Tunisia - Agricultural sector survey (Vol. 2 of 2) : Volume 2

Report No. 3876-TUN Tunisia Agricultural Sector Survey (In Two Volumes) Volume 11 September 29, 1982 Europe, Middle East, North Africa Projects Department Agriculture 11 FOR OFFICIAL USE ONLY Document of the Wbrld Bank 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 (As of January 1, 1982) Currency Unit = Tunisian Dinar (D) D 0.40 = US$1 D 1= US$2.5 D 1,000 = US$2,500 US$1,000 = D 400 US$1,000,000 = D 400,000 WEIGHTS AND MEASURES Metric System British/US System 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miles (mi) I square kilometer (km2) = 0.386 square mile (sq mil) I hectare (ha) = 2.47 acres 1 litre (1) = 0.2200 imperial gallons ( (I gal) 0.2642 US gallons (gal) 1 ton (t) = 1,000 kg/2,205 pounds (lb) 1 cubic meter (m3) = 35.315 cu ft REPUBLIC OF TUNISIA Fiscal Year January 1 - December 31  FOR OFFICIAL USE ONLY ABBREVIATIONS APH IN Small Farmer-Supervised Credit Project API - Agence de Promotion Industrielle BNT - Banque Nationale de Tunisie (National Bank of Tunisia) CIMNYT - Centre International pour l'Amelioration du MaYs et du Ble (International Center for Maize and Wheat Improvement) CNKA - Centre National d'Etudes Agricoles CUKI - Centre National d'Etudes Industrielles CRDA - Comissariat Regional au Dgveloppement Agricole (Regional Agricultural Development Commission) DPC - Direction des Ponts et Chaussees (Highways and Bridges Department) FAD - Food and Agricultural Organization FOBDA - Fonds Spdcial de Ddveloppement Agricole (Special Fund for Agricultural Development) GIU - Groupement Interprofessionnel des Arbres Fruitiers GIL - Groupeuent Interprofessionnel des Ldgumes GID a Groupesent Interprofessionnel des Dates IRAT - Institut National Agronomique de Tunisie (National Agricultural Institute of Tunisia) INRAT - Institut National de la Recherche Agronomique de Tunisie (National Agricultural Research Institute of Tunisia) OTD - Office des Terres Domaniales (Office of State Lands) PPAR - Project Performance Audit Report SIDA - Swedish International Development Aid S0ON1 A Societe Nationale de Motoculture (National Company Providing Tractor and Harvesting Services) UCP - Coop4rative de Production (Production Cooperative) UNDP - United Nations Development Program USAID - Agence Internationale de Developpement des US (United States Agency for International Development) This documnot Ms a restrictd diatributon and may be used by recipients only in the performance of their odfical dutios. Its contents may not otherwise be disclosd without World Bank authorization.   Volume II; Annexes 1. Supply and Demand Projections 2.A. Project Brief for the Development of Marketing and Processing Activity 2.B. Price Reform 3. Development of Farm Input Supply: Program Brief and Terms of Reference for Preparation 4. Agricultural Credit: Analysis and Recommendations 5. Agricultural Research and Extension: Program Brief 6. Livestock Development Programs and Project Briefs 7. Soil Conservation and Forestry Program and Project Brief 8. The Technical Assistance Project and Terms of Reference of Project Preparation Team for Sixth Plan 9. Project Brief for National Irrigation Management, Operation and Maintenance Project 10. Project Brief for the Tunisia Northwest Rural Development Project, Phase II I1. Project Brief for the Southern Tunisia Range Management Project  I  ANNEX 1 TUNISIA AGRICULTURAL SECTOR SURVEY SUPPLY AND DEMAND PROJECTIONS A. Production 1. Production projections are based on various techniques depending upon the commodity. 2. Production Constrained. Most agricultural commodities are production constrained in Tunisia. More rapid growth of production would either reduce imports, be consumed at lower prices, or would be exported. In such cases, production projections are based on extrapolation of the historical trend. The method is to estimate annual growth using linear regression analysis. The projection extrapolates this growth into the future. The production of the following commodities was projected in this way: - Vegetables; artichokes, tomatoes, potatoes, pepper, other vegetables; pulses; - Fruit: dates, citrus, table grapes, apricots, almonds, cereals; - Olives, olive oil, wine; - Fish, milk, other dairy products, beef, sheep, goat meat; - Wood. 3. Demand Constrained. A different production projection was made for commodities for which production will be constrained by domestic demand. The major example is melons whose production and consumption grew at 10.4% p.a. from 1965-1981. Consumption was projected not as a continuation of this trend, but as a function of the elasticity of demand for fruit with respect to per capita income (.7), multiplied by projected per capita income growth of 4% p.a. plus the expected rate of population growth (2.3% p.a.), or 5.1% p.a. Production growth above this rate is not tenable in the medium term. It was assumed therefore that production growth declined to the expected growth of consumption. Commodities treated in this fashion include: melons, eggs, poultry meat. Consumption 4. Consumption projections are made firstly using the traditional method of projection as a function of an income elasticity, projected per capita income growth, and projected population growth. This method was used in the case of melons, pulses, apricots, almonds, other fruit, cereals, vegetable oil, eggs, milk, other dairy imports, beef, poultry meat, wine. Production Constrained Consumption 5. In many cases, consumption is constrained by production possibilities. Use of the traditional methodology would give consumption growth greater than production. If imports are possible, this is acceptable. Often import is not undertaken due to cost, perishability, etc., and consumption is simply constrained by availability. This is true of many fruits and vegetables. Consumption is projected in these cases as equal to  - 2 - ANNEX 1 Page 2 production. This was done for citrus, other vegetables, artichokes, tomatoes, potatoes, pepper, dates, table grapes, olive oil, fish, sheep, goat meat, poultry meat, wood. Exports 6. Exports were difficult to Project since the quantities are typically small, and future exports depend on foreign markets which have not been adequately surveyed by the Tunisian Government. Historical trends were extrapolated for: tomatoes, potatoes, vegetable conserves, citrus, olive oil, fish. In most cases the projections are for declining exports. 7. For several commodities judged to have good export potential, exports were projected as the surplus of production over consumption (artichokes, dates, apricots, almonds). 8. For several, judgments were made on the basis of new production or technology starting up (early vegetables based on greenhouse production). 9. Finally, some exports were judged to have little potential given the inability of production to satisfy domestic consumption. No export growth was assumed in these cases (pulses, wine). Imports 10. Imports are a residual which permit consumption to be satisfied: consumption = production + imports -- exports. Future import growth rates are then calculated as growth from 1980 import levels. For vegetable oil, consumption is almost entirely imported, so that imports are projected to equal the increase in consumption. For certain imports, projections are made as the extrapolation of past trends in imports (fish).  -3- ANNEX 1 TUNISIA AGRICULTURAL SECTOR SURVEY Supply and Demand Projections ('000 tons) Actual Projected Growth Rates 1980 1986 1990 Historical Projected (% p.a.) PULSES (Broad Beans, Chick Peas, Peas) Produced 81.0 106.0 143.0 7.7 7.7 Imported 1.4 4.4 9.4 9.7 21.0 - Exported 7.4 7.4 7.4 13.3 0.0 Consumption 75.0 109.0 141.0 7.5 6.5 CEREALS: Bread Wheat Produced 129.0 123.0 99.0 -5.4 -5.4 Imported 400.0 422.0 545.0 10.4 3.1 Consumption 529.0 545.0 644.0 4.2 4.2 Barley Produced 296.0 337.0 360.0 1.7 1.7 Imported 64.0 11.0 58.0 0.0 0.0 Consumption 360.0 348.0 418.0 4.7 4.7 Durum Wheat Produced 740.0 886.0 958.0 2.0 2.0 Imported 273.0 21.0 169.0 0.0 0.0 Consumption 1,013.0 907.0 1,127.0 5.6 5.6 Maize Imports 166.0 206.0 239.0 3.7 3.7 Total Cereals Production 1,165.0 1,346.0 1,417.0 1.1 1.1 Imports 903.0 660.0 1,011.0 5.6 Consumption 2,068.0 2,006.0 2,428.0 5.0 5.0 SUGAR: Sugar Beet Production (1979) 52.0 63.0 71.0 3.2 3.2 Sugar Production, Converted (1979) 5.4 6.5 7.4 3.2 3.2 Imports 177.0 268.2 322.3 3.2 3.2 - Exports 36.7 36.7 36.7 24.5 0.0 Consumption 174.9 238.0 293.0 5.3 5.3 WOOD Production ('000 m3) 130.0 95.0 77.0 -5.4 -5.4 Imports 58.0 93.0 111.0 0.0 6.7 Consumption 188.0 188.0 188.0 -15.5 0.0 ESPARTO GRASS Production and Consumption 100.0 103.0 113.0 2.4 2.4 TOBACCO Production 4.1 Imports 3.3 Consumption 7.4  -4- ANNEX 1 TUNISIA AGRICULTURL4 SECTOR SURVEY Supply and Demand Projections ('000 tons) Projected Growth Rates 1980 1986 1900 Historical Projected VEGETABLES Artichokes Produced 13.0 18.6 19.1 .7 .7 - Exported 0.3 4.2 3.3 0.0 27.0 Domestic Consumption 12.7 14.4 15.4 2.2 2.2 Tomatoes Produced 280.0 527.0 684.0 6.8 6.8 - Exported 0.1 7.0 14.0 0.0 - Consumption 279.9 520.0 670.0 6.8 6.6 Potatoes Produced 120.0 176.0 210.0 4.5 4.5, + Imported 24.8 20.6 31.4 9.8 2.4 - Exported 2.9 2.6 2.4 -1.9 -1.9 Consumption 141.9 194.0 239.0 5.4 5.4 Pepper Produced 115.0 144.0 161.0 2.8 2.8 Consunption 115.0 144.0 161.0 2.8 2.8 Other Produced 315.0 359.0 409.0 3.3 3.3 V7egetables -Exported 0.0 3.5 8.8 0.0 - Consumption 315.0 355.5 400.2 3.4 2.5 Vegetable Conserves Exported 5.0 5.7 4.2 -7.4 -7.4 TOTAL Produced 843.0 1,225.0 1,483.0 4.5 4.5 - Exported 8.3 23.5 32.7 -5.1 15.0 + Imported 24.8 21.0 31.4 9.8 2.3 Consumption 859.5 1,222.5 1,481.8 4.7 5.6 FRUIT Melon Produced 280.0 377.0 460.0 10.4 5.1 Consumption 280.0 377.0 460.0 10.4 5.1 Citrus Produced 160.0 225.0 279.0 5.7 5.7 - Export 24.0 25.0 22.0 -2.6 -2.6 Consumption 136.0 200.0 257.0 7.4 6.5 Dates Produced 53.0 58.0 63.0 1.9 1.9 - Export 10.0 13.0 15.0 5.7 4.2 Consumption 43.0 45.0 48.0 1.6 1.6  -5- ANNEX 1 TUNISIA AGRICULTURAL SECTOR SURVEY Supply and Demand ('000 torn Growth Rate Actual Projected Historical Projected 1980 1986 1990 (% p.a.) Table Grapes Production 30.0 33.0 37.0 2.2 2.2 Consumption. 30.0 33.0 37.0 2.2 2.2 Apricots Production 26.0 31.0 38.0 3.8 3.8 _ Exports 2.9 5.3 6.8 1.4 8.9 Consumption 23.1 25.7 31.2 4.9 4.9 Almonds Production 37.0 63.0 98.0 11.4 11.4 Exports 2.0 16.0 40.0 .4 35.0 Consumption 35.0 47.0 58.0 15.8 5.1 Other Fruit Production 115.1 152.0 190.0 5.8 5.8 Imports 6.7 8.0 10.0 10.3 10.3 Consumption 121.8 160.0 200.0 5.7 5.2 Total Fruit Production 701 939 1,165 7.4 5.3 Imports 7 8 10 10.3 4.1 - Fresh Exports 46 66 90 2.0 8.0 - Fruit Conserve Exports 7 7 6 - 2.2 -2.2 Consumption 665 881 1,079 2.8 5.0 Olive Oil Production 85 111 100 - 2.6 -2.6 - Exports 70 83 85 .6 .6 Consumption 15 28 15 0.0 0.0 Vegetable Oil Imports and Consumption 27 37 45 - 6.2 5.1 Wine Grapes Production 94 71 59 - 4.7 -4.7 Export 76 47 29 0.0 -10.1 Consumption 18 24 30 0.0 5.1 (4) Included in consumption figure above  -6- ANNEX 1 TUNISIA AGRICULTURAL SECTOR SURVEY Supply and Demand Proiections (t000 tons) Growth Rate Actual Projected Historical Projected 1980 1986 1990 (% p.a.) Fish Production 60.2 90 118 7.0 7.0 Imports .5 1 1 3.3 3.3 Exports 6.8 17 32 16.8 16.8 Consumption 53.9 74 87 5.7 4.9 Eggs Production (10,000's) 726 1,030 1,300 12.6 6.0 Equals Consumption Milk Production 245 289 330 3.3 3.3 Imports (fresh 335 361 515 13.5 4.4 Consumption 580 650 845 8.3 8.3 Other Production 7 8 9 3.1 3.1 Dairy Imports 9 12 20 18.3 8.3 Consumption 16 20 29 10.0 10.0 Beef Production 31.0 41 45 2.1 2.1 Imports 5.6 5 8 11.1 3.6 Consumption 36.6 46 53 3.4 3.4 Sheep Production 31.2 34 34 0.2 0.2 Imports 1.1 0 1 -1.0 0.0 Consumption 32.3 34 35 0.2 0.2 Goat Production, Consumption 6.5 s.2 7.2 8.0 8.0 Poultry ?roduction, Consumption 41.5 36.0 61.0 14.5 14.5  -7- ANNEX 2 A TUNISIA THE AGRICULTURAL COMMODITY MARKETING AND PROCESSING DEVELOPMENT PROGRAM Initiating Project Brief Sector : Agriculture Project Code : 5TUNAASBl Appraisal July 1984 Project Officer K. Cleaver Date of This Brief : March 1982 Date of Last Brief Program Officer Lead Advisor Sectoral Context (See main text of Tunisia Agricultural Sector Survey) I. CONTEXT OF PROGRAM, AND AGRO-INDUSTRIAL, MARKETING SUBSECTOR A. Introduction 1.01 This Program was identified by the joint Tunisian/World Bank Agricultural Sector burvey issued in February 1982. The sector survey identified a large number of long-term agricultural development programs and projects, all of which require additional preparation. A technical assistance Project was proposed to finance this preparation. Substantial agreement was reached with the Ministry of Agriculture on the Programs and Projects to be prepared, and on their order of priority. The agricultural commodity marketing and processing development Program was identified as the fourth priority project in *Tunisian agriculture. The first three priority areas were (a) establishment of a Planning Task Force to prepare projects and programs for the Sixth Development Plan, (b) a National Research and Extension Program, and (c) several farm input supply projects. Numerous additional projects and programs were identified, of lower priority. The Program is too large for the Bank to finance all foreign exchange costs. This Brief does not concentrate on the part of the Program which the Bank would finance. It defines the entire Program, within which a Bank Project as well as other Projects would fit. Para. 5.02 identifies the highest priority components which might be assisted by the Bank. Once the Program is agreed with Government, a follow-up Bank mission would agree with Government on the part to be assisted by the Bank. The next Project Brief should concentrate on the Project so agreed.  