Tunisia - Technical Assistance Project

Document of . w X The World Bank i FOR OFFICIAL USE ONLY Report No. P-3306-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN THE AMOUNT EQUIVALENT TO US$4.5 MILLION TO THE REPUBLIC OF TUNISIA FOR A TECHNICAL ASSISTANCE PROJECT August 26, 1982 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 Currency Unit - Tunisian Dinar (TD) US $1.00 - 0.538 TD TD 1.00 - 1.859 US$ FISCAL YEAR January 1 - December 31 ABBREVIATIONS API Agence de Promotion des Investissements (Investment Promotion Agency) BDET Banque de Developpement Economique de Tunisie (Tunisian Economic Development Bank) CEPEX Centre de Promotion des Exportations (Export Promotion Center) CNEA Centre National des Etudes Agricoles (National Center for Agricultural Studies) CNEI Centre National d'Etudes Industrielles (National Center for Industrial Studies) ETAP Entreprise Tunisienne d'Activites Petrolieres (Tunisian Company for Petroleum Activities) IAEA International Atomic Energy Agency MNE Ministere de l'Economie Nationale (Ministry of National Economy) MOA Ministere de l'Agriculture (Ministry of Agriculture) MOPF Ministere du Plan et des Finances (Ministry of Planning and Finance) STEG Societe Tunisienne de l'Electricite et du Gaz (Tunisian Electricity and Gas Company) STIR Societe Tunisienne des Industries de Raffinage (Tunisian Company for Refining Industry) UNDP United Nations Development Program  FOR OFFICIAL USE ONLY REPUBLIC OF TUNISIA TECHNICAL ASSISTANCE PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Tunisia Amount: US $4.5 million equivalent, including a capitalized front-end fee. Terms: Payable in 17 years, including a grace period of four years, with interest at 11.6 percent per annum. Relending The Government would onlend US$300,000 to Socidte Terms. Tunisienne de l'Electricite et du Gaz on the same terms and conditions as those of the Bank loan. Project Description: The objectives of the project would be to increase the number and improve the quality of investment projects; strengthen local project preparation capabilities in both public and private sectors; provide a sound empirical base for policy formulation in agriculture, industry and export, and energy; and reinforce institution building efforts in all three sectors. The project would consist of the following components: Agriculture: Preparation of national programs leading to investment projects for agricultural services, and feasibility studies on projects in Northern Tunisia and on antidesertification. Industry and Export: Preparation of six priority subsectoral studies to identify a minimum of 20 specific new investment projects, feasibility and export-marketing studies, review of the institutional environment for export promotion, and establishment of an export expansion system. Energy: Assessments of renewable energy sources, energy conservation audits, plan for handling petroleum products, geological surveys, and power system planning. Benefits/Risks: The project would help prepare and promote a portfolio of investment projects and improve local capabilities to do so in the future. Because of their multi-sectoral character, effective coordination of studies is essential. The risk that this may not take place has been minimized by appropriate institutional arrangements in the Ministry of Planning and Finance and in the technical Ministries and agencies. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - .1 - Estimated Project Costs: Local Foreign Total ------------US$ Mi3lion------------ Agriculture Studies and Programs 0.72 2.13 2.85 Training 0.01 0.01 0.02 Equipment - 0.19 0.19 Subtotal 0.73 2.33 3.06 Industry and Export Studies at CNEI 0.20 0.58 0.78 Training at CNEI 0.02 0.07 0.09 Equipment for CNEI - 0.03 0.03 Studies at CEPEX 0.11 0.32 0.43 Training at CEPEX 0.01 0.06 0.07 Subtotal 0.34 1.06 1.40 Energy Studies 0.74 0.68 1.42 Training 0.12 0.36 0.48 Equipment 0.17 1.63 1.80 Subtotal 1.03 2.67 3.70 Total Base Cost 2.10 6.06 8.16 Physical Contingencies 0.11 0.11 0.22 Price Contingencies 0.19 0.36 0.55 Total Project Cost 2.40 6.53 8.93 Front-end Fee on Bank Loan - 0.07 0.07 Total Financing Required 2.40 6.60 9.00 Financing Plan: Local Foreign Total Percent ------US$ Millions----- Government 2.40 2.10 4.50 50 Bank - 4.50 4.50 50 Total 2.40 6.60 9.00 100 Estimated Disbursements: Bank FY 1983 1984 1985 1986 -------US $ Millions------- Annual 1.80 1.40 0.80 0.50 Cumulative 1.80 3.20 4.00 4.50 Staff Appraisal Report: None  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVWJCPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA FOR A TECHNICAL ASSISTANCE PROJECT 1. I submit the following report and recommendation on a proposed Bank loan to the Republic of Tunisia for US$4.5 million equivalent to help finance a Technical Assistance Project. The loan, which includes a capitalized front-end fee of 1.5 percent on the Bank loan, would be repaid over 17 years, including 4 years of grace, with interest at 11.6 percent per annum. The Government would onlend US$300,000 equivalent of the Bank loan to the Tunisian Electricity and Gas Company (STEG) on the same terms and conditions as those of the Bank loan. PART I - THE ECONOMY 1/ 2. The last economic report entitled "Tunisia - Country Economic Memorandum" (No.3399-TUN) was issued on September 15, 1981. Economic missions visited Tunisia in October 1981 and March 1982 to review a draft of the Sixth Development Plan (1982-86); this part reflects their preliminary findings. Country Data sheets are attached in Annex I. 3. Much of Tunisia is arid or semi-arid. Only three percent of arable land is irrigated, and areas where rainfed agriculture is possible are subject to severe year-to-year fluctuation in rainfall. Tunisia's most important raw materials are phosphates, petroleum, and natural gas; al- though the known exploitable reserves of oil and gas are approaching depletion, and those of phosphate deposits are of relatively low quality, there are recent promising indications of new reserves, but it is too early to assess their exact potential. There is also considerable tourism potential, and efforts have been made during the last decade to develop it rapidly. 4. Since independence in 1956, Tunisia has undertaken a massive effort towards development of its human resources, paying special attention to family welfare, education, and technical and vocational training. As a result, the infant mortality rate declined from 150 in the early 1960s to 90 at the end of the 1970s, the adult literacy rate increased from under 15 percent to about 62 percent, and average caloric supply per capita increased from about 80 to 115 percent of minimum standard requirements. The sharp decrease in mortality rates was not fully compensated by the simultaneous decrease in fertility and birth rates, despite an active family planning policy pursued by the Government. Therefore, the annual natural demographic growth rate decreased only slightly from 2.6 percent in the 1960s to 2.4 percent in the 1970s. Moreover, after 1976, the net emigration of Tunisians abroad was sharply reduced by restrictive measures taken in the EEC countries and Libya. As a consequence, the residential population of 6.57 million by the middle of 1981 exceeds the level projec- ted five years earlier by 130,000. I/ Part I is substantially the same as Part I from President's Report No. P-3291-TUN of April 29, 1982, for a Medjerda/Nebhana Irrigation Development Project.  -2- 5. Agriculture still occupies nearly one out of every three Tunisians in the labor force. To accelerate job creation, more than half of total invest- ments of the Fifth Plan (1976-81) was allocated to directly productive sec- tors, but the direct employment effects of the leading sectors (petroleum, phosphate mining and processing, and tourism) are small. These sectors, how- ever, make a vital contribution to GDP, public savings, and exports. They provided 65 percent of the country's foreign exchange earnings in 1980 while manufacturing activities, except phosphate-based chemicals, provided 17 per- cent. 6. Recent Economic Developments. During the Fifth Plan the growth performance differed from the impressive growth achieved from 1971 to 1976, not so much in terms of overall growth as in terms of the underlying growth factors: output in agriculture and in food industries has grown on average below the demographic rate since 1976, partially as a result of bad weather conditions; textile production and tourism development grew at a slower pace than projected both mainly because of the slump in European markets. By contrast, manufacturing industry other than textiles, as well as energy, phosphate processing, construction, and construction materials, expanded at a fast pace. 7. In spite of the considerable increase in domestic demand, particular- ly in investments, the balance of payments situation remained favorable from 1976 to 1981. Imports in current prices grew at a slower pace than exports, and the terms of trade improved significantly due to sharply higher post-1974 export prices for crude oil. As a result, the resource gap remained relative- ly small, and domestic savings financed on average over 76 percent of invest- ment, which increased from an average of 23 percent of GDP for 1972-76 to 30 percent for 1977-81. The current account deficit averaged $450 million per year (1977-81), and was easily financed; grant aid and private investments (mainly for oil exploration) provided about 30 percent, while the remainder was mainly covered by long-term foreign borrowing. Thus, during the 1970s total foreign debt increased little relative to GDP, and the debt service ratio dropped. 8. The public sector has played a major role in mobilizing and re- distributing domestic resources. Central Government revenues were equivalent to about one-third of GDP on average for the Fifth Plan period, one of the highest shares among middle-income countries. Over 30 percent of these revenues was saved, and public savings financed close to two-thirds of total Government capital expenditures. This comfortable public finance situation permitted a rapid increase in subsidy payments to private consumers and public enterprises. Such tranfers including for social security accounted for 19 percent of total current budget outlays and over 7 percent of GDP in 1981. 