Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4345a-TUN STAFF APPRAISAL REPORT TUNISIA SOFOMECA FOUNDRY MODERNIZATION AND EXPANSION PR May 10, 1983 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CUPPRENCY EQUIVALENTS (Used in the SAR) US$1 = Tunisian Dinar (TD) 0.63 TD 1 = US$1.59 WEIGHTS AND MEASURES 1 metric ton (t) = 1,000 kilograms (kg) 1 metric ton (t) = 2,204 pounds (lb) ABBREVIATIONS AND ACRONYMS USED ACMN - Ateliers de Constructions Metalliques et de Maintenance de Gabes AIIC - Arab Industrial Investment Company ARMICO - Arab Mining Company BDET - Banque de Developpement Economique de Tunisie BTEI - Banque Tuniso-Emiratienne d'Investissement BTKD - Banque Tuniso-Koweitienne de Developpement CKD Completely Knocked Down CMT - Complexe Mecanique de Tunisie CNEI - Centre National des Etudes Industrielles CNSS - Caisse Nationale de Securite Sociale EMI - Electro-Mechanical Industries GF - George Fischer Aktiengesellschaft IDB - Islamic Development Bank KHD - Kloeckner Humboldt Deutz MCE - Mechanical Construction and Engineering OSHA - occupational Safety and Health Administration (US) PIG - Project Management Group PPF - Project Preparation Facility SNCFT - Societe Nationale des Chemins de Fer Tunisiens SOFOMECA - Societe de Fonderies et de Mecanique SONEDE - Societe Nationale d'Exploitation et de Distribution des Eaux SOTINFOR - Societe Tunisienne d1Informatique et d'organization STIA - Societe Tunisienne d'Industrie Automobile STUSID - Societe Tuniso-Seouiienne dlInvestissement et de Developpement tpy - Tons Per Year FISCAL YEAR Government ) January 1 to December 31 and SOFOMECA ) FOR OFFICIAL USE ONLY TUNISIA APPRAISAL OF THE SOFOMECA FOUNDRY MODERNIZATION AND EXPANSION PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION .......................... I II. THE INDUSTRIAL SECTOR, THE ENGINEERING INDUSTRIES SUBSECTOR, AND T'E F(OUNDRY INDUSTRY ... 2 A. The Industrial Sector. 2 B. The Engineering Industries Subsector ........................ 4 C. The Foundry Industry ........................................ 7 III. SOFOMECA - THE COMPANY .......................................... 10 A. Backgrourd and ownership .10 B. Organization and Management ................................ 10 C. Present Facilities .13 D. Recent operations and Financial Performance ................. 14 IV. THE MARKET ........ 17 A. Supply and Demand of Castings in Tunisia .................... 17 B. SOFOMECA's Market Position and Marketing Arrangements ....... 23 C. SOFOMECA's Prices and Competitiveness ....................... 24 V. THE PROJECr ..................................................... 26 A. Project Objective and Scope . . . 26 B. Project Description . . ....................................... 27 1. Modernization of Existing Facilities . . 27 2. New Fourdry for Mechanical Castings . . 27 3. Sand Treatment Plant .. 28 C. Process, Technology and Technical Assistance ... 28 D. Raw Materials and Utilities .. 29 E. Ecology ..................................................... 30 F. Employment, Training and Productivity . . . 30 G. Project Implementation Schedule and Management ... 31 This report was prepared by Messrs. Harbaksb S. Sethi and Oscar de Bruyn Kops of the Irdustry Department. This document has a restricted distribution and may be used by recipients only in the performance of | their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - TABLE OF CONTENTS (Continued) Page No. VI. PROJECT COST, FINANCING PLAN AND PROCUREMENT ..................... 33 A. Project Cost Estimate .. 33 B. Financing Plan ........................... .................. . * 35 C. Procurement ............. 37 D. Allocation and Disbursement of Bank Loan . . 37 VII. FINANCIAL ANALYSIS ............. . 38 A. Prcduction Buildup, Revenues and Operating Costs . . 38 B. Financial Projections ard Analysis ........................... 42 C. Financial Covenants .. 43 D. Financial Return ............................................. 43 E. Auditing and Reporting .. 45 F. Major Risks .................................................. 45 VIII. ECONOMIC ANALYSIS ................................................ 47 A. Econcnic Costs and Benefits .................................. 47 B. Econcmic Rate of Return .. 48 C. Sectoral Impact and Other Benefits .. 49 IX. AGREEMENTS ....................................................... 50 ANNEXES 3-1 SOFOMECA: Current organization 3-2 SOFOMECA: Future organization 4 Tunisia: Projected Demand for Ferrous Castings 5-1 General Layout Plan of Present and Future Facilities 5-2 Project Management Organization 6-1 Project Cost Estimate by Project Ccmponent 6-2 Working Capital Assumptions and Requirements 6-3 Allocation of Funds by Financing Souroe and Cost Categories 6-4 Items to be Financed by the Bank 6-5 Estimated Disbursement Schedule for Bank Loan 7-1 Sales Volume and Revenue 7-2 Operating Costs and Unit Cost of Inputs 7-3 Financial Projections and Assumptions 7-4 Financial Rate of Return: Cost and Revenue Streams 8-1 Economic Rate of Return: Cost and Benefit Streams 8-2 Direct Foreign Exchange Effect - iii- TABLE OF CONTENTS (Continued) MAP IBRD - 16860 Tunisia: Project Related Locations OCUMENTS AVAILABLE IN THE PROJECT FILE Reference Title A. Selected Reports and Studies on Subsector A-1 "Study of Foundry Sector in Tunisia," prepared by the consulting ccmpany, Atkins Planning, United Kingdcom. A-2 "Development Strategy Paper on Foundry Industry," prepared by the World Bank. A-3 "Etude du Marche