8 - ANNEX 2 A Page 2 Summary of Subsector Constraints 1.02 The ,vL':is-e marketing and processing activity in agriculture is to efficiently satisf;y demand for agricultural products, to encourage growth of agricultural production, and to contribute to overall economic growth by contributing value added. Agricultural marketing enterprises include initial assemblers of goods in rural areas, transporters, wholesalers, wholesale marketplaces, retailers, and often various brokers between these institutions. In the Western European and North American countries the functions described above have been performed with increasing efficiency and effectiveness by enterprises which pursue profit. This pursuit consists of the identification and satisfaction (and often the shaping) of consumer desires. Those marketing enterprises that survived and grew did this with increasing efficiency. Those which were not efficient stopped functionning. Some of these efficiencies came with specialization and cost-cutting. Others came with backward and forward integration in which a single enterprise would expand into assembly, transport, wholesale, and often packaging or processing. 1.03 After independence, Tunisia established state monopolies for marketing cereals, olives, and wine grapes. Public marketing enterprises were also created to purchase and wholesale meat and pulses. Several Government development authorities ("Offices") participated in the collection of milk, fruit and vegetables. These products are sold by the "Offices" on the urban wholesale markets to private retailers, and to processing enterprises. The wholesale markets and the processing enterprises are regulated by Government. The purpose of Government participation was to (a) fill a void created by the departure of the French who controlled much of the agricultural marketing, and (b) accelerate the progression of the marketing and processing sectors to an organization similar to that described briefly in para. 1.02 for developed countries. The only difference was in public rather than private ownership. Government recognized no advantage in private ownership, and the private sector was not judged to have the ability to make the required investments. 1.04 Uncontrolled private markets are tolerated for all crops except industrial crops. Industrial crops have no market other than the Government-supervised processing industries. Trade on the uncontrolled private market predominates for pulses, meat, and milk. The private sector controls exports of most fruits, dates, and vegetables. Public marketing enterprises and Government-supervised enterprises predominate in the trade of cereals, wine grapes, olives and industrial crops. Most fruits and vegetables sold domestically transit through urban wholesale markets which are supervised by Government, but in which private commission agents do the trading. 1.05 Agro-industry is the final outlet for most agricultural products in Tunisia, including most cereals (for flour), olives (olive oil), wine grapes, industrial crops (sugar and tobacco), and some vegetables (for canning), fruit (for canning), milk and meat. Agro-industry did not grow in real terms from 1960 to 1970. It grew at 7.4% p.a. from 1970 to 1980. The manufacturing sector as a whole grew more rapidly (6.4% p.a. during 1962-69, 9.7% p.a. during 1970-78).  ANNEX 2 A - 9 - Page 3 1.06 Performance of the public sector marketing and processing enterprises, and the supervised private enterprises has been adequate for the period in which the objective was to provide a simple outlet for farm produce, to allow basic processing, and to transport what was available to consumers. Fine tunning of the marketing structure was unnecessary. The public enterprises responsible for exporting wine and olive oil were able to maintain exports previously controlled by French enterprises, though in declining amounts. An indicator of this relative success is the rapid increase in food consumption in Tunisia and the relatively high calorie intake. This would not have been possible had the marketing and processing sectors not been able to respond to growing demand. Calorie intake in Algeria and Morocco are shown for comparison. Calorie Intake Per Capita Per Day 1966/68 1974/76 1977/79 Tunisia 2,235 2,614 2,698 Algeria 1,826 2,188 2,363 Morocco 2,309 2,617 2,640 Source: FAO Production Yearbook, 1980. 1.07 The importance of responsive marketing and processing enterprises is increasing as Tunisia moves into middle income. Farmers will respond to changing consumer demand and prices. Much agricultural growth will come from this response. The enterprises through which farmers market their produce must be able to recognize evolving demand, and effectively communicate this information to farmers. These enterprises must change procurement practices in response to changes in demand, and efficiently transport and handle a changing product mix on its way to consumers. All of the public agricultural marketing and processing enterprises in the Maghreb, including Tunisia's, are slow to respond to market signals and to introduce cost-cutting efficiencies or consumer-satisfying innovations. Because they are subsidized by Government, they are not subject to serious financial discipline. This has rendered them into bureaucracies, with high costs, large staffs, and heavy investments in infrastructure. Where they have become monopolies (cereals, wine grapes, olive and vegetable oils), their existence keeps private and cooperative enterprise from participating, except on a small scale and illegally. 1.08 Administrative Regulations. For the numerous private agricultural processing enterprises, the major issues are administrative regulations and controls. Administrative regulations involve primarily the process of granting official approval of industrial projects by the "Agence de Promotion Industrielle," API. This system of licensing is designed to avoid excess capacity in certain subsectors. However, in so doing, it restricts competition, and permits many processors fortunate though to obtain a license to act as a monopsonistic buyer of agricultural produce. Because of lack of competititon, such buyers are able to set artificially low prices for agricultural produce, or where procurement prices are fixed, are able to offer poor service to farmers.  ANNFX Pagf 4 - 10 - 1.09 In the case of private agricultural marketing enterprises constraints include the regulations restricting the size of trucks which entrepreneurs can purchase, and prohibition of the devetlopment of fruit and vegetable wholesale enterprises. These constraints have kept private agricultural wholesale enterprises from developing in Tunisia. 1.10 There is little Government effort to facilitate access to credit by small-scale agro-industry and marketing enterprises. Banks finance virtually no such investments. Medium-scale agro-industry as well as other largely medium-scale industries are eligible for credit from Government's FOPRODI credit program and a World Bank-financed small-scale industry project. However, relatively few agro-industry projects have benefitted and even fewer have been small-scale (having fewer than 10 employees). Agro-industry outside of the cities has been almost entirely ignored. The tax exemptions of the investment code (No. 1974-74) applicaLble to agro-industry exclude firms with less than 10 workers, exclude marketing enterprises, and are lower for firms creating between 10 and 20 jobs than for firms creating more than 20 jobs. Most private agro-industrial firms are in the smaller category. Responsibility for the various regulations and policies affecting small-scale agro-industry is held by several Government institutions, excluding the Ministry of Agriculture. 1.11 Relatively few agro-industrial projects are identified and prepared by the public institutions established for this task (the "Centre National d'Etudes Industrielles," CNEI) and API. Little technical assistance is provided to small-scale agro-industry and none for agricultural marketing. Production and mat.. ting techniques of those enterprises that exist are inefficient. The enwloyer's association "Union Tunisienne de l'Industrie, du Commerce et de l'Art.sanat," UTICA, provides private industry with some information and guidance, but an insignificant number of enterprises have benefitted from this activity. Private agricultural marketing enterprises have not been assisted by any institution. The several public sector marketing enterprises, on the other hand, benefit from large public investments and credit. None of the institutions concerned with assisting small and medium industry including agro-industry are concerned with agriculture, nor with the issues raised in the following paragraphs. 1.12 Price policy has tended to discriminate against agricultural producers and agro-industry. An overvalued exchange rate cheapens imported food, both processed and unprocessed. In the absence of import duties, local processors and many farmers cannot compete with imports. Both raw and processed foods are also often subject to price control in Tunisia, causing prices to be artificially low. This reduces the incentive to invest in agriculture and agro-industry. Lack of interest by the private sector is often the justification then used by Government to establish public enterprises which produce, market, and/or process certain foodstuffs. These enterprises are invariably subsidized to permit financial solvency. Private entrepreneurs would be interested in this activity if the official sales price was not artificially low and the exchange rate not overvalued. Cereals, vegetable oils, wine grapes, olives, sugar, beef, milk production and processing all suffer to some extent from these problems.  11 - ANNEX 2 A Page 5 1.13 Other marketing and processing problems are commodity specific. These will be cited below. More detailed discussion is found in the appendixes. Supply and demand projections are mode for each commodity in Annex 1 of the Sector Survey. These are used to estimate investment requirements in marketing and processing facilities. II. MARKETING AND PROCESSING CONSTRAINTS FOR EACH COMMODITY A. Cereals 2.01 The creation of the "Office des Cdrdales" as the Government-owned cereal marketing monopoly was intended to permit simultaneous achievement of (a) improved cereal marketing from the countryside and from foreign exporters to industrial flour mills; (b) an imposition of Government cereal price policy which was to assure producers an incentive price and consumers a subsidized price, and (c) Government stocking of cereals for emergencies. The "Office des Cereales" has a legal monopoly on cereal purchases and imports, although a private uncontrolled market handles two-thirds of local production. Since the "Office" buys cereal at a higher price than it sells, it is compensated by Tunisia's "Caisse de Compensation" (US$60 million equivalent in 1979). 2.02 The official producer price of cereal is too low to encourage production and marketing through the "Office." Net effective protection of cereal production varies from about -30% for barley to -65% for bread wheat (Annex 2B). The average Tunisian farm of 14.4 ha, producing only bread wheat, would earn about US$575 p.a. in 1980, compared to expenditure by the average Tunisian household equal to US$2,480. About 80% of Tunisian farms are smaller than 14.4 ha, hence earning less. In a poor year the farmer may earn half this amount. Had world prices been paid for wheat, and for farm inputs, the average farmer would earn about 4 times this amount making his income comparable to the average Tunisian households. 2.03 The major problems facing the "Office des Cfrdales" are the following: (a) The "Office des Cereales" is relatively inefficient and responds poorly to changing market conditions. It has no incentive to be efficient or responsive since its operating losses are subsidized by Government. It is interesting that despite similar subsidies, flour mills are efficient, having an average incremental capital output ratio of 1.7 compared to 3.6 for Tunisian manufacturing as a whole (1972-81)/1. The reason for the efficiency of flour mills despite subsidies is that the subsidy is based on unit cost of production in Government-owned flour mills. If a particular mill is more efficient, its profit increases. Efficiency is therefore encouraged. /1 An incremental capital-output ratio is measured as investment during a given period divided by incremental output (value added) over the same period, or over a period during which the investment is expected to have an impact. A ratio of 1.7 suggests that US$1.70 of investment generated a US$1.00 increase in output per annum by the end of the period. The ratio of 3.6 suggests twice as much investment was required per US dollar of incremental output for the average manufacturing enterprise. Note that the incremental capital-output ratio for industry calculated in Chapter IV of 4.8 related to the period 1965 to 1979. The ratio has thus fallen over time indicating increasing efficiency (as well as some measurement error).  ANNEX 2 A - 12 - Page 6 (b) The "Office" appears to preefer to import cereals rather than to collect locally produced cereal, since importing is easier to arrange, is cheaper, there is no need to deal with many small producers, and the cereal is imported directly to the urban consumption areas thus avoiding internal transport bottlenecks. (c) Private intermediaries are not used by the "Office" to collect, store, or transport cereals. Since the procurement price paid fDr cereals is the same all year, farmers who stock their own cereal for later sale to the "Office" are not remunerated for the service of stocking. Flour mills which purchase cereal during the harvest season when the "Office's" storage capacity is used to its maximum do not receive a price discount from the "Office" even though the purchase reduces the "Office's" costs. The result is that the entire storage function is pushed onto the "Office." (d) As a result of the above, combined with growth in production and consumption, the "Office" faces infrastructure bottlenecks including the following: (i) cereal collection points and equipment at collection centers are unable to handle the volume of cereal offered. Collection is slow and inefficient, discouraging farmer delivery; (ii) the "Office" has inadequate storage capacity to maintain pipeline stocks, to stabilize supply and demand throughout the year, to provide carry-over stocks to ease inter-annual supply and demand fluctuations, and to act as an emergency buffer. Its total storage capacity is presently 163,000 tons at collection centers, 244,000 tons in intermediary and consumer areas. In 1974 this was adequate for the "Office" to collect 280,000 tons in Tunisia and to import 820,000 tons. By 1986 collections are expected to total 76u,00 tons and imports tons (see Annex I tor projections). The "Office's" capacity will not be adequate. (e) There are inadequate transport facilities to permit rapid turn-around of cereals at the "Office's" collection and storage points. 