9. The main objectives of the Fifth Development Plan were achieved, except for the employment target. The actual GDP growth fell short by 1.2 percentage points of the planned rate of 7.3 percent p.a., mainly because of poor performance in agriculture, while the investment objective of $9.8 billion in current prices, or 30 percent of GDP, was fully met. Completion of some large projects in the public sector (steel, expansion of the oil re- finery) were, however, delayed, but private sector investments, both foreign and national, exceeded Plan targets.  - 3 - 10. Open and hidden unemployment is a serious problem for the Tunisian economy at present. During 1977-81, although job creation objectives were achieved in all non-agricultural sectors except construction, these sectors could only absorb 90 percent of new job seekers at a time when migration to Libya and Europe slowed down. The overall unemployment rate, estimated at about 13 percent of the labor force in 1980, has therefore not declined. 11. Medium-term Prospects. The Sixth Development Plan (1982-86) was approved by the Parliament in July 1982. The main objectives are employment generation, export promotion, and more rapid growth in the three least developed regions of the country (North-West, Center-West, and South). Sectoral priority is to be given to agriculture, tourism, and electrical and mechanical industries. 12. The outlook for investment and growth during this period and beyond will partly depend upon future developments in the oil and natural gas sec- tor. Oil and gas exploration programs under way have been encouraging. Based on known reserves, and with the possible exploitation of smaller fields that recently became profitable, it is generally expected that domestic oil and gas production would at best be stabilized at about its present annual level of 5-6 million tons of oil equivalent until the end of the decade. However, barring large new oil or gas discoveries, and given the rapid rise in domestic demand for energy, Tunisia will have to face the consequences of a relative decline in energy revenues. The Government considers that the situation requires immediate policy changes and is analyzing the most urgent ones to be included in the Sixth Plan. By introducing these changes on time, Tunisia expects to reduce the associated economic and social strains, and avoid major balance-of-payments problems. 13. The Sixth Plan recommends a GDP growth objective in the range of 5.9 to 6.1 percent depending on agricultural performance. This growth rate is in line with recent trends. Projected growth of traditional exports (tourism, textiles, and phosphates-based chemicals) is insufficient to compensate for the projected decline in oil export revenues; these exports should be supplemented by new ones, in particular electrical and mechanical products. Production diversification and export promotion will, however, take time to bear fruit given, in particular, the depressed world market prospects. The Plan strategy therefore rightly aims at containing domestic demand in order to control import growth. The macroeconomic scenario assumes no improvement in terms of trade, as was brought about by oil price rises in 1973-74 and in 1979-80. This would not only affect the external account but also result in slower growth of domestic savings, particularly public savings. 14. Consequently, the Sixth Plan projects a drop in the fixed investment rate from 30 percent of GDP in 1977-81 to about 25 percent for the Plan period. This would still imply an increase of 24 percent in constant prices relative to the Fifth Plan investment. A major objective is to correct recent capital intensive biases in projects by appropriate sectoral allocation of investments. More resources would be allocated to small and medium manufac- turing enterprises in the underdeveloped regions, in order to ease the unemployment problem and reduce income disparities between rural and urban areas. Since June 1981, a new set of policy measures has targeted the incen- tive system toward this objective. The Investment Code was modified to offer free industrial zones and direct subsidies to job creation for new projects  - 4 - in underdeveloped zones, and a Promotion Fund for Handicrafts and Household Workshops was created. In order to promote a more efficient technical and financial management of the public and private modern sector, the Plan assigns a major role in project promotion and supervision to an expanded network of new Development Banks (two opened in 1981 and three are planned for 1982); they are to be joint ventures with foreign investors and should alleviate the pressure on the budget to finance too large a share of public investments. 15. Increasing budgetary constraints will require a reassessment of the present policies of subsidies for energy, basic foodstuffs, transportation, and public sector enterprises. In addition, interest rate policy and a better-adjusted fiscal system should be used to restrain final consumption and stimulate savings. As first encouraging steps in 1981 and in early 1982, sizeable price increases in energy and agricultural products were implemented, and the whole interest rate structure was revised upward, rates on saving accounts and term deposits being increased by 1.5 to 2 points. There was a sizeable increase of the legal minimum wage (30 percent) in March 1982, mainly to improve the low-wage earners' living conditions, but the Government recog- nizes that overall wage and salary policies should keep labor cost increases (including social costs chargeable to enterprises) in line with productivity increases, particularly since Tunisia wants to stimulate tourism, and improve its international competitiveness for exports of manufactured goods. 16. Social Issues. Tunisia's social performance has been impressive since independence, and the country has come a l1 lg way towards meeting the basic needs of its population and reducing absolute poverty. About 16 percent of GDP is now devoted to social programs. However, unemployment among the young and regional pockets of poverty still present serious social problems. 17. Recently published data show that the continued attention of the Government to poverty oriented social programs resulted in a reduction of the ratio of people under a minimum standard income from 17 percent of the total population in 1975 to 13 percent in 1980. During this period, the overall number of this group declined in urban areas but remained the same in some rural zones in the center of the country, as a consequence of poor agricul- tural performance. Income differentials between the coast (East) and the interior (West) widened, in part because the system of price controls and subsidies as well as budgetary expenditures had a weak redistributive impact. The Government is using the forthcoming Plan to focus on the largest zones of poverty, with a view to eradicating them before the end of this century. Reducing the demographic growth rate is considered an important factor in this endeavor. 18. Education expenditures rank first among budgetary outlays. The comprehensive education system provides free access to all students, and the gross enrollment rate has reached 102 percent for primary education, and 25 percent for secondary education. The performance of the system could, how- ever, be improved by expanding vocational training programs, improving their relevance and responsiveness to labor demand, and to the special needs of the poor and rural groups.  - 5 - 19. Public health services are second among social expenditures, and their overall beneficial effect is reflected in the improvement of the vital statistics (para. 4). There remain, however, regional disparities in the availability of hospital beds, doctors and nursing personnel; health services have concentrated largely on curative medicine, and the medical referral system is not functioning properly. As a result, the rural poor are often excluded. Closely linked to nutritional deficiencies, infant mortality remains high relative to middle-income countries. 20. In the Sixth Plan, investment in education, health, housing and water supply is focussed more on deprived areas, provided at lower costs (health, shelter), and made more relevant to the needs of the economy (training). In education, two reforms are under discussion: the first one would provide a nine-year schooling period for all children, and the second would create polytechnical high schools combining basic and technical education. In health, the Sixth Plan allocates more resources to preventive medicine and nutrition education. Finally, as regards housing, public subsidized programs will be directed to the neediest population groups. The housing demand from households above the minimum standard income limit will be satisfied by the private sector. 21. External Assistance and Foreign Debt. As mentioned above, the growth of foreign borrowing was modest during the second half of the 1970s, and a growing share of foreign funds was provided by public sources at relatively soft terms. During the 1977-80 period, foreign loan commitments averaged about $700 million per annum, 62 percent of which in the form of official assistance (ODA). About 65 percent of ODA commitments came from bilateral sources, chiefly France, the Federal Republic of Germany, Canada, and some oil-surplus countries. About 24 percent of total ODA was committed by the Bank Group, and some 11 percent by other multilateral sources. Borrowing terms were favorable, averaging 5.8 percent interest and 18.5 years maturity, including a grace period of 5 years. At the end of 1981, debt outstanding and disbursed was estimated at about $3.4 billion, or 40 percent of GNP; debt service was 12 percent of exports of goods and services, as compared with 17.7 percent in 1970. 