de la Fonderie en Tunisie," prepared by CNEI, November 1978. B. Selected Reports and Studies Relating to the Project B-1 Initial study of a foundry project, prepared by SOTINFOR, Tunisia. B-2 Prefeasibility study of SOFOMECA's foundry project, prepared by SOTINFOR, Tunisia. B-3 Feasibility study of SOFOMECA's foundry project, prepared by George Fischer AG, Switzerland. B-4 "Etude du Marche des Baignoires," prepared by CNEI, September 1980. B-5 Summaries of Studies on the CMT-project. B-6 Feasibility study on a foundry-cum-machining project, prepared by Tunisie-Consult on behalf of BDET. C. Selected Working Papers C-1 Technical evaluation of SOFOMECA's existing facilities, prepared by Juri Markus, Consultant. C-2 Integration program of SOFOMECA's castings in CMT and STIA production. C-3 implementation program of improvements in the organization and management systems of SOFOMECA. C-4 Agreement between George Fischer AG and SOFOMECA on engineering assistance. C-5 SOFOMECA: Historical financial statements. C-6 Miscellaneous statements relating to financial projections. C-7 Background material on financial and economic return calculations. C-8 Documents on STIA's program planning. TUNISIA APPRAISAL OF THE SOFOMECA FOUNDRY MODERNIZATION AND EXPANSION PROJECT I. INTTRODUCrION 1.01 The Government of Tunisia (the Government) arnd the Societe de Fonderies et de Mecanique (SOFOMECA), the Project Ccmpany, have requested the Bank to finance a project that will modernize and expand the facilities of SOFOMECA located at Megrine Riadh, 5 km north of Tunis. SOFOMECA is the larger of the two main foundries in Tunisia, both operating in the public sector at present. With the Project, SOFOMECA would change fram a majority publicly owned Company to a Company with a majority of shares held by semi-public anr private shareholders. 1.02 The Project includes both physical and technical assistance components. It will (i) debottleneck and mcdernize the existing facilities of SOFOMECA to improve quality and raise productivity; (ii) create new facilities for prcduction of mechanical castings; and (iii) establish two sand quarries ard a sand treatment plant. Further, it will provide transfer of technical know-how and assistance for training from a European equipment manufacturer (Kloeckner Humboldt Deutz (KHD) of the Federal Republic of Germany). The increased output of high quality castings would contribute to economic local integration of industrial intermediate products, promotion of efficient development of the Tunisian foundry industry and strengthening of its export-potential in the long-term. These objectives are in line with the investment priorities of the Government. 1.03 The total financing required for the Project is estimated at US$54.1 million equivalent, of which US$40.7 million is in foreign exchange. A Bank loan of US$16.8 million is proposed, and would cover 31% of total financing and 41% of the foreign exchange requirements of the Project. The remaining financing requirements (US$37.3 million including US$23.9 million in foreign exchange) would be financed through equity contributions and loans by local and foreign development banks and companies -- the Tunisian-Saudi Investment and Development Bank (STJSID), the Tunisian-Kuwaiti Development Bank (BTKD), the Tunisian-Enirates Investment Bank (BTEI), the Islamic Development Bank (IDB), the Arab Mining Company (ARMICO), and the Arab Industrial Investment Company (AIIC). 1.04 The Project was initially identified in 1980 as part of the Bank's sector work on engineering industries 1/, and project preparation started in April 1981 with assistance from the Bank. In particular, the Bank played a major role in assisting the Government in formulating a development strategy for the foundry industry. It stimulated actions and inputs for the sound preparation of the technical and economical aspects of the Project which was 1/ Tunisia - Review of the Electrical and Mechanical Industries, Report No. 2666 - TUN, June 4, 1980. - 2 - carried out with the assistance of George Fischer Aktiengesellschaft (GF) of Switzerland and Societe Tunisienne dlInformatique et d'organization (SOTINFOR) of Tunisia. Finally, the Bank is playing an important institution-building role in strengthening the management organization of SOFOMECA. The Project was prepared during three major missions with the assistance of consultants. It was appraised in October 1982 by Messrs. Sethi (Chief) and de Bruyn Kops of the Industry Department. II. THE INDWUSTRIAL SECTOR, THE ENGINEERING INDUSTRIES SUBSECTOR, AND THE FOUNDRY INDUSTRY A. The Industrial Sector 2.01 Over the past two decades, Tunisian planners have singled out the irdustrial sector as a major vehicle for econcmic development and employment creation. During the 1960s, industrialization policies focused on encouraging public, capital intensive, ard import-substitution projects. Due to the limited employment creation impact of these policies, and because of the small size of the domestic market, the inJustrialization strategy shifted during the 1970s to export promotion and greater emphasis on the private sector. Following this reorientation, the performance of the industrial sector improved markedly. Growth in value added of manufacturing (food processing, textiles/leather, construction materials, engineering industries, chemicals and others) accelerated from 7.9% per year in real terms during the 1960s to 10.3% during the 1970s, and manufacturing accounted for 42% of total employment creation luring the Fifth Development Plan (1977-81) as compared to 33% during the 1960s. The subsectors contributing most to manufacturing growth and employment creation were textiles, construction materials, ar.d engineering industries. Total manufacturing exports performed well during the Fifth Development Plan with 42% of total ccmmodity exports. Despite these achievements, the shares of manufacturing in GDP and national employment remained quite modest at 14% and 22% respectively in 1981. 