2.04 As a result of these problems, the "Office des Cereales" collects about 300,000 tons of domestically produced cereal per year regardless of the level of production. B. Fruit and Vegetables 2.05 Fruit and vegetables contribute about 44% of agricultural value added in Tunisia. With the exception of olives and wine grapes, they are traded on private markets. Olives and wine grapes are traded by Government marketing monopolies ("Offices"). They are therefore considered separately. Fruit and vegetable production has grown rapidly (4.5% p.a. for vegetables during 1970-80, and 6.9% p.a. for fruits during the same period) to meet the rapid growth in consumption. Imports are insignificant. The private market is relatively effective at communicating consumer demand to producers, and markets are cleared through daily variations in price. Although the fruit and vegetable marketing chain is operated by private entrepreneurs, the major urban wholesale markets are supervised by Government. About 50% of production passes through these markets. For dates, Government goes further in fixing prices. Government also fixes minimum prices for tomatoes sold to processing enterprises. The major issue of fruit and vegetable marketing is the need to  ANNEX 2 A Page 7 - 13.- increase efficiency in order to meet increasingly diversified tastes of consumers. The second issue is the need to expand marketing and processing facilities to accommodate the increase in output and in demand projected (Annex 1). A third issue involves measures required to exploit the potential for fruit and vegetable exports. 2.06 There are no specialized wholesalers in the fruit and vegetable marketing system, except for exporters. Efficient fruit and vegetable intermediation requires investment in transport, storage, and marketing facilities characteristically provided by wholesalers. This has not occurred in Tunisia because, by law, fruit and vegetables sold in the cities must be sold through urban wholesale markets. On these markets, farmers and their intermediaries must sell through commission agents or cooperatives, who receive a commission. About two-thirds is sold through commission agents, one-third through cooperatives. The wholesale market does not permit commission agents to become wholesalers. The system prohibits increased efficiency through integration of the assembling, transporting, trading and wholesaling functions. Commission agents do not purchase and sell products as do wholesale enterprises. Wholesale enterprises in other countries take risks, and have an incentive to cut costs in order to increase profit. Better service by a wholesale enterprise permits it to expand and increase income. No such incentive exists for the commission agent. The commission agent will not increase his efficiency because (a) he is constrained by the physical space of the wholesale market (14,000 m2 in total), (b) he has few costs to cut, and (c) he cannot compete on price since his commission is fixed. The commission agents have organized themselves into a union which protects their interests and regulates competitive behavior such as commission-cutting. Wholesalers would break the monopoly of the commission agents and are therefore resisted. The municipality has not introduced change because of (a) the political power of those who benefit from the present system, and (b) the municipality collects a tax equal to 7% of the value of each transaction on the wholesale market. If wholesale enterprises developed trading outside the physical confines of the wholesale market, collection of the tax would become administratively difficult. 2.07 Large marketing enterprises might have developed for the purchase of fruits and vegetables from farmers and from small rural markets for transport to wholesale markets. However, such development is constrained by the regulation prohibiting intermediaries from purchasing vehicles larger than three tons. All intermediaries use small "camionettes" leaving no room for introduction of transport efficiencies. The prohibition on wholesaling also prevents growth of such enterprises as does lack of credit and technical assistance. 2.08 Except for fruit and vegetable exports, wine, and olives, there is no standard grading system. Each seller and buyer personally j.udges the quality of produce traded. The absence of standard grades makes large-scale marketing difficult since each buyer and seller must personally supervise each transaction. Standard grades and measures would permit larger-scale more efficient trading. 2.09 Fruit and vegetable processing and preserving facilities will need to be developed to satisfy growing consumer demand for such products during the entire year, rather than only in the harvest period. This industry has grown at 8.5% p.a. from 1972-81, although it stagnated during 1977-79. A major contraint is Government fixing of processor output price at relatively low levels. Processors cannot increase the price at which they procure from  ANNEX 2 A -14 - Page 8 farmers beyond a point which would cause them to lose money, since the higher procurement price cannot be passed on to consumers. If the wholesale market price is higher than the processors procurement price, farmers will sell on the wholesale market, leaving processors with underutilized capacity. In recent years only about 40% of the capacity of this industry was utilized as a result of this situation. This is unfortunate since the industry is a very efficient user of investment having an investment to incremental output ratSio of .9. This is the lowest (most efficient) in agro-industry, and probably for manufacturing as a whole. 2.10 Exports of fruit and vegetables are stagnating, with the recent exception of dates. Exports are handled by private exporters. Major constraints are: (a) Domestic prices for vegetables, and sometimes fruit are generally higher than export prices (in dinars) due mostly to the overvalued exchange rate. Production thus goes to the domestic market. (b) There is no regular, predictable supply of vegetables for export, discouraging foreign importers from ordering Tunisian vegetables. (c) The limited supply of Tunisian fruit and vegetables makes it difficult to diversify foreign markets. Most goes to France to which transport facilities are well established. (d) Competition with other fruit and vegetable-exporting countries for an increasingly regulated European market is keen, and Tunisia has not maintained its share. (e) Tunisian packaging materials are expensive and of poor quality. They are provided by a local manufacturer benefitting from import protection and hence havin,g no incentive to improve quality or reduce cost. (f) Tunisian vegetable growers have not diversified production to those vegetables having greatest demand in Europe. Farmers concentrate on products consumed in Tunisia (hot pepper, tomatoes, melons). In addition, producers have not mastered greenhouse production techniques required for the earlier production (February) which is in highest demand in Europe. (g) Although Tunisian export potatoes are highly regarded in Europe, the Tunisian-Government is beginning to restrict export to satisfy domestic demand. C. Olives 2.10 Tunisia is one of the most important olive oil-exporting countries in the world. Olive trees cover about 30% of Tunisia's arable land, and olive oil provides about 10% of agricultural value added. Nearly 29% of Tunisian farms produce olives as a principal commodity. Production is stagnating as a result of production problems and low prices. Effective protection for olive oil production is about -10%. Olive oil is consumed by producers (16%) or marketed through the Government marketing monopoly (the "Office National d'Huile," ONH): 83%. ONH exports olive oil or sells it to local processors for further refining. A small amount (1%) is sold by producers on the black market.  ANNEX 2 A Page 9 - 15 - 2.12 Issues of olive marketing are as follows: (a) ONH has the function of assisting producers and processors, and of marketing olive oil. However, ONH has undertaken no promotion of olive oil exports, no market studies, and has not succeeded in diversifying markets. Most Tunisian olive oil (70%) goes to Italy, 11% to France and 11% to Libya. The entry of Tunisia's principal olive oil competitors into the European common market (Spain, Greece, Portugal) will cause Tunisia to lose this market. Since ONH has a monopoly, private marketing enterprises which might prove more dynamic in discovering new export markets have not been permitted to develop. It is alarming that stocks of unsold olive oil had reached 38% of ONH collections in 1980/81. Exports peaked at 124,000 tons in 1971/72, falling to 83,000 tons in 1978/79. (b) Equipment of the 1,100 olive oil processing plants is largely inefficient, causing low quality oil and low extraction of oil from olives. The industry (combined with vegetable oil refining) has an exceptionally high incremental capital-output ratio (9.9) suggesting inefficiency, and artificially low output prices. Credit is difficult to mobilize for these small-scale processors, and the technical assistance provided by ONH serves only a small percentage. (c) Subsidies on consumption of imported vegetable oil have reduced the domestic market for olive oil (see Annex 3). However, projections show considerable potential for olive oil production (Annex 1). Production of about 180,000 tons of olive oil is projected for 1986. This will result from recent olive tree plantations which begin to produce a technical assistance program to assist producers to increase productivity; and an improvement of oil extraction rates by modernization of equipment. A change in domestic price policy and export promotion will be required if this production is to be marketed. D. Wine 2.13 Production of wine has declined rapidly as land has been taken out of its production (Annex 1). About 75% of wine is exported. Domestic bulk wholesaling, export, and import of wine are controlled by the "Office du Vin." Ten domestic bottling enterprises purchase wine in bulk from the "Office du Vin," bottle and distribute it domestically to retailers and wholesalers. Major marketing issues include poor quality bottling material and European import restrictions. Import restrictions include the fixing by the EEC of a reference price for wine imported into the community which is high enough to prevent Tunisian wine from competing with European wine hence reducing Tunisian exports. In addition, subsidies are available to European exporters of wine, causing the world price of wine to be lower than otherwise (see Annex 1). The "Office" has not shown dynamism in diversifying export markets.  ANNEX 2 A - 16 - Page 10 E. Sugar Beet 2.14 Nearly all sugar beet is produced by farmers in irrigated areas on contract with the processing enterprise ("Societe Tunisienne de Sucre," STS). STS provides contracting farmers with inputs on credit. It purchases all production at an agreed price and assures transport of output to the STS factory at Beja. This contract farming is a useful model for other agricultural processors. Refined sugar in Tunisia comes from processed sugar beet (4%), the refining by STS of imported unrefined sugar (40%), and refined sugar imported by the "Office du ComLmerce de la Tunisie" (56%). 2.15 The sugar processing industry (sugar beet refiners and processors) are inefficient, having an investment to incremental output ratio during 1972-81 of 5 compared to 3.6 for marLufacturing as a whole. One cause is that this industry's operating losses are subsidized by Government so there is no incentive to increase efficiency. The industry is capital intensive, having high investment cost relative to other costs in generating output. Another cause is the artificially low price of sugar fixed by Government which reduces the value of output. 2.16 The capacity expansion plans of the industry are excessive at existing sugar beet prices, because farmers are unlikely to expand area sown to sugar beets in the spectacular manner required (from 2,000 ha to 11,000 ha in 5 years) without price increases (Chapter V). F. Meat 2.17 Most meat producers sell live animals (beef, goats, sheep) on local markets where intermediaries assemble stock purchased from numerous producers. Intermediaries sell on larger wholesale markets (such as Tunis), or to slaughterhouses. There are 85 municipal slaughterhouses in Tunisia supervised by Government, about 30'municipal slaughterhouses not supervised by Government and a GUveyai2:-t- _ieu meat marketing and slaughteri.ng enterprise, Ellouhoum, which serves Tunis. Private individuals also slaughter animals. The system works relatively well except for the distortion caused by beef consumption subsidies. Ellcureoum pELys beef producers artifically low prices (Annex 2B). Ellouhoum sells this beef to butchers at artificially low prices set by Government. Effective pr6tection of beef producers ranges from -40% to -80% depending on the production technique used. Ellouhoum also sells imported beef at low prices. Forty percent of Tunisian beef sales pass through Ellouhoum and are therefore subject to these price controls. This discourages both beef production and development of private beef marketing. The discouragement of private beef marketing occurs because Ellouhoum receives Government subsidy to support price intervention, and private intermediaries receive no subsidy. Private intermediaries are not able to compete effectively for the Tunis beef market as a result. Intermediaries thus do not develop into wholesale enterprises, remaining small assemblers and transporters of live animals in rural and semi-urban areas not served by Ellouhoum. For goat and sheep meat, prices are not controlled, and the marketing system works relatively well. However, due to a lack of credit and technical assistance, modern wholesaling enterprises have not developed. 