22. The external trade deficit reached $608 million in 1981, and is projected to grow to about $1.2 billion in 1986. New loan commitments from abroad, projected at $1.2 billion per year on average (at present dollar exchange rates), should not be difficult to obtain, with ODA providing half of the total. Leaving aside the possibility of major oil and gas discoveries, external debt service would be about 13 percent of total export revenues in 1986. 23. These relatively favorable prospects would depend on a timely implementation of the already mentioned policy changes to curb domestic demand, promote exports, and improve public sector savings. It should be noted, however, that the Sixth Plan recommends a low growth scenario in order to preserve the country's relatively high financial stability and credit- worthiness. This objective is even more crucial if the country is to succeed in mobilizing the large inflows of direct foreign capital assumed in the Plan. Foreign investments were small during most of the 1970s but have gained momentum during the last three years in line with increased activities in the oil sector, and new incentives offered to foreign investors in manufacturing.  Such investments have increased from $50 million in 1976 to about $200 million in 1981, and have been equivalent to 10 percent of total investments for 1977-81. The Plan's growth scenario estimates that about 15 percent of total investment could be financed by foreign capital, equivalent to an annual inflow of $400 million. The newly created Development Banks (para. 14) are expected to play a significant role in this context. 24. In conclusion, the balance-of-payments outlook can be considered favorable in the medium term. In the longer term, much will depend on the policy changes to be initiated during the next few years, and on developments in the hydrocarbon sector. Considering its long record of prudent and skillful balance-of-payments and external debt management, there are good grounds to assume that Tunisia will formulate and implement the necessary policy changes and will continue to be creditworthy for future Bank lending. The Bank's close dialogue with the Government on several policy aspects at the macro and micro levels will be pursued in connection with the implementa- tion of the Sixth Development Plan. PART II - BANK GROUP OPERATIONS IN TUNISIA 25. Since 1962, the Bank has committed to Tunisia fifty-two loans and eleven IDA credits amounting respectively to $1,051.9 million and $70.0 million (net of cancellations) of which twenty-one loans and all credits have been fully disbursed. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1982, and notes on the execu- tion of ongoing projects. Project implementation is generally satisfactory. As of June 30, 1982, overall disbursements amounted to 52 percent of appraisal estimates, which compares favorably with other countries in the region. Disbursement performance for irrigation, industrial finance and port projects has generally been above the country average, while larger than average disbursement delays have been experienced for agricultural credit, education, highway, urban and fisheries projects, due to project specific problems that are being addressed through supervision missions and sector discussions. In a number of sectors, important institutional improvements have been achieved, and autonomous agencies have been created or strengthened to ensure the efficient management of the related sectors or subsectors. 26. The Bank's lending strategy in Tunisia aims at supporting Government efforts to; (a) increase employment; (b) encourage more balanced growth and distribution of income among regions and income groups with particular emphasis on rural areas; (c) promote export-oriented policies, technological changes and labor productivity; and (d) provide selective support for the development of basic infrastructure and for institution building in key public services. An important feature of this strategy is to support the Tunisian authorities in the timely and well-coordinated preparation of projects through missions and advice by Bank staff, the assistance of the IBRD/FAO Cooperative Program, and the use of the Bank's Project Preparation Facility. The Bank is also supporting the Government in its efforts to increase the mobilization of domestic resources, and to secure cofinancing for the projects it assists. The latter is particularly important in view of the extent of Tunisia's external resource needs.  - 7 - 27. Within this broad framework, past lending emphasized support for long-term investments in infrastructure and social development. Lending for urban and social development, including water supply, sewerage, education, health, urban development, and the Tunis planning and public transport project has accounted for 25 percent of Bank/IDA commitments in Tunisia since 1971. Lending for transport, power and tourism infrastructure has accounted for 34 percent. Agriculture and fisheries have received 23 percent, and industrial and hotel financing, mostly through the Economic Development Bank of Tunisia (BDET), 18 percent of total commitments. 28. In line with its lending strategy, the Bank will pursue its efforts in key sectors of the economy that offer prospects for economic and social development. It will also assist projects which address the needs of the least developed regions of the country, develop research capabilities, increase productivity, and help reduce the gap between income groups, and between urban and rural areas. Particular attention will be paid to employ- ment creation, institution building, and agricultural development. In addi- tion to the proposed technical assistance project aimed at improving the Government's capability for project identification and preparation, proposed future lending would include projects in agriculture, industry, energy, urban development and education. 29. The Bank's economic and sector work will continue to focus on strengthening the macroeconomic and sector base for our lending program; it will be more centered in the future on the analysis of economic issues and policies related to the necessary adaptation process from a petroleum export- ing to a petroleum importing country. A preliminary analysis of this issue was included in the last Country Economic Memorandum (Report No. 3399-TUN of September 15, 1981). The Plan Review Report, to be issued together with two sector surveys on agriculture and urban development towards the end of 1982, will deepen this analysis. Further economic and sector work will include a review of employment issues, of incentive and pricing policies (in association with the study on effective protection), of the long-term energy strategy and of the education, transport, and small scale industry sectors. 30. The Bank and IDA accounted for about 15 percent of total public commitments to Tunisia during 1979-1980. Their share in total debt out- standing and disbursed at the end of 1980 (including loans from private sources) was 10 percent and their share in debt service during 1980 was 11 percent. The share of the Bank and IDA in Tunisia's disbursed external debt is expected to increase to about 14 percent by 1986, and their share in the debt service to about 18 percent. 31. IFC has invested in NPK Engrais (a fertilizer plant), in BDET, in Compagnie Financi6re et Touristique (COFIT, a company to promote and invest in tourism projects), in Societe Touristique et Hoteliare RYM (a large hotel development), in Industries Chimiques du Fluor, which produces aluminum fluoride from local fluorspar for export, and in the Sousse-Nord integrated tourism development project. IFC's net commitments in Tunisia totalled $11.3 million, as of March 31, 1982. IFC has recently arranged a $40 million loan package to COFIT, of which about $20 million equivalent for IFC's own account, and is looking into the possibility of loans for the expansion of a phosphoric acid fertilizer plant and for a new cement plant in the vicinity of Tunis.  - 8 - PART III - SECTORAL BACKGROUND The Institutional Setting 32. At the start of the Sixth Development Plan (1982-86), the portfolio of well-prepared projects in agriculture and industry slated for the Plan is insufficient to meet the sectoral targets. For only one fourth of the agricultural projects and one third of the industrial projects intended for the Plan, feasibility, engineering, finance, and marketing studies are com- plete and the projects ready for implementation. This situation prompted the Ministry of Planning and Finance (MOPF) to request technical assistance from the Bank to help strengthen project preparation capabilities in Tunisia, to increase the number and improve the quality of investment projects, and thus help achieve Plan targets. 33. This MOPF request was made in the context of existing technical assistance activities in Tunisia by multilateral aid agencies and bilateral aid donors, to complement such activities and bridge the gaps identified in the present programs. To help assure the realization of Plan objectives, the MOPF in consultations with Bank staff developed an integrative approach which combines consultant services, staff training, performance criteria, and follow-up procedures. The studies, training, and specialized equipment to be financed under the proposed Project were selected on the basis of recently completed sector reviews by the Bank. These reviews identified the con- straints to sectoral growth and the measures to eliminate or ease such con- straints, as well as the nature and scope of studies needed to carry out pro- grams of national policy reform. 34. The Government recognizes that project preparation is a continuous and expanding process which needs to be strengthened, in both the private and public sectors. To this effect, the MOPF has designated its Projects Depart- ment to monitor and follow up project preparation in the public sector, especially for large projects. The Projects Department also monitors projects during execution through approving disbursements from the Annual Economic Budget. 