2.02 Although private investment has increased substantially during the 1970s, the public sector still plays an important role in the manufacturing sector and accounted for 61% of investment during the Fifth Plan. Most of the larger enterprises in Tunisia are publicly owned, especially in the chemicals, construction materials, and engineering subsectors. In contrast, private manufacturing enterprises tend to be small and medium-sized, employing between 10-50 workers 2/, and according to the 1978 Industrial Census, they represented about 65% of the total number of firms in the sector. Manufacturing production is mostly concentrated in the Greater Tunis area and the regions bordering the east coast. Decentralization towards the interior of the country is being promoted, following the introduction of new incentives in June 1981. 2/ A Bank loan addressed the specific needs of these small-scale enterprises; see Small-Scale Industry Development Project, Staff Appraisal Report No. 3266 - TUN, Febtuaty 5, 1981. 2.03 Although the manufacturing sector has grown quite rapidly in the 1970s, its development has been affected by two sets of inter-related constraints. The first set of constraints originates from the Government's reliance on a complex system of administrative controls with regards to investment, pricing, tariff protection and import quotas, and several shortcomings in the incentive framework relating to fiscal exemptions, employment creation impact and sectoral integration. In effect, price controls--of a cost plus type-- 3/ coupled with high protection have made the domestic market more profitable (especially for enterprises fabricating end prcducts), without encouraging them to increase efficiency and competitiveness. The Government also has been controlling resource allocation and investment approval. This, however, has not ensured the desired coordination and consistency between investment programs, mainly because well-defined sectoral and sub-sectoral strategies have not been sufficiently developed. On the incentive framework, in spite of a beneficial impact of the investment incentive framework (Law 1974-74 for Tunisian investors and Law 1972-38 for foreign export-oriented investment) 4/ on the initiatives of the private sector, there have been distortions and negative secondary effects, such as fiscal exemptions granted irrespective of the efficiency of the investments ard their employment creation impact, and lack of encouragement for higher sectoral integration and value added content. The new measures introduced in June 1981 to promote accelerated decentralization of industrial activities and to expand exports and increase their local value-added content represent progress in this respect. 2.04 The second set of constraints involves: inefficient planning and management of production operations, insufficient specialization of product mix, weak linkages between firms and subsectors, excessive capacities in several subsectors, and shortages of skilled personnel as well as experienced indus- trialists/promoters. Some of the simpler project preparation and production management problems specifically faced by the small scale industries have been addressed through a technical scheme operated by Agence de Promotion des Investissements (API) and Centre National des Etudes Industrielles (CNEI) 5/. However, the specialized technical, engineering-type problems encountered by industries in general are not resolved. With regard to shortages of skilled labor, there are several ongoing technical training programs of the Government. To support further the Government's efforts to train technical manpower, the Bank's Fourth Education Loan (No. 1961-TUN) approved in May 1981, will assist the Government to expand the output of trainees, to improve the quality of training, and to promote closer cooperation among and involvement of enterprises in the training activities. 2.05 under the Sixth Development Plan (1982-86), the Government will pursue the same development objectives as in the last two Plans, namely, employment creation, export promotion, a more efficient and better integrated industrial structure, an increased participation of the private sector, and more rapid 3/ For more details, see Special Economic Report on Price Controls and Subsidies in Tunisia, Report No. 3405 - TUN, September 15, 1981. 4/ For more details, see Tunisia - Review of Electrical and Mechanical Industries, op. cit. 5/ More details are available in the Staff Appraisal Report (No. 3266 - TUN) of the First Small Scale Industry Development Project. - 4 - decentralization of irdustrial activities. Thus, a large share of the planned prcductive investments in manufacturing (projected at TD 1.6 billion in current prices or 19.5% of total Plan investment) would focus on labor intensive industries, particularly in the private sector. Manufacturing value-added is projected to grow at about 10.5% per year in real terms, slightly faster than the growth rate achieved during the Fifth Plan. The fastest growth (15.2% per year) is foreseen for engineering industries 6/ which have been given the highest priority in the Plan. Their share of total manufacturing value-added is expected to reach 18% in 1986 compared with 14% in 1981. 