2.18 Poultry production is responsible for 20% of value added in one livestock subsector, and is growing at 12.5% p.a. (1962-1970). This expansion was permitted by the introduction of industrial chicken production, with the average producing unit processing 50,000 chickens p.a. Production is controlled largely by Government, arLd several entrepreneurs. As a result, it has easy access to credit and receives high subsidies for investments and feed (Annex 2B). There is no effective encouragement of family farm poultry  - 17 - ANNEX 2 A Page 11 production or marketing, no system for grading, packing and stocking. There are few storage facilities. The problems of the fruit and vegetable marketing system are also characteristic for poultry marketing. 2.19 The marketing of fish is similar to that of fruit and vegetables. Fish canning factories suffer from the same price controls as do fruit and vegetable canners. Investment would be profitable in refrigerated storage, boats, trucks, and in canning equipment. The "Office National des Peches" increasingly intervenes in investment decisions with respect to marketing facilities. It has not been efficient in preparing feasibility studies for these facilities, nor in directly marketing fish. G. Milk 2.20 The three principal milk processors (STIL, Tunisie-Lait, and SOREPRAL) have limited milk collection facilities. Only 10% of the liquid milk sold by these processors is derived from domestic fresh milk. Ninety percent is reconstituted from imported non-fat dry milk. Most fresh milk produced in Tunisia (85%) is sold by farmers to intermediaries who sell it unprocessed to the consumer at prices above official milk prices. These intermediaries are efficient, buying milk at the farm and delivering to the doorstep of the consumer. However, in the long term, they will be inadequate because consumers will demand pasteurized fresh milk. They do not receive technical assistance nor credit. None have developed into wholesale enterprises. Several yaoughourt and cheese producers are also using domestic milk, but this market is limited. Private milk processors have no incentive to invest in collection and processing facilities because of the negative price incentive described in Chapter V. Government is attempting to overcome the collection problem by having the Irrigation "Offices" and other Agricultural Project units establish milk collection centers. Consideration is being given to Government investment in milk processing facilities. The preferable strategy is to provide private processors and cooperatives with the price incentives necessary to attract their investment in collection and processing facilities. Supply and demand projections of Annex 8 suggest that considerable investment in collection and processing facilities must be made if production potential is to be realized. III. The Agricultural Commodity Marketing and Processing Program A. Organization and Financing of the Program 3.01 Long-term (10-15 years) marketing and processing programs are to be developed for each agricultural commodity. Detailed studies would be prepared for the 5-year development plan period. The program would provide for institutional development, policy change, and investment. The objective of each program is that cited in para. 1.02. The strategy for agricultural marketing and processing in a middle-income country like Tunisia cannot be simply to assure an outlet for farm production and to satisfy basic consumer demand. Accent should be put on the speed and efficiency of market and enterprise response to changing consumer demand and farm supply. The Program consists, for each commodity, of; (a) promotional activity to assist private enterprises to invest in agricultural marketing and processing (identification of promoters and assistance with the mobilization of finance, subproject design, marketing, Government regulations, etc.);  --18 - ANNEX 2 A Page 12 (b) preparation of feasibility studies for marketing and processing subprojects; for dissemination to private promoters and- public enterprises; (c) a line of credit to be managed by participating banks, to be used to finance the above subprojects; (d) public budgetary funds to finance certain subprojects in the public domaine; (e)' a package of reforms in the areas of price policy, marketing, and processing regulation. 3.02 Subprograms are identified for the following commodity groups: (a) cereals, pulses, and derivatives (flour, bread, pastry, etc.); (b) fruits and vegetables (fresh, canned, conserved, frozen); (c) olives, olive oil, and vegetable oil; (d) wine grapes and wine; (e) sugarbeet, sugar, and derivatives; (f) meat, poultry (fresh, frozen, canned); (g) fish; (h) milk and dairy products; (i) other (beer, tobacco). The Bank-financed Technical Assistance Project foresees US$600,000 to help prepare these programs. 3.03 Each program could be financed as a subsector project, or could be divided into several projects. There are actions common to each program, and a common coordinating organization. The coordinating organization would be an Agricultural Promotion Institute which would be created in the Ministry of Agriculture. It would be established on the model of the Tunisian IndustriaL Promotion Agency ("Agence de Promotion Industrielle," API). However, it would have no licensing authority as API does. The Promotion Institute would be responsible for supervising the feasibility studies which will be required for the detailed preparation of the commodity programs. The Task Force discussed in Chapter I of the Sector Survey (Volume I) would start up these feasibility studies, supervising them until the Promotion Institute is established. The existing public, private, and mixed enterprises working in each sector would be given the responsibility for most of the detailed feasibility studies. However, they would be supervised first by the Task Force, and then by the Promotion Institute. These enterprises include the "Groupement Interprofessionnel des Arbres Fruitiers" (GIAF) for fruit, the "Groupement Interprofessionnel des Legumes" (GIL) for vegetables, the "Groupement Interprofessionnel des Dates" (GID) for dates, the "Groupement Interprofessionnel des Conserves Alimentaires"( GICA) for canning, "Office des Cereales" for cereals and pulses, "Office du Vin" for wine and grapes, "Offic:e National de l'Huile" for olives and vegetable oils, "Office d'Elevage," and Ellouhoum for meat and milk, and the "Commissariat des PAches" for fish. Several private and mixed ownership enterprises would participate such as STE;  -19- ANNEX 2 A page 13 and CTS for sugar, STIL for dairy product and fruit, and smaller private enterprises. The "Centre National d'Etudes Agricoles," the "Centre National d'Etudes Industrielles" and private consulting firms would also participate, particularly in designing programs oriented to the private sector. 3.04 Once the programs are being executed (early 1983), the Promotion Institute would provide limited assistance to private entrepreneurs and public enterprises in preparing marketing and processing investments in the context of the commodity programs. They would direct investors to institutions providing more sophisticated assistance if necessary (CNEI, CNEA, private consulting firms). The Institute would also identify projects, and promoters. It would assist promoters to obtain credit, to deal with Government regulations, to survey domestic and foreign markets, to identify appropriate equipment, contractors, locations, local authorities, sources of skilled and unskilled staff. It would also assist public sector marketing and processing enterprises to identify needed investments, management reform, foreign partners, etc. It would assist in the supervision of the new Agricultural Investment Code. Consultant assistance would be required in its establishment. US$400,000 is to be provided for consultant assistance to help establish the Promotion Institute under the Bank-financed Technical Assistance Project. 3.05 Several of the above services are already provided, though inadequately by the public institutions listed in para. 3.03. The Promotion Institute would work with these institutions. The "Groupements" have private sector participation and their collaboration will be particularly useful. The Promotion Institute could be organized as a Central "Groupement" for all commodities, except that it would have no production responsibilities, and expanded responsibility for promotion of marketing and processing. 3.06 The Promotion Institute would review all marketing and processing subproject feasibility studies to assure consistency with the commodity marketing and processing development programs. Approved projects would be submitted for financing to existing credit programs as appropriate (FOPRODI and the World Bank-financed Agricultural Credit, and Small-Scale Industry (SSI) Projects); or through an additional credit line to be created to finance the commodity programs. This credit line would be modelled after that of the recent World Bank-financed small-scale industry project except that the additional criteria of consistency with the commodity programs would be required. Subprojects would be monitored both by the financing bank as under the SSI Project, and by the monitoring and evaluation unit to be established in the Ministry of Agriculture (Annex 1). 3.07 Financing for the special credit line could be provided in the same manner as established for the small-scale industry project. Financing is mobilized by Government. It would transit through a special account in the Central Bank to be made available to eligible projects through the intermediation of the "Banque Nationale de Tunisie," BNT, and other participating banks. The banks could be responsible for appraisal, disbursement, and collection of subloans. They would be paid. a commission identical to that provided under the SSI Project: 2% on loans disbursed, 7% of interest and principal collected if amounts due are fully recovered, 1% if 50% or less is recovered, and varying percentages in between. Government would guarantee two-thirds of the risk, the banks one-third. The Treasury would finance eligible claims. Financing for the several public sector marketing projects would be provided by the Government budget, public enterprise own funds and normal credit channels. This financing scheme requires preparation, which would be undertaken by the Bank-financed Technical Assistance Project.  - 20 - ANNEX 2 A Page 14 3.08 There would be no competition between the proposed investment program and the SSI and FOPRODI schemes. Given the extremely limited number of small and medium agro-industrial projects financed under existing schemes in the past, and the virtual absence of financing for agricultural marketing, additional credit is necessary. Secondly, if existing FOPRODI and SSI financing c-an be used to finance some of the investment under these programs, this will merely reduce the additional credit necessary, i.e., competition is irrelevant. The credit line needed for the commodity marketing and processing project will be estimated after deducting funds available from other sources. Financing for several of the public sector marketing enterprises would be provided from the Government budget, enterprise funds, and normal credit channels. 3.09 Program Cost. The agricultural sector survey undertook a preliminary identification of investments and individual projects to be financed in each commodity program. These are based on existing feasibility studies, project ideas from various Ministries, and mission ideas. These are summarized in Table I attached. The total cost is estimated at D 345 million (US$690 million) including contingencies. The foreign exchange component has not been estimated, but would approximate 60%. A summary is as follows: Program Operator Total Cost (D Million) US$ Million (Equivalent) 1. Institutional Development Task Force, Promotion 4.2 8.4 and Coordination of Institute Programs 2. Cereals and Derivatives "Office des Cereales," 56.7 113.2 Promotion Institute, Private 3. Fruit and Vegetable Promotion Institute, 36.6 73.2 GIAF, GIL, GID, GICA, Private, "Offices" of Irrigation 4. Olives and Vegetable Oils "Office National de 19.0 38.0 I'Huile," Promotion Institute, Private 5. Wine and Wine Grapes "Office National du Vin," 3.3 6.6 Promotion Institute, Private 6. Sugar STS, CST 87.5 175.0 7. Meat and Poultry Ellouhoum, Promotion 13.0 26.0 Institute, Municipalities, Private, "Office d'Elevage" 8. Fish "Office des Paches," 20.0 40.0 Promotion Institute, Private 9. Milk Promotion Institute, 27.8 55.6 "Office d'Elevage," Processors, Private 10. Other (beer, tobacco)/l 10.0 20.0 TOTAL 278.0 555.9 Price Contingencies /2 67.0 134.0 GRAND TOTAL 345.0 689.9 /1 Estimates made by Agro-Industrial Department of the Ministry of the Economy. /2 Assuming investments are spread equally over the 5-year period and price inflation at 9% p.a.  -21 - ANNEX 2 A Page 15 3.10 Program Financing (5 years): Private Government Enter rise /1- Banks /2 Total ---------- US Million Equivalent ---------- (i) Institutional Development and Coordination 8.4 - - 8.4 (ii) Cereals and Derivatives 34.6 23.6 55.0 113.2 (iii) Fruit and Vegetables 33.2 12.0 28.0 73.2 (iv) Olives and Vegetable Oil 7.2 9.2 21.6 38.0 (v) Wine and Grapes 2.4 1.7 2.9 6.6 (vi) Sugar - 52.5 122.5 175.0 (vii) Meat and Poultry 13.1 3.8 9.1 26.0 (viii) Fisheries 10.4 8.9 20.7 40.0 (ix) Dairy 3.0 15.8 36.7 55.5 (x) Other (beer, tobacco) - 6.0 14.0 20.0 Subtotal 112.3 133.2 310.4 555.9 Contingencies 27.0 32.1 74.9 134.0 Total 139.3 165.3 385.3 689.9 /1 Assumes that 70% of private investment financed by banks, 30% by private sector. /2 Table 1 from which this data is taken shows responsibility for an investment divided between Government and private enterprise. Here, it is indicated that 50% of financing is Government, 35% banks, 15% private enterprise. IV. THE SPECIFIC COMMODITY PROGRAMS A. Cereal Marketing and Processing 4.01 Cereal marketing investments would include those of the "Office des C4rdales" in grain collection, transport, and storage facilities; and those undertaken by private intermediaries, farmers, cooperatives, and processors who would enter into competition with the "Office" in cereal marketing and storage. Private competition would be facilitated by the following; (a) The "Office" would institute a procurement and resale price system in which the price paid to the farmers is lowest at harvest time, and higher as the year progresses in order to encourage grain storage by farmers. The price at which cereal is sold to processors would be lowest at harvest to encourage rapid purchase and storage by processors. The margin between purchase and resale prices permitted to the two cereal collection cooperatives appears too low to allow the cooperatives to cover the costs of storage. There is no financial surplus generated by these cooperatives with which to invest in additional storage facilities. These margins would be increased to allow accumulation of an investible surplus by the cooperatives. (b) Technical assistance would be provided by the Agriculture Promotion Institute to private cereal intermediaries in investment decisions (transport equipment, warehouses), marketing contracts, (credit, regulations, location, project design), etc., as discussed in Section III above.  - 22 - ANNEX 2 AL Page 16 (c) Private cereal intermediaries could be supervised initially by licensing through the Agricultural Promotion Institute, or by the "Office des Cereales." (d) A system of bonded private warehouses would be assisted through credit and technical assistance, as defined in Section III. In this system, space would be rented by warehouse owners to tradesmen and farmers who would receive receipts indicating the amount and quality of cereal in the warehouse. To take the cereal out the receipt must be redeemed. The receipt can thus be given to a bank or other creditor by the owner of the cereal as collateral for credit. Legislation would be required to regulate such warehouses. 4.02 Planned collection, transport and storage facilities for the "Office des Cereales" would be scaled down tc, account for the increase in private and processor storage. Incentives must be provided to the "Office" to encourage it to seek cost-cutting innovations and increase efficiency. In a Government-owned organization the best way to do this is to establish a contract-plan between the enterprise and Government specifying the rights and obligations of both the enterprise and Government. Management would be evaluated against these objectives and provided bonuses for good performance. Penalties should be imposed for poor performance. An end-of-the-year audit should be undertaken to judge performance and to discourage mishandling of funds-l. 4.03 Investments are foreseen in cereal-related agro-industry, including flour mills, bakeries, and other specialized enterprises which use flour, but excluding animal feed manufacturing. Capacity utilization is low in the animal feed manufacturing sector and there will be no need for additional capacity if feed subsidies are reduced as is recommended. However, competition should not be stiffled by API refusal of licenses to new entrants in industries where capacity utilization is low. The Agricultural Promotion Institute should identify and promote industries which manufacture animal feed out of crop derivatives produced in Tunisia (sugar beet and citrus derivatives, fruit pits, etc.). 4.04 The Program would be prepared by the Task Force, the "Office des Cer6ales," the Agricultural Promotion Institute, the Ministry of the Economy (Price Reform), BNT, and other participating banks. Total cost in 1981 prices, including that of Program preparation, investments, management, etc., is estimated in Table 1 at D 57 million. This includes the cost of Program preparation, credit, investment by the "Office des Cereales," investment in processing, and consultant costs to develop a proposal for management reform in the "Office des Cereales." B. The Fruit and Vegetable Marketing and Processing Program 4.05 Given the predominance of private enterprises in fruit and vegetable marketing, and their neglect by Government, the Program emphasizes promotion, technical assistance and credit to private enterprises. Policy reform is also emphasized. 4.06 The several "Groupements Interprofessionnels" (GIAF, GIF, CID, GICA), assisted and coordinated by the Agricultural Promotion Institute would identify subprojects and promoters (private and cooperative) to establish /1 No such mishandling was in evidence. However, the absence of serious audits of public enterprises invites abuse.  ANNEX 2 A -23 - Page 17 fruit and vegetable wholesale and processing enterprises. The "Groupements" and Promotion Institute would assist promoters in arranging financing, dealing with Government regulations, project design, setting up management systems, feasibility studies, undertaking marketing studies, and in contacting foreign importers. They would also provide advice to banks on investment proposals. The Promotion Institute would also draft legislation permitting the reforms cited in the following to be implemented. 4.07 Fruit and vegetable marketing in Tunisia satisfies many of the classic criteria for potential cooperative success/I. These include the inadequacy of existing marketing structures from the perspective of the farmer. Vegetable growers are also concentrated geographically (in irrigated areas) facilitating their organization. There is room for additional investment in collection, transport, and storage facilities. There are no cultural conflicts within the irrigation perimeters preventing cooperation. Constraints include the aversion to Government-organized cooperatives by farmers due to (a) the bad experience with forced cooperativization during the 1960s, (b) the proximity to wholesale markets making it possible for many farmers to sell their own produce directly, (c) the rigidities of the Tunis wholesale market described above. A cooperative development project is proposed which would train cooperative managers, develop the legal framework for cooperatives, promote their development among farmers, and draft legislation defining the role of members and of managers. Technical assistance and credit is foreseen under the Program proposed here. 4.08 Legislation is required permitting wholesale enterprises to purchase from farmers or intermediaries and sell to retailers, without operating through the urban wholesale markets. These enterprises could be taxed by the municipalities. The enterprises must be permitted to operate large trucks. 4.09 Standardized product grading systems would be introduced by the four "Groupements" and the Promotion Institute. This will facilitate pricing according to quality differences and long distance depersonalized trading. Market information would be published and broadcast daily, organized by the Promotion Institute, to facilitate competition and arbitrage (movement of goods from surplus areas where prices are low to deficit areas where prices are high). 4.10 The urban wholesale markets require deregulation permitting farmers and wholesalers to actively trade. Free entry would be permitted into the profession of commission agent. Commission agents should be permitted to develop into wholesale enterprises. The Project to create a new wholesale market at Tunis should include these reforms. 4.11 Investments planned by the Irrigation "Offices" in fruit and vegetable marketing facilities and cold storage should preferably be undertaken by private and cooperative investors, assisted through promotion, credit, and technical assistance. If no private investment is forthcoming, the "Office" would invest, selling the facilities when private or cooperative purchasers become available. Credit should be provided to private fruit and vegetable marketing and processing enterprises for this purpose as described in Section III. /1 Cooperatives could be developed for fruit and vegernhl' market`Vg a milk, citrus, wine grape, and olive marketing.  ANNEX 2 A. Page 18 - 24 - 4.12 Government would not prevent free entry by new enterprises into fruit and vegetable processing activities even though there is excess capacity. Commodity procurement prices paid by processors, and processor output prices should not be regulated by Government. This would stimulate competition between processors for produce, and encourage full capacity utilization. Credit should be provided to such enterprises. 4.13 Contracts between growers and both processing enterprises and cooperatives would be introduced and promoted by the "Groupements" and the Agricultural Promotion Institute. The contracts could be modelled after those used by STS with sugar beet producers. Contracting farmers would receive inputs, credit and technical advice from processors or cooperatives. Farmers would guarantee that production be sold to the factory or the cooperative. Processors and cooperatives must be willing to renegotiate prices based on wholesale market prices if farmer respect for contracts is to be assured. Hence the necessity of freeing processor resale prices. 4.14 Export market research is req[uired in order to diversity into new markets. The "Groupements" assisted by the Promotion Institute would be responsible. 4.15 The investment program proposLed in Table I broadly includes (public-, private, and cooperative investments): (a) refrigerated and non-refrigerated storage facilities; (b) trucks and transport handling equipment; (c) packaging, and grading equipment; (d) urban wholesale and farmers markets; (e) industry (canning, conservation, fruit and vegetable by-products); (f) development of wholesale entetrprises, including working capital. Total cost is estimated at D 36.6 million in 1981 prices. C. Olive and Vegetable Oil 4.16 ONH has proposed an olive development program which includes agronomic research, extension, development of olive producer cooperatives, agricultural credit for olive tree maintenance and planting, credit to expand and modernize olive oil-processing enterprises, and price policy reform. These proposals constitute a good basis for several investment projects. The research and extension component is best handled within the context of the national research and extension project (Annex 10). Credit is best provided within the context of the national agricultural credit program. This leaves the marketing and processing components. 4.17 Private intermediaries would be permitted to market and export olive oil in competition with the "Office National d'Huile," ONH. Incentives would be provided to ONH to increase its efficiency through a plan-contract with Government, identical to that recommended for the "Office des Cereales." Arn end-of-the-year audit of ONH finances would be undertaken.  ANNEX 2 A Page 19 - 25 - 4.18 ONH and the Promotion Institute would provide technical assistance to olive processors similar to that suggested for fruit and vegetable processors. Credit would be provided for expansion and modernization of olive oil processing factories, factories for the extraction of olive oil from olive pits, vegetable oil refining, and marketing facilities. Total costs shown in Table 1 are estimated at D 19.0 million. D. Wine Grapes and Wine 4.19 As for olive marketing, private enterprises would be permitted to export wine, assisted by the Agricultural Promotion Institute and the "Office du Vin." The wine grape marketing and processing program would provide credit to private wine marketing enterprises (Section III). It would also provide credit for creation and renovation of wine cellers, renovation of equipment and the creation of a factory producing grape juice. Total cost is foreseen at D 3.3 million (1981 prices). These investments will be profitable only if production is stimulated and export markets diversified. Management of the "Office National du Vin" should have the same incentive system, codified by a contract plan, as proposed for the Cereals "Office" and Olive Oil "Office." It should also be the subject of an end-of-the-year audit. E. The Sugar Marketing and Processing Program 4.20 As noted above, the sugar beet marketing system works well, and is a model for other commodities. It would be expanded. Investments foreseen by Government in sugar beet processing, sugar refining and other sugar products equal D 87.5 million. These are to be implemented by processing enterprises. This is nearly 35% of agro-industrial investment, compared to the contribution of sugar beet to agricultural value added equal to .2%. The size of the investment is probably too large, particularly if sugar beet prices are not increased to stimulate greater planting and production. A reduction in investment during the Sixth Plan may therefore be advisable. F. Meat Marketing and Processing Program 4.21 Beef prices should be freed, as is now the case with sheep and goat meat. With free meat prices, Ellouhoum would primarily buy and sell meat in order to stabilize prices. It should import meat when there are domestic shortfalls. Ellouhoum could supply "fair price" shops in poor areas with cheaper imported frozen meat. InVestments in refrigerated and frozen meat facilities are foreseen for this purpose. This would include cold storage, refrigerated trucks, and credit for purchase of small refrigeration units for butcher shops. Investment cost is estimated at D 3 million. The major policy decision is to permit price increases when meat production is low, in order to stimulate production. Ellouhoum should not import so much meat when there is a production shortfall that prices are blocked, discouraging additional meat production. This will require constant attention by the Monitoring and Evaluation Unit in the Ministry of Agriculture. Ellouhoum should receive no subsidy and its management should be evaluated using the contract-plan approach proposed for other public enterprises, combined with an end-of-the-year audit. 