35. Several training programs to strengthen general project preparation capabilities in public agencies are currently being financed by multilateral and bilateral aid agencies. The Bank's Economic Development Institute (EDI) assisted in the preparation of a training program for Tunisian officials in project appraisal methodology in agriculture, industry, and development banking. A series of courses will be conducted in Tunisia over the next 18 months in these three areas. The United Nations Development Program (UNDP) has agreed to help finance these courses, with the U.N. Department of Technical Cooperation (DTC) as executing agency. Furthermore, the Government has approached bilateral sources and UNDP to finance a number of experts to work in the Projects Department of MOPF to assist and train staff in the general methodologies of project appraisal and monitoring. The proposed Technical Assistance Project complements these efforts by providing consul- tants and training to strengthen local agencies specialized in agriculture, industry, and energy to carry out both general project preparation and studies for national and sector-wide policy reforms.  - 9 - 36. A number of local development banks and autonomous government agencies contribute to general and specialized project preparation. Examples include the Tunisian Economic Development Bank (BDET), the National Center for Industrial Studies (CNEI), the Investment Promotion Agency (API), the National Center for Agricultural Studies (CNEA), and the technical departments in the Ministry of Agriculture (MoA). The UNDP has participated in financing some of these and similar efforts during the 1970s. Aid agencies of bilateral donors have also contributed to project preparation, especially in defined sectors with special interest for the donors. Despite increased capabilities of public and semi-public agencies in project preparation in recent years, the continuously rising demands for specialized project preparation services have increased the need for consultants. Compared to the earlier Plans for which a major portion of project preparation was done by foreign consultants, the orientation in the 1980s is to depend as much as possible on local consul- tants. In highly specialized tasks, and in cases where qualified local consultants are not available, foreign expertise is to be employed directly in Tunisian agencies to transfer technical know-how to nationals. Sectoral Developments, Policies and Issues 37. The proposed Project addresses some of the key issues in three lead- ing sectors of the Tunisian economy: agriculture, industry, and energy. In agriculture, the principal issues are instituting an incentive system to in- crease the profitability of agricultural investment and production, moderniza- tion of farm operations, and maintenance and expansion of productive resources. In industry, the central issues are broadening the production base and achieving the objectives of maximum employment generation, export expan- sion, and greater private sector participation. In energy, the main issue is formulating a comprehensive plan for the development, production, and use of energy to meet future demand for energy at minimum cost. 38. Agriculture: Tunisia's agriculture performed well in the 1970s compared to that of other middle-income countries, growing at 4.4 percent per annum in real terms. Agriculture's share in Tunisia's GDP has been declining, and now stands at about 15 percent, compared to 24 percent in 1972. Similarly, agriculture's share in total employment has declined to 35 percent in 1979, from 41 percent in 1972, as has its share in commodity exports (13 percent in 1979, compared with 43 percent in 1972). The decline in the rela- tive role of agriculture has been caused by the more rapid growth of other sectors, particularly petroleum, manufacturing and tourism. Tunisia's rapid GDP growth (about 7 percent per annum in the 1970s) and population growth (2.4 percent per annum) have both increased demand for food faster than supply, causing a rapid expansion in food imports (17 percent per annum growth in current prices during the 1970s). Supply and demand projections suggest that expanding food imports will continue, unless the major constraints to agricul- tural growth can be overcome and output increases accelerated. Expanded agricultural output would at the same time contribute to Government objectives of increased rural income, employment creation, expanded foreign exchange earnings and savings, and economic growth. 39. The major issues facing agriculture have been identified by a joint Bank/Government sector mission in late 1981 and are reflected in the Sixth Development Plan as follows:  - 10 - (a) most agricultural prices and farm input prices are fixed by Government from the farm gate to retail levels. Over time, the system of fixed prices has become significantly distorted. In many cases, farm gate prices are fixed at artifically low levels, discouraging production of food. In some cases, production is subsidized (mostly irrigated crops). Food price subsidies at the retail level encourage excess consumption. The system of subsidies and taxes on farm inputs distorts decisions with respect to farm input use; (b) public marketing and input supply enterprises are relatively inefficient. Private marketing and input supply enterprises are so closely regulated that they have not developed significantly; (c) numerous institutions and project administrations have introduced autonomous or semi-autonomous research, extension and credit systems for individual crops or regions, thus hampering the effectiveness of the Government's agricultural extension, research, and credit services; (d) Tunisia's land tenure system is not conducive to developing agriculture. Most farms are extremely small (68 percent have less than 10 ha.) and fragmented (70 percent have two or more separated parcels). Many are owned by absentee landlords who do not exploit the land properly. Large tracts of collectively owned land are poorly managed and overgrazed by livestock; (e) soil erosion and desertification are causing both rapid loss of arable land and the silting up of reservoirs; (f) irrigation perimeters are poorly maintained, and management systems are inadequate; and (g) there is considerable untapped potential for livestock develop- ment; further introduction of "green revolution technology" consisting of higher yielding crop varieties, fertilizers and other chemical inputs; small scale irrigation development; and fruit and vegetable production using improved irrigation systems, greenhouses, and better cultivation practices. 40. Projects and policy reforms have been identified which would contribute to overcoming the above constraints. These require immediate preparation if execution is to begin under the Sixth Plan. The proposed Technical Assistance Project would facilitate the preparation of high priority projects and lay the groundwork for policy reforms. 41. Industry: Growth of the manufacturing industry during the Fifth Development Plan (10.3 percent in 1977-81) exceeded growth of GDP (6.7 percent). Total employment creation in the sector exceeded its target, and represented 45 percent of employment creation for the Plan. The sector absorbed only 18 percent of realized gross investments, against a targeted 23 percent, mainly because of delays in large projects (public and Government promoted) in chemicals and construction materials, and a  - 11 - slowdown in tectiles. While public investments were delayed, private investments surpassed targets. Manufacturing exports performed well, meeting the targeted 45 percent of total commodity exports in the Plan. 42. Despite these quantitative achievements, the share of manufac- turing in GDP and in employment remained modest at 11 percent and 20 percent, respectively. Several issues face industrial development in the 1980s: (a) shortage of identified industrial projects in export-oriented activities and in the intermediate goods and capital goods sectors; (b) distortions in the price structure due to Government price intervention, regulatory structure, and overprotection of the domestic market, all of which discourage investment either in small and medium industry, or in export industry; (c) slow development of institutions responsible for industrial project identification, preparation, and promotion; (d) inadequacy of export promotion; and (e) low labor intensity of new projects and the need to promote labor-intensive projects. 43. Energy: Tunisia's economic growth during 1977-81 was financed without excessive foreign borrowing mainly because of increased foreign exchange earnings provided by the export of crude oil and some petroleum products. Tunisia exports its entire production of crude oil at premium prices because of its superior quality, and imports cheaper crude for domestic use. In 1980, exports of crude oil and petroleum products amounted to about 5.6 million tons compared to imports of about 2.6 million tons which provided about $573 million in net foreign exchange earnings. However, the contribution of the energy sector to future net foreign exchange earnings of the country is expected to decline steadily as exports of crude oil and petroleum products level off because of the continued growth in the domestic demand for energy and the stabilization of annual output of the presently-proven reserves. Unless major oil and gas fields are discovered and domestic demand for energy reduced significantly, Tunisia is expected to become a net importer of energy towards the end of the decade. 