2.06 The Bank has supported the industrial sector in Tunisia primarily through provision of loans to BDET which has been the major vehicle for channeling Bank funds to manufacturing industries. This incluldes among others a loan to Banque de Developpement Economique de Tunisie (BDET) for engineering industries, which in addition to providing resources for this important manufacturing subsector through a line of credit, addresses several policy issues in the subsector (para 2.12). In addition to neeting BDET's resource requirements, these loans assisted in strengthening BDET's organization arA improving its performance. Also, the Bank financed a project for the rehabilitation of the textile industry (Loan No. 2012 - TUN of October 27, 1981). Recently, the Bank has approved a technical assistance loan which will alleviate constraints to the preparation of projects in industry through strengthening local project preparation capabilities ard will reinforce the training efforts of the Government in industry. B. The Engineering Industries Subsector 2.07 The Tunisian engineering industries have grown rapidly, by 18% per year in real terms during the 1960s from a small base, by 13% per year during the 1970s, arnd have maintained their good performance during the early 1980s. In 1982, the subsector grew by 10.3% as against a 3.4% overall growth for manufacturing. The subsector remains small, however, representing only 2% of GDP in 1981, arnd 14% of value-added and 12% of employment in manufacturing. The subsector is dominated by a dozen large enterprises (steel mill, foundries, ship repair, vehicle assembly, household appliances, mechanical hardware), which account for more than half of the subsector's output. overall, however, engineering industries are generally of small and medium size with the majority of enterprises engaged in steel structure/plate work, metal products arin intermediate gcods. 2.08 The subsector is largely inward-oriented. As a result of policies pursued in the 1960s, the development of engineering industries has taken place principally in import-substituting assembly industries producing consumer ard 6/ Defined to include the following industries: basic metals (including foundries); fabricated metal products; non-electrical machinery and supplies; electrical machinery, appliances and supplies; transport equipment; and measuring and control equipment. In some countries, such as Tunisia these industries are also defined as electrical and mechanical industries. durable goods and relying largely on imported components. As a consequence of the focus on assembly activities, the value-added content of the subsector's output has remained low at an average of 25%. The proliferation of assembly industries has also led to insufficient integration within the subsector arid an increasing pressure on the balance of payments because of growing imports of engineering intermediate and equipnent gocds. In spite of these structural weaknesses, exports of engineering products grew from 10% of engineering industries output in 1977 to 16% in 1981 with their share in total manufacturing exports rising fram 6.0% to 8.6% during that period 7/. On the other hand, imports of engineering goods increased from 35% of all imports in 1970 to 45% in 1979. 2.09 Two major constraints which have affected the engineering industries in particular are: (i) the low level of labor prcductivity; and (ii) the biases of the incentive framework (investment ccde, protection, pricing) against firm specialization in the manufacture of intermediate and end-products, rationalization of product-mix, intra-sectoral integration, exports, arnd the prcduction of capital gocds and supplies. The first constraint derives partly from the biases against firm specialization, but mainly from general weaknesses in plant lay-out and in operating practices, due, in turn, to constraints on the supply of technical assistance and on-the-job training of labor. Concerning the second constraint, the investment code (Law 1974-74, revised by Law 1981-56) did not encourage strong linkages between the supplies of intermediate ard semi-finished products and the end-product assembly industries 8/. Administrative red tape and the lack of quality standards have also constrained exports by local engineering industries and intra-sectoral linkages between local firms and the foreign exporting firms. Also, the investment code arnd the structure of protection and tariffs for imported engineering goods has resulted in a low or negative effective protection for Tunisian capital goods industries. Further, the Tunisian authorities have been using discretionary import licensing procedures to limit imports of capital, and intermediate goods. The investment code revisions of 1981 have focussed on the general issues of regional decentralization and capital intensity of investment in manufacturing (para 2.02). These revisions, however, fall short of what would be necessary to remove all constraints noted above. In this respect, under a recent Bank loan for engineering industries (para 2.12), the Government has agreed on specific incentives for these industries, on appropriate protection measures anJ incentives for capital goods industries, on measures for specific industrial standards ard better quality control, and for better procedures for tax/duty exemption on inputs used for exports. As part of this loan, the Bank is assisting the Tunisian authorities with an Effective Protection Study for the manufacturing sector which would assess the appropriate levels of protection for engineering industries also, with a view to reducing the variation in tariff 7/ Exports of electrical products have taken the largest share in engineering exports, and have ccme mainly fran foreign firms assembling electrical and electronic prcducts on an "off-shore" basis under the Law 1972-38. 