4.22 Credit and technical assistance should be provided to private meat wholesaling enterprises. Investment must be foreseen in extension and modernization of existing slaughterhouses and butcher shops. Total costs are roughly estimated at D 10 million. Considerable preparation is required. Additional discussion of reform of the meat marketing system is found in Chapter X of Volume I.  -26 - ANNEX 2 A Page 20 4.23 Poultry marketing cooperatives would be developed as recommended for fruit and vegetables. Cooperatives could contract with private producers in which the cooperative provides inputs, credit, and technical assistance in return for sale of all poultry and eggs through the cooperative. Private wholesaling of chicken and eggs would also be promoted using the system described in Section III. A grading system for poultry and eggs would be established by the Promotion Institute and the "Office d'Elevage.' Poultry marketing and processing will not grow rapidly if animal feed concentrate subsidies are reduced as is recommended. D 3 million is sufficient. 4.24 Fisheries. Fish marketing should not be regulated. Facilities to be established by the "Office de PEches" would not constitute a marketing monopoly. Credit and technical assistance should be provided to private enterprises for marketing and canning of fish, using the system described in Section III. Preliminary cost estimates of all fisheries marketing and processing investments is D 20 million. This includes ice-making capacity, refrigerated storage, freezing facilities, refrigerated boats and trucks, canning factories, etc. G. Milk Marketing and Processing 4.25 The proposal by the Commission on Prices and Marketing that the irrigation "Offices" invest in milk collection and processing facilities is only appropriate if milk price policy cannot be reformed as proposed in Chapter V. If price policy is reformed, processors would have an incentive to make such investments. The Program foresees investments in milk collection and processing facilities by processors, cooperatives of milk producers, or by the Irrigation "Offices" if price policy is not reformed. Facilities would be sold to private or cooperative enterprises by the "Offices" as soon as feasible. Total investment is estimated at D 27.7 million (Table 1). Investment feasibility studies would be prepared by the several milk processors, the "Office d'Elevage," ancl the Promotion Institute. V. ISSUES 5.01 Program Size. The Program is too large to be financed by any single foreign financing Institution. Most of the investments involving public enterprises can be financed separately (such as grain storage). Donors wishing to contribute to private and. cooperative enterprise development could finance the part of the line of credit and/or part of the technical assistance foreseen for this. The credit line and technical assistance lend themselves to cofinancing. It is recommended that alternative financing sources be sought out during preparation and the Program subdivided for financing purposes. 5.02 World Bank Participation. On the basis of a survey of financing sources, Government will solicit funds for parts of the Program. The high priority areas for World Bank financing are the line of credit for private and cooperative enterprises and the first several years functionning of the Agricultural Promotion Institute. A Wo-rld Bank Project could finance a 3-year time slice (say years 2-4), and could concentrate on several commodities (cereals, fruit and vegetables, olives and vegetable oil, meat, poultry, dairy products). Total credit foreseen in these areas for a 3-year project, plus technical assistance (to continue the work begun on the Promotion Institute under the Bank-financed Technical Assistance Project) would be about US$105 million with contingencies. The part of the Program to be financed by the Bank should be identified by mid-1982 to permit more concentrated preparation. The next Project Brief would emphasize the Project so identified (para. 5.04 for preparation schedule).  -27 - ANNEX 2 A Page 21 5.03 Creation of the Promotion Institute. The role of the Agricultural Promotion Institute is more extensive and ambitious than that presently foreseen by the Ministry of Agriculture. Its creation will take considerable time. It will not be fully staffed for several years. The marketing and processing-investments to be undertaken by established private and public enterprises (_ee Table 1) can be prepared without the assistance of the Promotion Institute. This preparation should begin immediately. Preparation of the credit mechanism and establishment of the Promotion Institute will have to be coordinated by the Task Force under the Technical Assistance Project. Consultants will be required until the Promotion Institute can take over this work. Delay in creation of the Promotion Institute will delay start-up of the full Program. The result would be execution of public sector projects only. 5.04 The tentative preparation schedule is as follows: Date Begin End 1. Identification of Marketing and Processing of Program 10/81 3/82 2. Prefeasibility Study (in Sector Survey) 10/81 3/82 3. Discussion with Government and Modification of Prefeasibility Study and Project Brief 3/82 4/82 4. Rescheduling of Program Preparation 3/82 3/82 5. Bank Identification of Priority Components for its Financing 10/81 4/82 6. Task Force Begins Preparation of Each Project Cited in Table I Designating the Appropriate Operator as Shown 4/82 4/82 7. Preparation of Each Project and Program by Various Operators 5/82 5/83-5/84 8. Preparation for Creation of Promotion Institute 5/82 5/83 9. Start-up of Projects 5/83-5/84 Ongoing 10. Start-up of Promotion Institute 6/83 Ongoing 11. Bank Appraisal 7/83 8/83 12. Execution of Bank Project 6/84 6/87 Price Policy 5.05 Chapter V and Annex 2 of the Sector Survey discuss Tunisia's agricultural price policy.The objectives of Tunisian agricultural price and marketing policy are several, and often require contradictory policy. Objectives include (i) providing food at affordable prices to low income groups, (ii) establishing prices which provide a sufficient incentive for farmers to produce, (iii) maintaining farm income levels, (iv) improving farm productivity and hence output by subsidizing key inputs such as fertilizer and animal feed, (v) insulating the economy from short-term international price fluctuations, and (vi) developing the marketing system to respond to changing consumer demand. For some commodities, Government intervention has been presumed necessary to attain all of these objectives simultaneously. For example, the wheat price consistent with maintaining low retail prices for bread is not consistent with that necessary to induce efficient cereal production. Therefore, to attain its objectives simultaneously, Government  ANNEX 2 A Page 22 - 28 - fixes the retail price at a low level, fixes the producer price of wheat at a level it judges sufficient to induce efficient production, and the difference is met by Government financial transfers to processors and wholesalers. 5.06 Price policy affecting farmers can be categorized as follows: (a) Prices paid to farmers by all purchasers are legally fixed by Government for the following commodities: (i) cereals; (ii) olives and olive oil; (iii) wine grapes; (iv) sugar beet, tobacco, other industrial crops; (v) milk; (vi) potatoes (periodically); (vii) dates. (b) Prices paid to farmers by Government-owned enterprises are fixed by Government, but a private market is legally permitted to operate: (i) pulses; (ii) beef; (iii) poultry and eggs. (c) Minimum price paid to farmers is fixed by Government: (i) tomatoes for canning. (d) Prices paid to farmers are determined by free market: (i) sheep and goat meat; (ii) fruits and vegetables not listed above; (iii) forage; (iv) wool; (v) fish. 5.07 Most prices of agricultural products sold by processors and retailers are also effectively fixed, including flour, bread, vegetable oils, olive oil, sugar, butter, milk, eggs, poultry, beef, canned tomatoes, wine, tobacco, and periodically potatoes. Fixing of prices at several marketing levels (producer, wholesa ler, processor, retailer) is not only complicated, but has necessitated a complex system of Government subsidies to compensate some participants (but not all) for losses incurred as a result of price policy. 5.08 Annex 2B shows that agricultural producer prices fixed by Government are in most cases below both world prices and prices which would be determined by -a free market. Prices of agricultural products are artificially low as the result of (a) price controls, and (b) artificially low dinar prices for imported substitutes and low export prices (in dinars) due to the overvalued exchange rate. Income has been transferred out of agriculture to other sectors as a result.  - 29 - ANNEX 2 A Page 23 Recommendations 5.09 Annex 2B recommends that producer prices not be fixed except in contracts mutually agreed by marketing or processing enterprises and farmers (as is done for sugar beet and tobacco). Floor prices should be announced for cereals, as is now done for pulses, prior to planting. Announced prices should be maintained at world levels plus an amount equal to the average tariff levels on all Tunisian imports, which is a proxy for the degree of currency overvaluation. Tariffs should be established on food imports (cereal, meat, milk, sugar, vegetable oil) equal to the degree of currency overvaluation to protect Tunisian producers from artificially cheapened imports. If producer prices were free in such a situation, they would quickly approximate the world price plus the tariff. Exported products (olive oil, wine grapes, exported fruits and vegetables) should receive an export subsidy equal to the average tariff on Tunisian imports to offset the effect of overvaluation. This is relatively simple for olives and wine grapes since subsidies can be provided through Government marketing agencies. For other fruits and vegetables, subsidies might be provided through marketing cooperatives, which would also aid in establishing such cooperatives. Prices for fruits and vegetables sold on the local market should continue to be free. This would require freeing of prices paid for tomatoes by canning factories, and termination of periodic Government intervention on the fruit and vegetable wholesale market to reduce potato prices. As tariff levels on manufactured goods fall, and Tunisia's average price level comes closer to international prices, export subsidies and import tariffs should be reduced. 5.10 It is recommended that reform of agricultural price policy be incorporated in the marketing and processing program. The implementation of such investment programs will facilitate price policy change, and act as the catalyst for it. At the same time, without price policy change, many of the programs will not be viable. An action program for policy changes should be prepared under the Bank-financed Technical Assistance Project as part of the commodity marketing and processing program.  - 30 - ANNEX 2A TABLE 1 Page 1 COSTS COMMODITY MARKETING AND PROCESSING PROGRAM /1 COMMODITY PROJECT EXECUTING COST PROGRAM AGENCY (D '000) I. Institutional 1. Task Force Coordination Department of Planning, 50 Development and of Marketing Programs Ministry of Agriculture Coordination of 2. Establishment and Task Force, and the 4,000 All Programs Operation of Promotion Promotion Agency Agency 3. Feasibility Study For Task Force, 100 Creation of Commodity Ministry of Plan and Marketing and Processing Finance Credit Lines 4. Feasibility Studies for shown below Commodity Marketing and for each Processing Projects Program 5. Continuous Price Policy Task Force 50 Analysis Subtotal 4,200 II. Cereals 1. Program Preparation Task Force, Promotion 200 Agency, "Office des Cereales," (OC) 2. Storage (86,000 tons), OC, Private 30,000 Trains, etc. 3. Rehabilitation of Silos OC 2,000 4. Expansion of Flour Mills Private 27,000 (279,000 tons) 5. Factory Rennovation, Private 1,000 Pastry Products, Couscous 6. Bakeries (Creation, Private 14,000 Modernization, etc.) 7. Infant Farina (creation) Private 1,000 8. Yeast Factory Extension- CST (private) 4,000 9. Animal Feed Private 8,000 Modernization, Storage 10. OC Management Reform OC 100 Total 87,200  -31- TABLE I Page 2 III. Fruit and 1. Program Preparation, Task Force, Promotion 400 Vegetable Draft Legislation, Agency, GIAF, GIL, Technical Assistance GID, GICA Required, Grading System, Price Policy 2. Potato Storage GIL, Private, or 2,355 Cooperative 3. Vegetable Sorting and Nebhana "Office," 1,000 Grading Center at Nebhana Cooperative 4. Cold Storage (400 tons) OMVVM, Private, or 230 Bordj el Amri Cooperative 5. Collection Centers, OMVVM, "Offices Kairouan, 2,215 Packaging Gab&s-Medenine 6. Canning Plants, El Batham OMVVM, or Private 465 7. Cold Storage: Cap Bon,(5,000 tons) "Office" Cap Bon, Private, 300 or Cooperative Bou Salem (800 tons) "Office" Jendouba, Private, 110 or Cooperative Oued Meliz (500 tons) "Office" Jendouba, Private, 290 or Cooperative 8. Transportation, Packaging "Office" Jendouba, Private, 120 Equipment or Cooperative 9. Germination Potatoes "Office" Cap Bon 125 10. Promotion of Service Directorate for Small and 6,000 Cooperatives Medium Farms, Promotion Agency 11. Fruit and Vegetable Private 2,500 Canning Plants 12. Expansion of Canning Plants Private 2,000 13. Development of Fruit- Private 1,000 Freezing Capacity Private 14. Creation of 5 Date "Office" Gabes-Medenine, 6,500 Treatment Stations Private, or Cooperative 15. Tunis Wholesale Market SOTOMAG 1,000 16. Other Wholesale Market Urban Municipalities 2,000 Development 17. Credit for Marketing and Promotion Agency, 6,200 Wholesale Enterprises Private, banks 18. Working Capital for Banks 1,000 Storage Financing 19. Processing Fruit'and Banks, Promotion Agency 300 Vegetable By-products Total 36,610  - 32 - TABLE I Page 3 I. Olives and 1. Program Preparation ONH, Promotion Agency 200 Vegetable Oil 2. Promotion Activity ONH, Promotion Igency 2,500 (export marketing, assistance to processors) 3. Creation, Modernization, Private 14,000 Olive Oil Processing Capacity 4. Capacity for Oil Extraction Private 