44. The Sixth Plan for energy has been formulated on the assumption that major new discoveries would not be made during the next five years. As a result, the Plan concentrated on stemming the growth of demand for energy and intensifying the development and exploitation of domestic energy resources. On the demand side, the Plan calls for decelerating the growth of demand from its level of 12.5 percent during the past five years to about 10 percent for 1982-1986 and to 7 percent for 1987-1991, by: a) increasing prices of petroleum products and electricity to reach parity with their economic cost by the end of 1983; b) emphasizing labor-intensive industries and slowly decreasing the number of energy-intensive projects included in the Sixth and Seventh Plans; and c) reducing the overall energy consumption of the household and industrial sectors by placing greater emphasis on conservation. On the supply side, the Government plans to concentrate on: a) accelerating the development  - 12 - and exploitation of renewable energy resources to substitute where possible for conventional energy; b) formulating an optimal strategy for petroleum exploration and development in order to maximize the foreign exchange earnings from the sector; and c) improving the efficiency of the infrastructure for the production, storage, transportation and distribu- tion of petroleum products. However, these objectives need to be integrated into a national long-term energy plan, which in turn is to be coordinated with the macro objectives of the Sixth and Seventh Plans. The long term energy plan would set the targets for the various energy sub- sectors (power, refining, exploration, etc.) and make possible the identification of high priority projects. PART IV - THE PROJECT Background 45. In September 1981, the Government of Tunisia requested a Bank loan to assist in transforming the sector-wide targets of the Sixth Plan into pipelines of well-prepared projects. A Bank mission to Tunisia in October 1981 identified agriculture, industry and energy as the sectors where technical assistance was most needed. A mission in March/April 1982 appraised the project and worked out the institutional, administrative, technical, and financial details with the executing agencies. Negotia- tions were held in Washington in early July, 1982. The Tunisian delega- tion was led by Mr. Mohamed Ali Souissi, Director General of Projects, Ministry of Planning and Finance. The main features of the project are summarized in the Loan and Project Summary and in Annex III of this report. Project Objectives 46. The broad objectives of the project are to overcome existing con- straints to the preparation of projects in agriculture and industry, help improve the use of energy resources, and establish an action program for export expansion. 47. The specific objectives of the project are: (a) to increase the number and improve the quality of investment projects, especially those to be generated in the private sector and suitable for external financing; (b) to strengthen local project preparation capabilities in both public and private sectors through the provision of specialized staff and train- ing; (c) to provide a sound empirical base for the formulation of sector-wide policies (agriculture, industry), or economy-wide policies (energy, exports); and (d) to reinforce institution building efforts in all three sectors. Project Description 48. The Project would consist of three components: agriculture, industry and exports, and energy. Project outputs would include feasibility studies for industrial and agricultural projects; policy studies, training of Tunisian staff, and proposals for institutional changes in all three sectors; and sub-sector studies in industry. The  - 13 - outputs would also include the creation and/or restructuring of institu- tions, and the strengthening of the export promotion system. Inputs financed under the Project would include consultants to assist in studies, instructors, specialized Tunisian Government staff, and equipment. Agriculture 49. The agriculture component, designed to address the major cons- traints identified in paras. 38 to 40, would finance foreign and local consultants in the preparation of studies emphasizing the identification of investment projects as follows (Attachment 1, p.l): (a) national research and extension program; (b) national plan for farm input distribution (chemical inputs and seeds); (c) national plan for farm mechanization; (d) feasibility study for the first phase of an extension, research, input supply and mechanization project in Northern Tunisia; (e) national agricultural marketing and processing program for fruits, vegetables, milk, and fish; (f) action program for land reform; (g) national program of improvement of irrigation perimeters; (h) national program of well construction and rehabilitation; (i) feasibility study for anti-desertification and a range management project in South-Central and Southern Tunisia; and (j) assistance in the start-up of an agricultural promotion agency. The project would also provide for vehicles where lack of transportation would be a constraint to execution of the studies, and for the training of Tunisian staff (para. 53). The studies were selected on the basis of criteria agreed upon with the Government in the context of a recent sector mission (para. 39). They include: (a) the significance of the constraints to be addressed; and (b) the degree of complexity of the projects and/or the speed with which they are to be prepared. Industry and Export Promotion 50. The industry and export promotion component is designed to * alleviate the constraints discussed in paras. 41 and 42 and would finance foreign and local consultants to help Tunisian institutions in carrying out the following activities (Attachment 1, p. 2): (a) six priority subsectoral studies to result in identification of specific new investment projects. Criteria for subsector selection would be satisfactory to the Bank (Loan Agreement, Section 3.07). Such criteria were discussed during negotiations and would consider: export orientation, contribution to the replacement of imports of intermediate or capital goods, relative labor intensity, and contribution to regional development; (b) feasibility studies, both for the projects so identified and for others meeting the selection criteria; (c) export-marketing studies for specific subsectors and/or products;  - 14 - (d) training programs to improve abilities of Tunisian personnel involved in the above activities; (e) three related studies to aid the policy of export expansion: (i) review of the institutional environment for export promotion of manufacturing and agriculture, in coordination with a separate effective protection study, to identify bottlenecks in the existing system; (ii) development of an export promotion strategy, and defining the role of existing institutions and the Export Promotion Center (CEPEX) in that strategy; and (iii) preparation of a plan of action for CEPEX with respect to its organization, operational strategy, staffing and financial resources; (f) review of the institutional environment for promotion of private industrial investments, and development of appropriate policy measures as well as an action program for improving the effectiveness of existing institutions in this field (Investment Promotion Agency - API, development banks, etc.); and (g) promotion activities for investment projects identified and prepared through the studies carried out under (b) above. The project would also provide micro-film equipment for information storage and retrieval at the National Center for Industrial Studies (CNEI). Energy 51. The proposed energy component would strengthen Tunisia's energy planning capabilities and provide the inputs needed by the Government to formulate a comprehensive energy plan, and prepare projects for the Sixth and Seventh Plans. It would help address the constraints discussed in paras. 43 and 44 either by filling existing gaps in the Plan or by continuing previous work undertaken by the Government. Specifically, it would assist the Government in achieving the objectives set for the energy sector by financing foreign and local consultants and related equipment. The activities included under this component are designed to: (a) reduce the industrial consumption of energy; (b) provide the tools and data needed for formulating an optimal strategy for exploration and development of oil and gas; (c) assist in accelerating the program for the development of renewable energy; and (d) establish a quantitative basis for improving the efficiency with which petroleum products are stored, transported, and distributed. 52. The energy component would consist of the following tasks (Attachment 1, p. 3): (a) energy conservation audit of ten large energy-consuming enterprises with a view to assisting such enterprises in preparing engineering design and bidding documents for energy conservation works; and training of local staff in energy conservation; (b) assessment of geothermal resources through an analysis of geological data and the preparation of an exploration drilling program; (c) analysis of the cost structure of storage, transportation and distribution of petroleum products;  - 15 - (d) formulation of a system for compiling electricity consumption data for load forecasting and power systems management and planning; training of engineers of the Tunisian Electricity and Gas Company (STEG) in load forecasting and planning; and provision of computer hardware and software for STEG's planning department; (e) installation of computer hardware and provision of software for the Tunisian Company for Petroleum Activities (ETAP) for compil- ing data on geology and well production for use in formulating an optimal strategy for petroleum exploration planning and produc- tion management; (f) equipping of about twenty wind and solar energy data collection stations; and (g) demonstration of the possibilities of wind energy use for water pumping in Tunisia through the installation of about ten wind energy assessment units (windmills). Training 53. For agriculture, training would be tailored to the needs of the staff of the Ministry of Agriculture, especially those in the Department of Planning. A course in the fundamentals of project management and monitoring would be designed and delivered by the National Center for Agricultural Studies (CNEA) in two sessions lasting about two weeks each, with potential enrollment of 12 staff members in each session. The objective would be to help manage the selected tasks smoothly and efficiently. 