8/ In advanced engineering industries, the final processing and assembly typically account for 20-30% of the end-product value, while the remaining 70-80% comes fram the supplier industries where most of the engineering processes take place. - 6 - levels and adjusting cases of overprotection. Further Bank assistance in improving the export envirorment will be provided under the recent Technical Assistance Loan (No. 2197-TUN of October 1982) through the execution of an export prcmotion study which will review constraints in the present incentive system and institutional framework for exports and recommend measures for improverment. 2.10 Tunisia has a ccnparative advantage in selected engineering product lines. Its comparative advantage consists of its labor force with relatively low wages and increasing competence and quality and its proximity and potential access to the EEC markets. The primary development objectives for the subsector, i.e., to increase labor prcductivity and local value-added content, will be best achieved in the medium-term by focusing on three major categories of products in the industries producing capital and intermediate goods with potential for growth and efficiency improvement. These categories camprise: (i) products for efficient import-substitution using simple or intermediate labor-intensive technologies with a domestic market large enough to sustain econcomic operations, such as castings, steel structures ard platework, selected intermediate goods and electro-mechanical and electronic goods; (ii) products with potential for development with smaller donestic markets than in the first group, involving high processing technologies, such as parts and components, as well as assembly of various machinery and equipment (air ccmpressors, generating groups, tractors, trucks, dumpers, forklifts); and (iii) intermediate goods and end-products with established or potential markets for exports, such as hard tools and cutlery, mechanical and electrical conponents and appliances, and castings. A focus on these three categories of priority activities would foster the development of industries representing currently about two-thirds of the engineering industries output. It would also aim at substituting efficiently engineering industries imports and prcmoting abroad the image of Tunisia as an efficient exporter of engineering gocds. 2.11 The Sixth Development Plan has projected a total investment in engineering industries of about TD 385 million (US$610 million), representing 24% of total projected manufacturing investment as ccnpared to 13% during the Fifth Plan. As a result, the growth of the subsector's value-added is expected to accelerate from 13.1% per year during 1977-81 to 15.2% per year during 1982-86. By 1986, engineering industries would represent about 18% of manufacturing value-added and 3.1% of GDP, thereby making their importance in the structure of the Tunisian manufacturing sector closer to that of countries with similar level of development. The Plan's priorities for the subsector and the derived investment program reflect largely the strategy outlined above (para 2.10). 2.12 To support the efficient development of engineering industries under an appropriate policy framework, and to address the development constraints noted above (para 2.09) the Bank has recently approved a US$30.5 million loar. for an Electro-Mechanical Industries (EMI) project 9/ which will provide financial and technical assistance to engineering industries. This project will finance, 9/ Loan No. 2113-TIJN, Electrical and Mechanical Industries Project, Staff Appraisal Report No. 3689 - TUN, March 2, 1982. through a line of credit to BDET, new and mcdernization projects in priority engineering subsectors. Furthermore, the project provides technical assistance to engineering industries by establishing an Institute for Stardardization and Quality Control of industrial products, ard a Technical Center for delivering production-related assistance and on-the-job training. Finally, the project helps to implement changes in incentives specific to engineering industries in the areas of protection, exports and financing. As part of the agreements reached with the Tunisian Government concerning protection and incentives for engineering capital goods industries, the Government would take appropriate measures to ensure that tariffs on imports of engineering capital gocds ard supplies be maintained below 18% (21% for steel structure and platework) and that these levels be applied consistently for products that could be produced in Tunisia. For priority engineering products protected by import licensing procedures, the same competitive pricing discipline would be sought by ensuring that manufacturers