1,300 From Olive Pits 5. Vegetable Oil-Refining Private 2,900 Capacity 6. Olive Marketing and Handling ONH, Private 1,800 Facilities Total 22,700 V. Wine and Grapes 1. Program Preparation ONV, Promotion Agency 100 2. Creation and Renovation ONV, Banks, Private, or 1,740 Wineries Cooperative 3. Grape Juice Production ONV, Private 250 4. Transport Equipment and Other ONV 40 Equipment for ONV 5. Credit to Assist Private Banks, Promotion Agency 1,000 Marketing Enterprises Total 3, 330 VI. Sugar 1. "Complexe Sucrier de Tunisie" CST 33,200 2. Renovation and Creation of STS 3,400 Sugar Beet Processing Plants 3. Factory for Processing Pulp STS Into Animal Feed 4. Secondary Processing of Sugar Private 9,500 Total 46,100 VII. Meat: A. Red Meat 1. Program Preparation Promotion Agency "Office d'Elevage" (OEP) 2. Municipal Slaughterhouses Municipalities With Refrigerated Facilities 3. Ellouhoum Material And Ellouhoum Equipment, Vehicles 4. Credit for Intermediaries Promotion Agency (Vehicles, Equipment) Banks 5. Extension/Modernization Private of Butcher Shops Subtotal 10,000  - 33 - TABLE I Page 4 B. Poultry 1. Program Preparation and Promotion Agency 100 Creation of Grading System OEP 2. Creation of Marketing "Departement des Petites Cooperatives for Private et Moyennes Entreprises," Producers OEP, Promotion Agency 3. Slaughtering Facilities, "Departement des Petites Storage et Moyennes Entreprises," OEP, Promotion Agency Subtotal 3,000 C. Fisheries 1. Program Preparation "Commissariat des Peches" 100 Promotion Agency 2. Ice-Making Capacity, "Office des Pgches," 10,190 Refrigerated Storage, Private, "Commissariat Freezing Facilities, des Peches" Refrigerated Boats and Trucks 3. Sardine Canning Private 2,500 4. Tuna Canning Private 1,200 5. Fish Flour Private 2,000 6. Metal Containers Private 4,000 Total 19,990 VIII. Milk and Dairy 1. Program Preparation Promotion Agency, "Office 200 d'Elevage," STIL, Tunisie- 2. Milk Collection Centers Lait "Offices," 2,570 (7 foreseen in Irrigation Enterprises or Cooperative Areas) 3. Processing Milk (creation STIL, Tunisie-Lait, Private 36,200 and renovation) Total 38,970 XI. Other 1. Beer Manufacturing Private 5,000 Extension 2. Tobacco, Modernization "Regie Nationale de Tabac" 5,000 Total 10,000 GRAND TOTAL 282,100 Price Contingencies /2 67,020 GRAND TOTAL WITH CONTINGENCIES 349,120 /1 Only a summary of Projects is given here due to their large number. Details are given in Annex 2. /2 Assuming investments spread equally over the 5-year period and inflation at 9% p.a.  - 34 - ANNEX 2 B TUJNISIA AGRICULTURAL SECTOR SURVEY ANALYSIS OF AGRICULTURAL PRODUCER PRICES AND FARM INPUT PRICES A. Methodology Used in Evaluating Price Policy 1. For each agricultural commodity, the adequacy of producer prices as an incentive for farmers to produce is assessed. Marketing and agro-industrial investments will not be viable unless additional agricultural production is forthcoming. Production may be constrained by numerous factors, including inadequate prices. Other factors'are investigated elsewhere in this report. Prices are considered here because they are linked to marketing. The methodology is to postulate typical producer situations for each commodity. Each situation involves average farm input use and likely production per hectare. The average net income per hectare derived from the production of each commodity is then determined. Commodities for which producer incomes are declining are likely to show declines in production, all other things equal. Average farm incomes in various situations are then estimated. These incomes are judged in comparison to average l'unisian income in other sectors. 2. The major methodological issue here is that the use of a package of farm inputs in the production of an a[gricultural commodity will have a different production impact depending on the soil/weather characteristics of a particular area, the cultivation methods of the particular farmer, and the availability of certain inputs such aLs water. For each commodity produced in Tunisia, the income per hectare obtained by different farmers varies greatly. The analysis therefore estimates this; variation. 3. The third step is to quantif'y the impact of Government price, tax, exchange rate, import, export, and subsidy policies on income obtainable from the production of each commodity. This second set of calculations is based on the idea that the average net income obtainable from agriculture results both from factors inherent in production in Tunisia (such as soil, climate, agricultural skills, agricultural techniques used), and from Government policies which affect price relationships. In order to determine the incentive effect of policies alone, net income per hectare per commodity is re-estimated using reference prices. Reference prices are those which would have existed had Government policy not altered them. Net income for a commodity may be reduced or increased as a result of Government policy. It was found, for example, that net revenue per hectare for cereals is higher using reference prices than using Tunisian prices. This indicates that those policies causing Tunisian prices to diverge from reference prices reduce the income obtainable from cereal production. This reduces the incentive to produce cereals, probably reducing cereal production compared to what it would have been had Government policy been neutral. It also serves to transfer income from cereal producers to cereal users (processors and consumers).  - 35 - 4. The net revenue calculated using reference prices also provides a rough indication of the value to the economy of using the average hectare of land to produce the commodity. This is useful information in determining which crop development programs to emphasize and which to de-emphasize. It will assist i'L determining the emphasis to place in investment, the terms of trade between agriculture and the rest of the economy, and net transfers between the public and private sector. 5. The reference situation is that in which prices equal world prices. Without Government intervention, Tunisian prices paid to farmers would not be able to go much above or below import prices (c.i.f.) for importables or export prices (fob) for exportables, adjusted for transport and handling costs within Tunisia. If domestic prices of importables are higher than world prices, foreign exporters would quickly increase supply to Tunisia, forcing prices down. If export prices were set higher than world prices, Tunisia would find no market since its supply of any product on the world market is small compared to world trade. Therefore, reference prices (or "economic" prices) for all inputs and outputs tradable on world markets are world prices adjusted for transport and handling costs to and within Tunisia. 6. These reference (or "economic") prices are converted to dinars at a reference exchange rate. The reference exchange rate adjusts for the average difference between Tunisian prices and foreign prices, thus reflecting the average price distortion in Tunisia. The average Tunisian price is from 12-25% higher than the world price. For the purpose of this study the lower figure is used since it approximates the average ratio of import duties plus export taxes to the value of imports and exports. The effect of this can be illustrated with an example. If the c.i.f. price of wheat is US$210/ton, the reference price at the official exchange rate is D 105/ton (US$1 = D .5). However, D 105 buys 12% less in Tunisia than does US$210 on the world market. US$210 is really worth 12% more in dinars (1.12 x D 105/ton) or D 118/ton. The reference price used is therefore D 118/ton. This price is then compared to the price paid to producers equal to D 76/ton in deciding that price policy discriminates against domestic producers. Similarly, for farm inputs, the import price of ammonium nitrate is US$134/ton. At the official exchange rate this equals D 67/ton. However, the official exchange rate artificially cheapens imported fertilizer by 12%. The reference price is thus (1.12 x D 67/ton), or D 75/ton. 7. Outputs and inputs which are not tradable on world markets (such as Tunisian labor, cement, transport, draft animals, marketing costs, etc.) are valued at the marginal economic cost of their supply. This is estimated by decomposing the domestic cost of production into foreign exchange costs and primary inputs. Foreign exchange costs are valued at world prices and converted to dinars with the reference exchange rate. Primary inputs such as labor are valued at their opportunity cost. 8. Important causes for differences between market prices and economic prices are Tunisian indirect taxes and tariffs, import quotas, the excess of wages for unskilled labor above their opportunity cost, and prices fixed by Government either above or below world prices. Price comparisons for each agricultural product are shown in Tabe 2(a) and discussed in the relevant Annex chapter dealing with the commodity. Reference and domestic prices for farm inputs are shown in Tables 2(b) and 3, and are explained in the notes to t ,- . <C_ ~1 1 Z 1;-,  - 36 - 9. There are drawbacks to this system of reference prices including (i) the need to select an appropriate long-term world price in real terms whexi there is considerable world price fluctuation, (ii) the difficulty of quantifying the degree of domestic currency overvaluation, and (iii) the frequent distortion of world prices by foreign Government price intervention, dumping, and other world market imperfections. However, world prices are still the only reference prices avai'Lable, and for the reasons given above, are appropriate, as long as the above problems are taken into account. ThIe "economic" prices of farm inputs are discussed in Annex 3 which deals with input supply. Agricultural prices are dealt with in each commodity chapter. B. Farm Input Prices 10. Labor. The minimum wage for agricultural labor was D 1.63 per day in 1980. The cost to the Tunisian economy of using agricultural labor is less than this due to the underemployment of labor. The 1978 survey of agricultural labor estimated that the 1.09 million people working in agriculture were underemployed so that the comparable full employment rate was 867,800, or 80%7.!. This means that 20% of available labor time is not utilized. Other estimates of agricu-Ltural employment based on the 1975 census suggest the full employment equivalent of agricultural labor to be about 550,000 people, or 50% of available labor time not utilized. This latter figure is probably a significant overestimate. Assuming that about 75% of available labor time is employed at 1) 1.63 per day (in currency or in-kind), ai,d 25% of available labor time is unemployed. this yields an opportunity cost of labor use equal to D 1.2 per day (.75 x D 1.63). This opportunity cost will vary considerably from one part of Tunisia to another and from season to season. In irrigated areas the opportunity cost of labor may be above the minimum wage. In poor areas such as Northwest and Southern Tunisia it wilL be much lower. Labor should not necessarily be paid this reference price. A reference price lower than the actual wage indicates only that the cost to the economy of using labor is less than the cost to the employer. Labor costs have increased at 12.5% p.a. during 1L975-1980. This has discouraged the use of labor. 11. Fertilizer. Tunisia imports nitrogen fertilizers. It produces phosphate fertilizers. Most fertilizer is purchased by the "Office des Cfreales" for distribution at its 150 collection centers. The "Office" purchases from two state-owned distributors, STEC and SIAPE. The collection center prices of fertilizers paid by farmers are fixed by Government at low levels. The economic price of each fertilizer, computed as the c.i.f. price converted to dinars with the reference price for foreign exchange, is considerably higher than the domestic price (table 2). Since the "Office dles Cereales" buys fertilizer at an unsubsidized price, it is compensated by the "Caisse de Compensation" for the difference. Economic world prices are higher than domestic prices by 44% for ammonium nitrate 37% for triple superphosphate, and 4% for potassium sulfate. The subsidy for fertilizer use implicit in these results is intended to encourage fertilizer use. Fertilizer use is suboptimal (about 16 kg/ha of nitrogen fertilizer used in 1980 and 9 kg/ha of phosphate fertilizer compared to optimal levles of kg/ha and kg/ha respectively). The subsidy has not caused fertilizer use to reach the optimal level, nor even to increase since 1984 (nitrogen fertilizer use did not increase significantly since 1974, while phosphate fertilizer use increased at 4.3% p.a.). The reason is that large farmers use most of the fertilizer. They would use the fertilizer without they subsidy. Because of fertilizer distribution bottlenecks (table 23E), small farmers other than those having farms in the proximity cf a distribution center, have difficulty  37 - obtaining fertilizer. Table 22 shows that about 68% of Tunisian farmers have from 0-10 ha of land, and use only 22% of fertilizer. The largest 3.8% of farms use 55% of fertilizer. Since larger farmers are familiar with fertilizer, it is probable that no more fertilizer is used with the subsidy than would have been used without the subsidy (see also para. ). It is therefore recommended that such subsidies be phased ut. 12. Pesticides and Herbicides are imported for distribution primarily by private distributors. The prices of these products are directly subsidized by 50%. In addition, farmers are indirectly subsidized by the artificially low dinar price of foreign exchange. However, they are penalized by an import duty of these products. The net result is that farm prices are about 45% lower than the reference price. Since the private sector efficiently satisfies demand for these inputs, it is likely that subsidies encourage greater use than would be the case without subsidies. Until these products are widely introduced, such subsidies would be marginally desirable except that the cost of administration is excessive, and that most of the subsidy goest to larger farmers. Therefore, it is recommended that such subsidies be terminated. 