54. For industry, four two-week training seminars in basic and advanced project evaluation, marketing, investment promotion, and sub- sector methodology would be specially designed by external consultants and offered over a one-year period to about 60 professionals from CNEI and other agencies. The objective would be to help improve the professional standards and performance of the participants to carry out satisfactory sub-sectoral studies and project feasibility studies. For exports, consultants would provide training in international marketing to about 10 CEPEX staff, either through a specially designed course or, if feasible, through courses in other local institutions. 55. For energy, training in conservation audit techniques would be provided to six engineers recently assigned to the Conservation Unit in the Department of Renewable Energy of the Ministry of National Economy (MNE). This training program would be in two phases: the first would be a comprehensive three-month course in Paris in the techniques of energy audit, and the second in Tunisia for about six months under the super- vision of two expatriate instructors to prepare manuals on energy- intensive industries suitable for investment in conservation. The train- ing in power system planning would be provided to five engineers of STEG by Argonne National Laboratory (U.S.) in collaboration with the International Atomic Energy Agency (IAEA) in Vienna, Austria, and would consist of three phases: (i) assessment of the computing capabilities at STEG and the formulation of a system for the compilation, storage, and  - 16 - retrieval of power system data, (ii) training at Argonne Laboratory in load forecasting and systems planning for three months in the U.S.; and (iii) installation of the data management system and its integration with existing computer models for load forecasting and systems planning, for a period of about one month. Finally, training in petroleum exploration planning would be provided to six qualified geologists and geophysicists for two months each in Tunisia. This program would cover compilation, analysis, and synthesis of geological data, together with preparation of the software provided under the Project for use at ETAP. The Administering Agencies 56. The multisectoral nature of the Project requires the involvement of several administrative agencies (Loan Agreement, Schedule 5). The agricultural component will be managed by the Planning Department in the Ministry of Agriculture (MOA). The Planning Department performs several functions, including planning, monitoring and evaluation of projects, collection and preparation of statistics, and preparation of the invest- ment budget for submission to the Ministry of Planning and Finance (MOPF). The Department is presently staffed by about 150 employees, most of whom are in statistical analysis and data gathering. Ten high-level staff (agriculture engineers) are engaged in the preparation of projects and all would participate in the Project. A senior agricultural management and planning advisor will be hired to assist the Planning Department to manage the Project. Seven studies will be carried out in the technical departments of MOA. In three studies, MOA will be assisted by the Cereals Office, the Livestock Office and CEPEX, and the Land Reform Agency, respectively. Both the Cereals Office and the Livestock Office are semi-autonomous agencies set up on a commercial basis under the authority of MOA. Both have their own budgets, with independent sources of revenue from the sales of specialized goods and services. However, they also get some annual allocations from the State Budget. The Land Reform Agency, although an independent entity, gets its entire budget directly from the Ministry. The Agency has hitherto been responsible for land reform in irrigated areas. The Project would assist this agency to establish an action program for expanding activities to non-irrigated areas. 57. The industry and export component will be carried out by CNEI and CEPEX, respectively, under the management of the Ministry of National Economy (MNE). Both agencies are independently managed, but their budgets are part of the Ministry's. CNEI started in 1960 as a research arm of the Directorate of Industry in MNE. CNEI's activities became too diversified over time and it became unable to perform any one function adequately. During the last seven years, its management changed several times, without much improvement. This prompted a recent reorganization, which placed its regional offices serving small industries under API, and placed its industrial standardization activities into a separate agency. What remains is an agency entrusted with project feasibility and subsectoral industrial studies, under a new capable management, with a staff of 45 economists, financial analysts, and engineers who need special and intensified training to improve their performance. CEPEX, on the other hand, was established in 1973 to promote Tunisia's exports. Its achieve- ment record is mixed. During the last two years, CEPEX has done relatively little to promote exports. However, the new emphasis of the Government in the Sixth Five-Year Plan on export expansion focussed  - 17 - attention on CEPEX. Its management was changed early in 1982 to activate the agency. Its 10 professional staff could benefit from special train- ing in international marketing and export promotion techniques. 58. Except for the power system planning task, which will be carried out by STEG, the energy component will be managed by MNE through its Department of New and Renewable Energy. This Department would also be responsible for the implementation of energy conservation and the renewable energy activities under the project. The Exploration and Production Department, responsible for all activities relating to the exploration for oil and gas, and to the production of oil, would, with the assistance of ETAP, implement the geological data compilation task under the project, while the Secondary Energy Department, which is responsible for oil refining and handling of petroleum products and for electricity, would be in charge of the study dealing with the handling of petroleum products. All three departments are adequately staffed. STEG, which is the sole utility in Tunisia responsible for the public production, trans- mission, and distribution of electricity and gas, has received five Bank loans, and is a competently managed and well-staffed organization. The Government would onlend $300,000 of the proposed loan to STEG under a subsidiary loan agreement on the same terms and conditions as the Bank loan. The execution of the subsidiary loan agreement would be a condition of effectiveness of the proposed loan (Loan Agreement, Section 5.01). Project Implementation 59. While the Project Department of MOFP would be in charge of the overall coordination of the Project, specific ministries and their agencies would be responsible for all aspects associated with the execu- tion of each Project task, such as preparing terms of reference and hiring and supervising consultants, according to Bank Guidelines; specific arrangements would be made to ensure systematic training of staff. An understanding with the Government was reached during negotiations on a detailed implementation schedule for each task. To help ensure prompt implementation, a monitoring system involving the agencies mentioned above would be established. The system would be based on two processes: quarterly reports by the executing agencies would be sent to the Bank through MOPF starting March 31, 1983, and annual reviews would be conduc- ted by the Projects Department of MOPF, the executing agencies, the managing institutions and the Bank, to start by December 31, 1983 (Loan Agreement, Section 3.04). The objective of the monitoring system would be to assess progress achieved and to identify remedial measures, where required. Project implementation is expected to be completed by June 30, 1986. 60. The agricultural component is expected to be implemented in three and one-half years. Detailed terms of reference for the various studies have been agreed upon between the Government and the Bank. All consultants are expected to be hired and start their assignments by the end of 1982, and complete those assignments by mid-1985. By March 31, 1983, each institution/department participating in the Project would  - 18 - designate a senior staff member who would coordinate with MOA's Planning Department the implementation of the studies under his or her institu- tion's or department's responsibility. In addition, steering committees with memberships and terms of reference satisfactory to the Bank would be established by that date, and would be responsible for the implementation of each task, the evaluation of the results and the provision of draft reports on each task to the Bank for review and comment (Loan Agreement, Section 3.05). The Planning Department of MOA would be responsible for the management of the steering committees, and for the quarterly reporting to the Bank, through MOPF. The various departments of MOA are adequately staffed with qualified Tunisians who would participate in these tasks. Consultants would thus be expected to act as catalysts as well as advisors in getting the tasks started and completed in a timely manner. To assist in the prompt execution and supervision of the agriculture component, a senior agricultural management and planning advisor to the Director of the Planning Department would be employed by March 31, 1983, with terms of reference and qualifications satisfactory to the Bank (Loan Agreement, Section 3.02(a)(i)). 61. The design of the agricultural component tasks would involve the recruitment, travel, and accommodations of numerous foreign and local consultants and thus would require complex and time-consuming logistical support beyond what the Planning Department could normally offer. The Planning Department, therefore, would engage the National Center for Agricultural Studies (CNEA), which has a long experience in handling consultants, to assist in managing logistics. 