would not be allowed to charge ex-factory prices in excess of 118% (121% for steel structure and platework products) of the comparable foreign price (defined as the ex-factoLy price of the foreign project partner in his domestic market plus a reasonable estimated provision for transport and insurance costs to Tunisia). The above agreements on protection of engineering goods also apply to the ferrous castings manufactured by the proposed SOFOMECA Project and to the products of SOFlOMECA's major new clients, such as diesel engines and tractors (paras 4.07 ard 4.18). C. The Fourdry Irdustry 2.13 The Tunisian foundry industry, with an average growth of almost 8% per year during the 1970s, has not kept pace with the overall good performance of the engineering industries subsector (13%). Its share in the subsector is small, and in 1981 it accounted for only 2.5% of engineering industries output, 3.6% of employment, and 4.6% of investment. The foundry industry is underdeveloped and weakly integrated within the engineering subsector and needs particular development if it is to become, as it should, a backbone for the development of the Tunisian engineering industries. Tunisian foundries, dominated by two public enterprises (SOFOMECA and Fonderies Reunies) which account for 90% of the national capacity and output of castings, prcduce low grade castings of iron and steel in small series for varied uses on the domestic market (construction sector, mines, cement industry, railways and engineering industries), and some exports. The two foundries cover aLmost the complete range of traditional cast iron products (infrastructure- and housing-related) with some duplication of the types of castings produced. Due to the small domestic market and the diseconomies of scale there is a need for rationalization of future production among these foundries. Foundry output in Tunisia, due to various constraints (para 2.14), amounted to only about 7,800 tons in 1982 and represented just 33% of domestic consumption of foundry products, with the balance being imported in rough or finished form (para 4.01). 2.14 The major constraints which have affected the development of the foundry industry are: (i) the low level of labor productivity; (ii) the low quality of final products; and (iii) the bias of the policy framework against - 8 - development of engineering industries and intra-sectoral integration (para 2.09). The low level of productivity of the Tunisian foundry industry is due to the diversification of its product-mix, lack of specialization among the two main foundries, technical inefficiencies and old equipment, and inadequate management organization. The low quality of foundry products derives mainly from the lack of good quality casting sand. The use of inferior sand leads to costly finishing operations, thereby further decreasing labor productivity. Poor quality is also the result of the lack of adherence to established quality standards and of the lack of development of new casting technologies. Finally, the policy environment has not been conducive to the development of the foundry industry. The Tunisian foundries have had a low or negative effective protection as the imported castings used in capital gocds for approved investments pay low custom duties and taxes compared to those paid by local foundries on their imported inputs. Further, the incentive framework in Tunisia has not encouraged the development and integration of engineering industries (para 2.09), thus also hampering the integration of foundry products. The policy issues have been addressed in a broader context under the Bank's EMI-loan (para 2.12). 2.15 To address the foundry industry-related constraints discussed above, the Bank prepared a foundry development strategy paper in 1982 focussing on measures to: (i) raise productivity; (ii) raise the quality of foundry products; (iii) expand and intrcduce product lines where Tunisia has a comparative advantage in substituting growing imports; (iv) ccmpensate for the small domestic market by increasing domestic integration of castings; and (v) establish a sound basis for exports. The strategy reccmmends specific measures in each of these areas. Firstly, measures to raise productivity include (i) rehabilitation, mcdernization and expansion of existing foundries; (ii) rationalization of production among the two main foundries to attain higher economies of scale and a more intensive use of facilities, with, based on the present capabilities of the foundries, SOFOMECA concentrating on castings in the upper range of quality, and Fonderies Reunies (the second large publicly owned foundry, para 2.13) mainly producing castings in the lower quality range; and (iii) a program of technical assistance and training to address weaknesses in management organization and in the quality of the labor force. Secondly, measures to raise the quality of foundry products focus on the establishment of a local sand quarry and treatment plant for foundries, and establishment of quality control standards and training of the labor force on the importance of such standards. The modernization of present foundries and removal of bottlenecks would also contribute to improving the quality of foundry products. Thirdly, based on an analysis of the market for foundry products in Tunisia and of Tunisia's comparative advantage in the various foundry products (para 4.18), the strategy proposes that Tunisia expand its foundry capacity in the