Forecast Supply and Demand of Textiles in Tunisia ... 24 D. Marketing of Textiles in Tunisia . . 25 V. THE PROJECT .................................................. 26 A. Choice of Project ....................................... 26 B. Project Scope ........................................... 27 C. Project Technology ..................................... 30 D. Raw Materials and Utilities ............................. 31 E. Ecological Considerations and Occupational Hazards ...... 31 F. Project Implementation, Staffing and Training .... ....... 32 VI. CAPITAL COST, FINANCING PLAN AND PROCUREMENT .... ............ 35 A. Capital Costs ........................................... 35 B. Financing Plan ................... 37 C. Procurement and Disbursement ........................... 39 This report was prepared by V. Bates, H. Oteifa, and A. Sandig of the Industrial Projects Department. | This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - TABLE OF CONTENTS (Continued) Page No. VII. FINANCIAL ANALYSIS ........................................... 40 A. General ......................... ........................ 40 B. Production ........ .............. ....................... 40 C. Sales Volume and Revenue ............. .. ................ 41 D. Production Costs ................... .................... 42 E. Financial Projections ................ .. ................. 43 F. Financial Rate of Return, Sensitivity Analysis and Risks. 45 1. Operating Risks and SITEX Sensitivity Analysis ...... 46 2. Other Risks for SITEX ............................... 48 3. Other Risks not Related to SITEX .................... 49 G. Other Financial Covenants .............. .. ............... 49 H. Reporting and Auditing Requirements ..................... 50 VIII. ECONOMIC ANALYSIS ........................................... 50 A. Adjusted Costs and Benefits for Economic Analysis ....... 50 B. Economic Rate of Return ................................. 51 C. Other Benefits ......................................... 51 IX. AGREEMENTS .......................... ......................... 52 ANNEXES 2 Tunisia: Net Imports, Production and Consumption of Yarn Imports, Production, Export and Consumption of Woven Textile Fabrics Volume and Value of Textile Output 3-1 Organizational Structure - SITEX 3-2 SOGITEX: Audited Income Statements and Balance Sheets - 1976-78 4-1 Import, Export and Apparent Consumption of Denim in Western Europe 4-2 Current MFA Quotas for Tunisia 4-3 Tunisia: Historical Consumption of Textile Products 4-4 Tunisia: Supply and Demand for Textile Products 4-5 Tunisia: New Investment for Manufacturing Textile Products 5-1 Draft Terms-of-Reference for Technical Assistance -- SITEX 5-2 Draft Terms-of-Reference for Technical Assistance -- The Holding, SITER, SOMOTEX, and TISSMOK 6 Projected Disbursement Schedule for Proposed Bank Loan 7-1 Assumptions Used in SITEX Financial Projections 7-2 SITEX Production and Pretax Sales "With the Project" 7-3 Fixed Assets and Depreciation - SITEX "With the Project" 7-4 SITEX Income Statement "With the Project" 7-5 SITEX Working Capital "With the Project" 7-6 SITEX Cash Flow "With the Project" 7-7 SITEX Balance Sheet "With the Project" 7-8 SITEX Financial Rate of Return Calculations  - iii - ANNEXES 8-1 Assumptions Used in Economic Projections 8-2 SITEX Economic Rate of Return Calculation MAP IBRD Tunisia: Project Location (IBRD Map No. 15613) DOCUMENTS CONTAINED IN THE PROJECT FILE 1. Study on the Reorganization of SOGITEX in Tunisia, April 1980 - by the P-E Consulting Group (U.K.). 2. Study on The Reorganization of SOGITEX in Tunisia, Technical Supplement, April 1980 - by the P-E Consulting Group (U.K.). 3. SOGITEX Textile Rehabilitation Project - Production Program, Equipment List and Price Estimates, December 1980. 4. Text of International Advertisement for Registration of Suppliers - Published mid-February 1981. 5. Terms of Reference for Consultancy Services for SITEX and for SITER, SOMOTEX and SOGITEX Holding. 6. Contract between Swift Textiles, S.A. of Zug, Switzerland and SITEX, September 1973. 7. SOGITEX Textile Rehabilitation Project - Wages and Salaries Grid for Monthly-paid Staff and Workforce, January 1981. 8. SOGITEX Textile Rehabilitation Project - SOGITEX Group Past Performance and Financial Restructuring, March 1981. 9. SOGITEX Textile Rehabilitation Project - US Cotton Denim Fabric Exports-- Major Markets, February 1981. 10. SOGITEX Textile Rehabilitation Project - Capital Cost Estimates, January 1981. 11. SITEX - Financial Projections without the Project.   I. INTRODUCTTON 1.01 The Government of Tunisia (the Government) has requested the Bank to help finance a project which involves: (a) rehabilitation and expansion of the spinning and weaving facilities of Societe Industrielle des Textiles (SITEX) located at Sousse and Ksar Hellal, 120 and 145 km south-east of Tunis, the capital city (Map IBRD No. 15613); (b) minor investment in debottlenecking and essential spares for Societe des Industries Textiles Reunies (SITER), Societe Monastirienne des Textiles (SOMOTEX) and Societe de Tissage de Moknine (TISS-MOK); and (c) technical assistance for SITEX, SITER, SOMOTEX and TISSMOK as well as the holding company. SITEX, SITER, SOMOTEX, TISSMOK and another operating company, SOPIC, are fully owned by the holding company, Societe Generale des Industries Textiles (SOGITEX Holding), and together form the only public sector company in Tunisia engaged in the manufacturing of textiles. 1.02 The proposed Project includes both physical and Technical Assist- ance components. In SITEX, it will expand and improve the quality of denim 1/ production for export, by: (a) reconditioning the spinning and winding equipment and upgrading the service facilities at the spinning plant in Sousse; (b) expanding and upgrading the existing weaving and denim finishing facilities at the weaving plant in Ksar Hellal; and (c) upgrading the company's financial management and accounting systems to meet the require- ments of modern textile operations. Upon Project completion in 1983, total annual yarn and finisVed denim production will reach 13,250 tons and 26 mil- lion square meters (m ), respectively. Compared with 1980 this represents an increase of about 50%. 1.03 In SITER, SOMOTEX and TISSMOK, the proposed physical investment will be aimed at balancing the existing production facilities as well as urgent overhauling of certain equipment to maintain productivity. The proposed technical assistance program will: (a) upgrade SITER's, SOMOTEX's, TISSMOK