62. The industry and export component would be implemented in three and one-half years. Guidelines for the preparation of terms of reference of subsector and project feasibility studies were discussed and agreed upon during negotiations. A deputy general manager would be appointed in CNEI to take charge of the operational management of the institution, and specifically to carry out day-to-day monitoring and quality control of staff work. His appointment with terms of reference and qualifications satisfactory to the Bank would be a disbursement condition for the CNEI part of the loan (Loan Agreement, Schedule 1, para 4 (ii); and Section 3.06). For about one year, he would be assisted by a senior advisor, whose terms of reference have been agreed upon between CNEI and the Bank. As regards exports, CEPEX would undertake a review of the institutional environment for export promotion with a view to formulating an action program for export promotion. 63. The energy component is designed to be implemented in about one year. The recruitment of consultants for training (power planning, conservation audits, and petroleum exploration planning) would be started shortly. A short list of the engineering consultants for the energy audits has been compiled by the Borrower and draft terms of reference are being prepared by the Bank. A request by the Government for proposals by consultant engineers is currently planned for the third quarter 1982 and selection and signing of agreements is expected to be completed by the fourth quarter. The bids for equipment (geological exploration, power planning, and wind energy) would be invited by third quarter 1982, and the contracts would be awarded by first quarter 1983.  - 19 - Project Costs 64. Total cost of the project, excluding the front-end fee, is estimated at $8.9 million, of which $6.5 million (73 percent) is the estimated foreign cost. Base costs of studies are $5.5 million (67 percent of base cost), training $0.7 million (8 percent), material and equipment $2.0 million (25 percent). The project cost estimate contains adequate provision for contingencies. Physical contingencies ($0.22 million) are 5 percent of base cost, and price contingencies ($0.55 million) have been calculated on the basis of expected price increases of base cost plus physical contingencies (8 percent in 1983 and 7 percent p.a. thereafter, for local and foreign cost) for the agriculture and industry and export components. The cost estimates for energy contain no contingencies since they are based on quotations for fixed-price contracts to be signed by the end of 1982 and on works to be completed by the end of 1983. The costs in man-months are summarized below. The breakdown between foreign and local consultants is the best estimate at the time of appraisal. Consultants man-months were estimated on the basis of: (a) preliminary terms of reference for each study, which define needs for consultants; and (b) discussion with each of the executing agencies. Costs per man-month include fees, subsistance and travel. The relatively high cost in industry and export are explained by industry standards and, for foreign consultants, by the fact that much of the work will be carried out in Tunisia rather than abroad, the latter being the case for the energy consultants. Foreign Local Man-months $/Man-month Man-months $/Man-month Agriculture 200 $11,000 133 $ 5,000 Industry and Export 69 $15,000 34 $10,000 Energy 125 $11,000 - - Financing Plan 65. The Bank loan of $4.5 million would finance about 68 percent of the estimated foreign exchange cost of the project, or about 50 percent of total project cost, and the front-end fee of $66,502. The balance of the project cost would be financed by the Government. Part of the Government contribution may be replaced with bilateral assistance or suppliers' credits, should this become available in time to meet the timetable for project implementation. To expedite project implementation retroactive financing of up to $450,000 for expenditures incurred after July 1, 1982 is proposed for urgent tasks for which the Government has entered, or will have entered before expected loan signing, into commitments with consultants or equipment suppliers (Loan Agreement, Schedule 1, para. 4 (i)). The Government contribution would include $0.52 million representing incremental local staff costs for energy. In addition, recurrent costs for the agriculture and industry components, estimated at $1.9 million per year, would be provided by the Government, as they would have been incurred by the Government regardless of the Project. 66. In terms of the project components, the financing plan is detailed below:  - 20 - Bank Government Total ---------US $ Million---------- Agriculture Studies 1.31 1.54 2.85 Training 0.02 - 0.02 Equipment 0.19 - 0.19 Industry and Export Studies 0.54 0.67 1.21 Training 0.11 0.05 0.16 Equipment 0.03 - 0.03 Energy Studies 0.78 0.64 /a 1.42 Training 0.22 0.26 0.48 Equipment 0.83 0.97 1.80 Subtotal 4.03 4.13 8.16 Contingencies 0.40 0.37 0.77 Subtotal 4.43 4.50 8.93 Front-end Fee 0.07 - 0.07 TOTAL FINANCING 4.50 4.50 9.00 /a Including $0.52 million for incremental local staff. Procurement and Disbursement 67. Assurances were obtained during negotiations that the employment of consultants would be in accordance with Bank Guidelines (Loan Agree- ment, Section 3.02 (b)). It is understood that consultants responsible for training would be different individuals from those doing the studies, to ensure proper emphasis on training. 68. Vehicles under the project would be required at different points in time over the life of the project. As a result, they would be pur- chased in small lots under limited international tendering (LIT) after receipt of simultaneous quotations from at least three manufacturers or suppliers offering adequate guarantees of service and spare parts. Virtually all of the remaining materials and equipment would be for the energy component of the project and, with the exception of those for the wind energy task, consist of relatively small computers where servicing capabilities are particularly important, as well as of highly specialized software, and for which LIT is also the most efficient procurement method. The same applies to the equipment for the wind/solar energy collection stations. The ten wind assessment units (windmills), expected to cost a total of about $50,000, would be purchased directly from STEG, the only local producer of this experimental-type equipment, under a negotiated contract (Loan Agreement, Schedule 4, Part A). As regards procurement for the power system planning of the energy component, the software would be  - 21 - provided free of charge by the International Atomic Energy Agency (IAEA). Training in its use, however, would be done at Argonne National Laboratory, the institution entrusted worldwide with training by IAEA. 69. Funds from the Bank would be disbursed over 18 months for the energy component, and four years for the industry and export and for the agriculture components. The Bank would disburse 65 percent of the cost of studies, training and equipment, except for vehicles, micro-film equipment and wind assessment units where the Bank would disburse 100 percent of foreign expenditures or 90 percent of local expenditures (ex-factory). The Bank would disburse funds either (a) directly to consultants and equipment suppliers upon receipt of standard documentation from executing agencies, and authorized by them, in the proportions indicated in the Loan Agreement; or (b) through reimbursement to the Government for expenditures made under the Project on the basis of statements of expenditures, and in the proportions indicated in the Loan Agreement. In the latter case, supporting documentation would not be submitted to the Bank, but retained for review by Bank missions at their request. It is expected that the Bank loan would be fully disbursed within four years from signing the Loan. Accordingly, the closing date of the loan would be December 31, 1986. Accounts and Audit 70. Accounts would be kept by each of the executing ministries or their agencies, and would be monitored by the Projects Department of MOPF. The executing ministries or agencies would be audited by the General Financial Audit Service, an independent agency functionally attached to MOPF, in accordance with criteria and procedures agreed upon with the Bank. Such criteria and procedures would include the audit of withdrawals based on statements of expenditures. Certified copies of accounts and the auditors' annual report thereon, including a specific report on the audit of withdrawals based on statements of expenditures, would be sent to the Bank within six months of the end of each fiscal year (Loan Agreement, Section 4.02). Benefits and Risks 71. The Project would help prepare and promote a portfolio of invest- ment projects, and improve local capabilities to fulfill these tasks through specialized training. Provision of foreign consultants to local institutions is designed to improve domestic skills. Policy-oriented studies in agriculture, energy, and export promotion would lay the ground for the careful design of action programs. In the long run, the mechanisms set up to prepare new projects would help strengthen the institutions involved. 