production of castings for automotive and mechanical industries parts to substitute for their growing imports. Furthermore, capacity of existing foundries is proposed to be expanded to accommodate the growing domestic supply gap for traditional castings. Fourthly, to overcomre the limited size of the domestic market for castings for mechanical industries, the strategy proposes integration of locally produced castings into the production programs of downstream assembly plants - 9 - through the establishment of programs with the plants to incorporate local castings into imported assembly kits. These measures, along with a revision of procedures that would allow foundries to recover custan- duties and taxes on imported inputs used in the production of castings for exports (para 2.09), should form a sound basis for exports as a result of improvement in quality and cost competitiveness. 2.16 The conclusions of the strategy paper were discussed with the Tunisian authorities and its major aspects are reflected in the Tunisian Sixth Development Plan. Based on the strategy, the Government has decided to implement two foundry modernization and expansion projects, for SOFOMECA (the Project) and Fonderies Reunies, which will remain the only two main foundries supplying primarily the domestic market. The Fonderies Reunies project, presently in the study stage, would consist of the mcdernization and expansion of its existing facilities from 3,500 tpy to 7,000 tpy, mainly for the production of traditional castings. The two foundry projects would address the major identified constraints in the foundry industry and contribute to the implementation of specific measures identified as part of the foundry development strategy (paras 2.14 and 2.15). Productivity in the foundries would be raised through (i) rehabilitation, modernization and expansion of existing facilities, (ii) rationalization of production among the two foundries; and (iii) technical assistance and training to improve management organization and the quality of the labor force. Quality of foundry products would be raised through the establishment under the SOFOMECA Project of local sand quarries and a sand treatment plant for supply of quality casting sand to SOFOMECA and other foundries, and through the modernization of present facilities as well as training of the labor force (para 5.02). Furthermore, these projects fit well into the strategy to expard into product lines where Tunisia has a comparative advantage to meet growing imports (para 2.10). The SOF'OMECA Project would also meet the Government's objective to prcmote private sector participation in industrial development (para 2.05), as, with the implementation of the Project, the ownership structure of SOFOMECA will change from a publicly owned to a semi-public and privately owned Company. In addition to these two projects, the Government is considering to establish export-oriented foundries in collaboration with foreign partners, which would export their entire production to the foreign partners in compensation for imports of assembly parts and components for various industries. One such foundry, presently under discussion, is to be established by Peugeot with a capacity of 7,000 tpy. In order to ensure an orderly development of the foundry industry in Tunisia, in line with the proposed foundry strategy, the Government has agreed to consult the Bank before amending its general directions for or affecting the foundry industry in Tunisia and before undertaking or approving any important project or investment in the foundry industry for the Tunisian market. - 10 - III. SOFOMECA - THE COMPANY A. Background and ownership 3.01 The facilities of SOFOMECA were installed in 1964 as a maintenance workshop for the Tunisian railway company, Societe Nationale des Chemins de Fer Tunisiens (SNCFT). In 1965, its management became independent, arnd in March 1966, SOFOMECA was established as a societe anonyme, an independent legal entity. Initially, SOFOMECA's production was mainly geared to two major customers, SNCFT and the Phosphate ccmpany of Sfax-Gafsa. Since the late 1960s, however, sales diversified, and in 1972 SOFOMECA began exporting its castings. 3.02 SOFOMECA at present is publicly owned, with the Tunisian Government holding 87.2% of the Company's shares directly, the remaining 12.8% being divided among 24 of SOFOMECA's domestic clients, which are also mainly publicly owned. As part of the Project financing plan (para 6.05), SOFOMECA will increase its paid-in capital fram TD 1.21 million at present to TD 12.31 million by 1985. The increase of TD 11.10 million will come from damestic and foreign sources in the semi-public and private sectors (para 6.06). With the Project therefore, the ownership structure of SOFOMECA will change from a majority publicly owned Company to a Conpany with a majority of shares held by semi-public and private shareholders. In order to establish the price of the new shares to be issued by SOFOMECA, it appointed a local audit ccnpany to provide the basis for the revaluation of the Ccmpany's assets and to recammend an issue price of the new shares (para 7.11). The auditing canpany calculated a price equivalent to 160% of its ncminal value (TD 5). However, SOFYOMECA decided to fix the nominal value as the price of the new shares. This is justified on the ground that the calculated value does not truly reflect the market price of the shares, as SOFOMECA'S shares are not publicly