13. Machinery Services. Machine services are provided by private farm machinery owners, by farmers themselves, and by a public enterprise (SONAM). During 1980 SONAM charged D 3 per hour for the use of a tractor for soil preparation. The use of a combine harvestor costs D 9.5 per hour. Calculations shown in the notes to Table 2 show the economic cost per hour of tractor services to be D 3.1 per hour, while that of a combine is D 9.8 per hour. These are not significantly different from the domestic price. 14. Seeds. Improved varieties of seed are sold by the "Office des Cereales" collection centers at prices designed to cover the costs related to the domestic production of these seeds. However, farmers are permitted to exchange up to a fixed number of quintals of ordinary grain for an equal amount of high-yielding seed. This exchange is an implicit subsidy of farmers equal to the differnce between the cost of supplying the cereal seed and the economic value of the cereal grain. For high-yielding durum wheat seed, the subsidy equals about 25% of the domestic price. Despite the subsidy, not all cereal farmers use high-yield cereal varieties. About 22% of cereal seeds used in Tunisia are high-yielding varieties/l. Table 1 attached compares reference and Tunisian prices for a large number of seeds and plants. Some are subsidized and some are not. Those produced in Tunisia and sold at cost plus a small margin are given a reference price equal to the Tunisian price. 15. Costs of Livestock Production. The relationship between economic and domestic prices for the various services used in livestock production are shown in Table 3 (use as in drugs, transport, and building materials). Veterinary services are subsidized in Tunisia at about one-half their cost. The domestic price of concentrate is maintained at 55% of the world price by subsidies. The domestic price of concentrate averages D 47/ton, while the economic price is about D 85/ton. The raw material for concentrates, which includes barley, soybean meal, and bran are largely imported and delivered to animal feed factories at subsidized prices. These prices remained constant through the mid-1970s until 1979. This subsidy encourages the use of imported concentrate, and discourages the use of domestically produced forage which is not subsidized. The result has been a rapid shift from meat and milk production based on domestic feed production to a system based largely on imported feed. It is recommended that this subsidy be progressively abolished.  - 38 - 16. Other costs of livestock production include farm machinery services costed above, plastic for silage cover (economic price equals 70% of domestic price), rye-oat seed (domestic price 12% below economic price), and fertilizers (costed above). The reference price of cross-bred livestock is equal to the domestic price, while imported milk cows are subsidized by 20%. 17. Irrigation Water. A water clharge of D 6 per 1,000 m3 was applied in the Medjerda irrigation area during 1980. This water charge, plus the land betterment levy, assured a cost recovery of 30%. A water charge corresponding to 100% recovery equals D 32 per 1,000 m3 in 1980 prices. This is the economic price of water. C. The Issue of Producer Prices 18. The "Office" administers Government's cereals price policy by purchasing all cereal offered to it at official prices. Since it must resell at a lower price, it is compensated by an amount equal to D 22.37/ton for durum wheat, D 21.98/ton for bread wheat, and D 33.5/ton for barley. The cereal procurement and resale prices have been more stable than world prices. However, producer prices of cereal prices are too low to stimulate efficient production. This is shown in tables 9 to 11 which quantify average costs and revenues per hectare for durum wheat, bread wheat and barley. The results using three different production technologies are shown. Traditional technology is characterized by the use of ordinary rather than high yielding seed, an insignificant amount of nitrogen fetilizers (50 kg/ha), no herbicides or pesticides, primarily animal drawn implements and considerable labor. Intermediate technology introduces high yield seed, more nitrogen fertilizer, limited phosphate fertilizer, a limited amount of herbicides, and mechanical cultivation and harvest. More intensive cultivation adds more fertilizer, herbicides and more intensive machine work. Results vary by agro-climatic zone, soil type and farm. The tables give for each technology low average and high production. Some farmers will do worse than the low and some will do better than the high. However, in any year most farmers will perform between the two. The following gives the resualts for durum wheat: Net Income Plus Return to Labor per ha Average Year Poor Year Good Year -------------- Dinar/ha ----- (a) Traditional Farmer 15 -15 58 (b) Intermediate Technology 26 -6 60 (c) Modern Technology 37 0 96 Source: Table 9. The official exchange rate is approximately US$1 = D .5. 19. The more modern the technology used, the higher the return per hectare, even in bad years. There is an incentive to use more modern technology, even though Table 1 shows it to be more expensive per hectare. However, because losses will be considerable in bad years, there is risk involved in wheat production with all technologies. This risk is linked to rainfall. Low rainfall causes low yields and low income, or even loss.  -39 - 20. Similar results are obtained for bread wheat and barley. Net Income and Return to Labor per ha of Barley and Bread Wheat Average Year Poor Year Good Year ---------------D'inarha--------------- A. Barley (a) Traditional Technology -3 -13 11 (b) Intermediate Technology 17 -11 44 (c) Modern 42 -11 80 B. Bread Wheat Intermediate Technology 17 -23 56 Source: Tables 10, 11. 21. The income obtainable from cereal production is lower than the average Tunisian household expenditure, discouraging cereal cultivation. The net income obtainable from durum wheat production can be estimated by assuming that the average farm, which has 14.4 ha in Tunisia, puts its entire area under durum wheat in the average production year. Traditional Intermediate Intensive Technology Technology Technology --------------- Dinars/farmily------------- Net Farm Income (14.4 ha) 216 374 533 In all cases the net farm income is lower than the average Tunisian household expenditure in 1980 (including agriculture) of D 1,240. Even modern farmers on the average farm would earn only 43% of what the average Tunisian household spends. This inequality wTil induce farmers to substitute other crops having a higher value per hectare, or if this is impossible, to leave agriculture. Since the cereal-growing area of Tunisia receiving enough rainfall to permit cultivation of higher value crops such as fruits and vegetables is limited, farmers are leaving agriculture, rapidly. Rural-urban migration is at .5% p.a. To obtain a revenue equal to D 1,240, a cereal farm must be about 35 ha and use modern technology. Table 18(a) of the main text shows that about 9% of Tunisian farms have this area or more. 91% are smaller. 75% of farms are smaller than the average 14.4 ha. 22. The net value of production in economic prices is'shown below for each cereal crop. The value in domestic prices is shown for comparison. Labor costs are deducted. Only the intermediate technology situation in the average year is shown (see Table 9-11 for detail). Average Net Value Effective /1 Effective /2 of Production per ha /3 Subsidy Protection Domestic Economic % % Prices Prices ----- Dinars/ha ---- Durum Wheat 10 52 -81 -60 Bread Wheat 17 79 -79 -66 Barley 1 12 -92 -32 /1 Effective subsidy is measured as : (income per ha in domestic prices) - (income per ha in economic prices) divided by income per ha in economic prices. /2 Effective protection is measured as above, except that value added is substituted for income. /3 Income per ha is less than that shown in the tables above because labor costs have been deducted as an economic cost here.  - 40 - 23. The net economic value of cereal production per ha is higher than the value in domestic prices. The negative levels of effective subsidy and effective protection indicate that income per hectare from cereal production is reduced by Government price policy. Effective subsidy is the percent by which income is changed as a result oE Government price policy. Effective protection measures the percent by which value added changes as a result of Government price policy. The results show that Government is holding the official price of cereals far below world prices. The input subsidies on fertilizer and herbicides are not sufficient to alter this effective taxation. 24. The above price relationships are in 1980 prices. The following price data indicate that the situation has been worsening: Percent Annual Average Rate of Price Increase 1974-1980 Durum Wheat Prices 8.1 Bread Wheat Prices 7.9 Barley Prices 11.7 Costs of Cereal Production 12.5 Source: "Rapport de la Sous-Commission, Prix et Commercialisation, Juin 1981," and Ministry of Agriculture. 25. The uncontrolled market for cereals does not offer a more remunerative alternative to the official price. Official prices effectively set the uncontrolled market price. This results from the fact that if the uncontrolled market price increased above the official price, (a) farmers would sell their production on the uncontrolled market pushing the price down, and (b) the "Office" would import cereals for sale to industrial flour mills. Industrial mills must buy from the "Office." Both these tendencies will push uncontrolled market prices down to the official price level. If the uncontrolled market price went much below the official level, farmers would sell their entire production to the "Office," forcing the uncontrolled market price upwards. In this circumstances the uncontrolled market can exist only due to "Office" inefficiency in collection. The "Office" has only 150 collection centers which have insufficient capacity to handle supply after the harvest. In addition, small farmers living a considerable distance from collection centers incur substantial transport costs to deliver to the centers. As a result, about two-thirds of domestic production is either consumed on the farm or sold in the uncontrolled market. 26. It is interesting that the marketing of pulses is not controlled by Government. Pulses can be sold directly from producer to consumer on local markets, through the wholesale market, through the "Office des Cereales," or grain cooperatives (CCSPS, COSEM). The price is determined by supply and demand, although the "Office des Cereales" will buy at a floor price. It is this same system, which works well for pulses, which is recommended for cereals below.  - 41 - Conclusions for Cereal Price Policy 27. Price policy has reduced cereal prices paid to the farmers. A price policy originally designed as a price stabilization scheme has been converted into an instrument of effective taxation. Given the scarcity of production, stabilization of prices means the maintenance of low prices. The effects of this are to reduce income from cereal production. 28. Farm income obtainable from cereal production is considerably lower than average income in Tunisia, and the income gap is increasing partly as a result of price policy. Per capita expenditure in rural areas is about 52% of that in urban areas/l. 29. Most studies conducted elsewhere indicate an elasticity of cereal production in response to price changes between .3 and 1 (a 1% increase in price increases output by .3 to 1%)/Z. Artificially depressed prices are therefore partly responsible for recent stagnation in cereal production. Other factors are of course important in explaining cereal production, particularly technological change. However, with lower income available per ha of cereal production due to discriminatory price policy, less use will be made of modern inputs, and average yields will be lower. Studies in East Asia suggest a close relationship between output prices and input use/3. Other research has indicated the linkage between pricing policy, the character of new technological discoveries and the adoption of these techniques by /1 1975 Household Budget Survey, and Table 20 to the main text. /2 P.L. Scandizzo and Colin Burce, "Methodologies for Measuring Agricultural Price Intervention Effects," World Bank Staff Working Paper No.394, June 1980. /3 Comparative Price Data for Fertilizer and Rice Price of Paddy Price Fertilizer Ratio of Paddy Yields to Producers Nutrients Paddy Price in 1970 (in US cents to Producers to Fertilizer (in tons Country per kg) (in US cents Price per ha) per kg) Japan 30.7 21.5 1.428 5.64 Korea 18.4 19.1 0.963 4.55 Rep. of China 11.7 26.2 0.447 4.16 Malaysia 8.8 20.3 0.433 2.72 Sri Lanka 11.3 15.8 0.715 2.64 Indonesia 4.5 15.2 0.296 2.14 Thailand 4.5 14.2-50.0 0.315-0.090 1.97 Philippines 7.0 17.3 0.405 1.72 Burma 3.1 25.1 0.124 1.70 Source: C. Peter Timmer and Walter P. Falcon, "The Political Economy of Rice Production and Trade in Asia," in Agriculture in Development Theory, ed. by Lloyd G. Reynolds, New Haven and London, Yale University Press, 1975. As the ratio of output price to input price increases, input use and crop yields increase.  - 42 - farmersL. There is a strong link between price incentives and private investment in chemical inputs, labor, land levelling, irrigation and other measures to increase farm output is strong. Where profits, permitted by reasonable prices are high from the adoption of a new technology, the adoption is made/ . The decline in the rate of increase in Tunisian cereal yields from 10% p.a. during the period 1965-1974 to 1.4% p.a. thereafter is partly due to the deteriorating price situation for cereal productionL_3. More intensive use of inputs, permitted by higher cereal prices, would be economically desirable since income per hectare, measured in economic prices, increases with intensification. This is shown in the following, from tables 9-11: Value of Production per ha in Economic Prices Durum Wheat Barley