72. General risks may be faced as a result of the multi-sectoral character of the project. To minimize such risks, arrangements have been made under the project to ensure effective coordination of project implementation among the ministries and agencies concerned. Most ex-post  - 22 - studies of technical assistance projects suggest that close Bank super- vision is needed and more than the usual manpower for that purpose necessary, to minimize the risks associated with this kind of project. To this end, appropriate measures have been devised. For example, in agriculture, efforts have been made to minimize risks by defining at an early stage the required tasks, terms of reference, consultant needs, and institutional arrangements. Government commitment has been obtained through careful consultation at the working level. In addition, the project would provide for a senior agricultural management and planning advisor to the Director of the Planning Department, and a contractual arrangement with a suitable agency to manage the logistical support to consultants. For the industry component, a deputy general manager at CNEI, assisted by an experienced advisor, would be appointed to control the quality of staff work and ensure that terms of reference for the studies are according to guidelines provided by the Bank. PART V - LEGAL INSTRUMENTS AND AUTHORITY 73. The draft Loan Agreement between the Republic of Tunisia and the Bank and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Execu- tive Directors separately. Special features of the draft Loan Agreement are referred to in the text, and listed in Section III of Annex III. The execution of a subsidiary loan agreement between the Government of Tunisia and the Tunisian Electricity and Gas Company (STEG) would be a special condition of effectiveness of the proposed loan (draft Loan Agreement, Section 5.01). The appointment by CNEI of a deputy general manager in charge of quality control of staff work with terms of reference, qualifications, experience and conditions of employment satisfactory to the Bank would be a condition of disbursement for those parts of the project where CNEI would be the sole executing agency (draft Loan Agree- ment, Schedule 1, para. 4 and Section 3.06). 74. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 75. I recommend that the Executive Directors approve the proposed loan. A.W. Clausen President Attachments August 26, 1982 Washington, D.C.  -23 - ATTACHMENT I Page 1 of 3 TUNISIA TECHNICAL ASSISTANCE PROJECT AGRICULTURAL COMPONENT Total Consultant and Sub-Project Administration in Charge /1 Equipment Costs Us$ 1. Consultant to Assist Ministry of Agriculture Planning Department 130,000 Planning Department to manage Project 2. Preparation of National (a) Planning Department 390,000 Research and Extension (b) Crop and Animal Production Program Departments (c) National Research Inst. (d) Dept. of Training Extension, and Research 3. Preparation of National (a) Cereals Office 190,000 Plan for farm input dis- (b) Crop Production Department tribution (chemical inputs and seed) 4. Preparation of National (a) Rural Works Department 320,000 Plan for farm mechani- (b) Crop Production Department zation 5. Feasibility study for (a) Planning Department 130,000 project including first (b) Crop and Animal Production tranche of research, Departments extension, input supply (c) National Research Inst. and mechanization programs in Northern Tunisia 6. National agricultural (a) Planning Department 500,000 marketing and processing (b) Ministry of National for fruits, vegetables, Economy milk and fish (c) Livestock office (d) Export Promotion Center 7. Preparation of action (a) Department of Land Tenure 150,000 program for land reform (b) Agency for Land Tenure Affairs in Irrigated Areas 8. Preparation of national Department of Coordination of 270,000 project for improvement Irrigation Offices of operation and maintenance of irrigation perimeters 9. Preparation of national Department of Rural Works 110,000 program of well rehabili- tation, creation and equipment 10. Feasibility study for Department of Forestry and 180,000 anti-desertification/ Soil Conservation range management project in South-central and Southern Tunisia II. Consultants to assist Planning Department 480,000 start-up of Agricultural Promotion Institute 12. Training for Tunisian (a) Planning Department 20,000 staff participating in (b) Ministry of National the Project Economy 13. Equipment (vehicles) (a) Planning Department 190,000 (b) Ministry of National Economy Total Base Cost 3,060,000 /1 All are in the Ministry of Agriculture, except the Ministry of National Economy and the Export Promotion Center (paras. 6(b), 6(d), 12(b) and 13(b) above).  - 24 - ATTACHMENT 1 Page 2 of 3 TUNISIA TECHNICAL ASSISTANCE PROJECT INDUSTRY AND EXPORT COMPONENT Total Consultant Administration and Equipment Sub-project in Charge Cost 1. Consultants for Quality National Center Control and Policy Advice for Industrial Studies (CNEI) 180,000 2. Subsector, Feasibility and CNEI 600,000 Marketing Studies 3. Training CNEI 90,000 Export Promotion Center (CEPEX) 80,000 4. Equipment CNEI 30,000 5. Study of Institutional CEPEX Environment to Promote Exports 220,000 6. Assistance in Establishing an Export CNEI and Promotion System CEPEX 200,000 Total Base Cost 1,400,000  - 25 - ATTACHMENT 1 Page 3 of 3 TUNISIA TECHNICAL ASSISTANCE PROJECT ENERGY COMPONENT Sub-Project Administration Total Consultant in Charge and Equipment Cost 1. Energy Conservation Training Ministry of 215,000 National Economy Studies (MNE) 905,000 2. Assessment of Geothermal Resources Study MNE 310,000 3. Plan for Handling Petroleum Products Study MNE 150.000 4. Power System Planning Training Tunisian Elec- 130,000 Equipment tricity & Gas 330,000 Company (STEG) 5. Petroleum Exploration Planning Training MNE with Tunisian 130,000 Equipment and Software Company for Petro- 1,200,000 leum Activities (ETAP) 6. Assessment of Wind Energy Equipment MNE 330,000 Wind measurement (280,000) Windmills (50,000) Total Base Cost 3,700,000  - 26 - AhNN.E I Page 1 of 6 TABLE 3A TUNISIA - SOCIAL INDICATORS DATA SHEET TUNISIA REFERENCE GROUPS (WEIGHTED AVERAGES AREA (THQUSAND SQ. F.M.) - MOST RECENT ESTIMATE)fa TOTAL 163.6 HIDDLE INCOME AGRICULTURAL 75.2 MOST RECENT NORTH AFRICA 6 MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b MIDDLE EAST LATIN AMERICA & CARIBBEAN GNP PER CAPITA (US$) 230.0 380.0 1310.0 1253.6 1902.0 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 165.2 289.7 589.9 713.5 1259.9 POPULATION AND VITAL STATISTICS POPULATION, KID-YEAR (THOUSANDS) 4221.0 5127.0 6354.0 URBAN POPULATION (PERCENT OF TOTAL) 36.0 43.5 51.7 47.3 65.7 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 10.1 STATIONARY POPULATION (MILLIONS) 17.8 YEAR STATIONARY POPULATION IS REACHED 2080 POPULATION DENSITY PER SQ. PH. 25.8 31.3 37.9 35.8 35.2 PER SQ. KM. AGRICULTURAL LAND 60.7 72.9 82.4 420.9 92.5 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 43.4 46.2 41.4 44.3 39.7 15-64 YRS. 52.5 50.0 54.9 52.4 56.1 65 YRS. AND ABOVE 4.2 3.8 3.7 3.3 4.2 POPULATION GROWTH RATE (PERCENT) TOTAL 1.8 /c 1.9/c 2.1 2.8 2.4 URBAN 3.2 3.8 3.9 4.6 3.8 CRUDE BIRTH RATE (PER THOUSAND) 48.9 41.8 34.9 41.2 31.4 CRUDE DEATH RATE (PER THOUSAND) 21.0 14.6 9.2 12.2 8.4 GROSS REPRODUCTION RATE 3.4 3.2 2.6 2.9 2.1 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 29.2 180.9 USERS (PERCENT OF MARRIED WOMEN) .. 10.0 21.3 FOOD AND NUTRITION INDEX OF FOPD PRODUCTION PER CAPITA (1969-71-100) 97.0 96.0 132.0 100.4 110.0 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 83.2 88.2 115.1/d 108.5 108.4 PROTEINS (GRAMS PER DAY) 51.8 56.6 75.ld 71.9 66.0 OF WHICH ANIMAL AND PULSE 12.9 13.5 22.7Td 18.0 34.0 CHILD (AGES 1-4) MORTALITY RATE 36.1 24.5 9.8 15.1 5.6 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 48.1 54.2 60.2 56.9 64.2 INFANT MORTALITY RATE (PER THOUSAND) 158.9 131.3 90.0 104.3 64.2 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL . 49.0 70.0/e 59.1 65.6 URBAN . .. 63.07;i 83.1 78.9 RURAL .. .. 77.0OT 39.8 43.9 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 62.0 .. ,, 59.3 URBAN .. 100.0 .. .. 75 3 RURAL .. 34.0 60.0/e .. 30.0 POPULATION PER PHYSICIAN 10026.1 5934.0 3576.2 4015.5 1617.3 POPULATION PER NURSING PERSON .. 727.5 1167.8 1802.2 1063.5 POPULATION PER HOSPITAL BED TOTAL 405.2 409.1 463.7 641.7 477.4 URBAN 277.3/f 302.8 340.7/e 538.3 679.8 RURAL 1040.97? 1269.3 1275.87? 2403.3 1903.4 ADMISSIONS PER HOSPITAL BED .. 24.1 25.0/e 25.5 27.3 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. 5.1/' URBAN .. 5.1j ... RURAL .. 5.1 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. 3.2 .. URBAN .. 2.77. RURAL 3.6 * ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 24.0 / URBAN .. .. RURAL .. ..  - 27 - Page 2 of 6 TABLE 3A TUNISIA - SOCIAL INDICATORS DATA SHEET TUNISIA REFeRENCE GROUPS (WEIGHTED AVE*GUS - MOST RZCENT ESTIMATE)- MZDDLZ INCOMZ MOST RECENT NORTH AFRICA M MEDDLE INCOME 1960 /b 1970 /b ESTIMATE /b MIDDLE EAST LATIN AMZRICA & CARIBBEAN EDUCATION 'DJUTED ENROLLMENT RATIOS PRIMARY: TOTAL 66.0 100.0 102.0 88.7 104.3 MALE 88.0 121.0 119.0 104.5 106.4 FEMALE 43.0 80.0 85.0 72.5 103.3 SECONDARY: TOTAL 12.0 23.0 25.0 39.7 41.3 MALE 19.0 33.0 31.0 49.3 40.4 FEMALE 5.0 13.0 19.0 29.0 41.8 VOCATIONAL ENROL. (S OF SECONDARY) 23.5 11.1 35.0 10.1 33.7 PUPIL-TEACHER RATIO PRIMARY 61.1 47.5 39.2 34.1 29.9 SECONDARY 15.8 27.8 20.4 23.7 16.7 ADULT LITERACY RATE (PERCENT) 15.5 24.0/ 62.0 43.3 79.1 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 10.5 13.0 18.3/1 17.8 42.8 RADIO RECEIVERS PER THOUSAND POPULATION 40.3 75.7 94.8 131.3 270.5 TV RECEIVERS PER THOUSAND POPULATION 0.1 14.0 48.4 44.1 107.7 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 19.0 16.0 43.8 31.5 63.7 CINE1A ANNUAL A7TENDANCE PER CAPITA 2.0 .. 1.5/d 1.7 2.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 1137.9 1214.8 1631.1 FEMALE (PERCENT) 6.0 7.7 8.3 10.6 24.4 AGRICULTURE (PERCENT) 56.0 50.0 34.0 42.4 31.3 INDUSTRY (PERCENT) 18.0 21.0 33.0 27.8 23.9 PARTICIPATION RATE (PERCENT) TOTAL 27.0 23.7 25.7 26.0 33.6 MALE 50.2 44.2 46.5 46.2 50.4 FEMALE 3.3 3.6 4.3 5.6 16.8 ECONOMIC DEPENDENCY RATIO 1.8 2.1 1.8 1.9 1.3 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 17.0/h HIGHEST 20 PERCENT OF HOUSEHOLDS .. .. 42.07.. LOWEST 20 PERCENT OF HOUSEHOLDS .. .. 6.07d. LOWEST 40 PERCENT OF HOUSEHOLDS .. .. 15.07. POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 204.0/d 279.2 RURAL .. .. 97.07- 178.6 184.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 193.0/d 403.6 518.0 RURAL .. .. 193.o7;[ 285.6 371.1 ESTIYATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 20.0/d 22.1 RURAL .. .. 15.O7F 30.9 Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted aritlmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. lb Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1978 and 1980. Ic Due to emigration population growth rate is lower than rate of natural increase; /d 1977; /e 1976; /f 1962; /g 1966; /h 1975. 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