traded on any exchange and the suggested price therefore remains untested. Further, the Government intended to provide an incentive to the new shareholders to attract capital for this priority project in the industrial development of Tunisia. With the implementation of the Project, the Government will hold directly 9% of the Company's shares and indirectly another 15% which represents the Government's interest through the participation of five of the new shareholders' institutions (STUSID, BTKD, BTEI, AIIC and IDB). B. Organization and Management 3.03 SOFOMECA's present organization is shown in Annex 3-1. Its Board of Pdministration is appointed by the General Shareholders meeting, and consists of 12 members who are appointed for 6 years each. Presently, they represent the Ministry of National Economy (2), the Ministry of Plan and Finance (1), a local bank (1) and clients of SOFOMECA (8). The Board is the policy-setting and monitoring body of the Company, which meets at least four times per year and is not involved in the day-to-day operations of the Company. The President of the Board, Mr. Sifaoui, represents the Ministry of National Economy and is also the Ccmpany's General Director. In managing the daily operations of the Company, Mr. Sifaoui is assisted by three Directors: a Technical Director who presently acts also as - 11 - Deputy Director General, a Financial Director, and a Ccomercial Director. Recently, the Company created a function of Internal Audit and Management Control which reports to the General Director. General Government supervision of SOFOMECA's operations, apart from representation on the Board, is carried out by a Financial Controller, appointed by the Ministry of plan ard Finance ard by a Technical Controller, appointed by the Ministry of National Economy, as a legal requirement for companies with a direct Government participation of more than 10%. Following the increase in the paid-in capital through the new shareholders (para 6.06), SOFOMECA's present Board of Administration will change to reflect the representation of the final shareholders. The new Board, with a larger private-sector orientation (para 3.02) is expected to be more active in setting ard monitoring the Canpany's policies. It is expected that the new Board will be constituted by around September 1983. 3.04 SOFOMECA presently employs 542 persons, of whcm 477 are involved in production, including 20 apprentices, and 65 in supervisory arnd administrative functions. SOFOMECA's labor is competent and skilled in the technologies used by the Ccmpany. The Canpany has also made considerable efforts in upgrading technical skills of its labor through participation in foundry-related courses at the Government vocational school and of its middle ard lower management through specialized training in France. Furthermore, SOFOMECA itself operates a good apprenticeship program. Conditions of employment are regulated by a social statute for the Company, which is stardard for all public enterprises in Tunisia. Salaries of management are sufficiently ccmpetitive with those in the private sector to retain and attract qualified and experienced personnel. Wage increases are negotiated yearly between the Government and the national trade union (Union General des Travailleurs Tunisiens), of which the majority of SOFOMECA's labor force are members. On top of the annual general increases of wages, SOFOMECA's management can award premiums for all its employees. In 1981, such premiums totaled about 9% of base wages. However, SOFOMECA does not practice individual incentive schemes since the trade union is generally against such schemes. Although union representation is quite strong in SOFOMECA, and minor strikes have occurred in violation of the social statute, absenteeism is low (less than 3% in 1981). With the decreasing share of the Government in the ownership of the Company (para 3.02), the Company's role in determining the conditions of work, including incentive schemes, is expected to increase. SOFOMECA's management has discussed the Project, including the Government's declining role, with the Conpany's Workers' Council, which has approved the Project as it would improve the working conditions and strengthen the employment conditions of the labor. 3.05 Several deficiencies in SOFOMECA's financial, technical and commercial management organization and systems which need attention have been discussed with SOFOMECA management. In the financial area, the Ccnpany does not possess an appropriate cost accounting system which analyzes costs by work centres and products, as well as deviations fran set standards. As a result, management is unaware of the precise costs of prcducts, and what selling prices are appropriate to cover costs. The Campany therefore does not have exact information on profits or losses that it makes on specific products. - 12 - Furthermore, SOFOMECA's annual budget is prepared by the financial management with aLmost no involvement frcm other technical and canmercial personnel an-d without control on its implementation. The budget, therefore, is not used as a management tool. Finally, improvements are needed in the management of working capital, particularly the management of inventories and receivables. In the area of technical management, although the Company has a proper systein for production planning and control, it is unable to operate the system efficiently as it takes on too many orders resulting in delays and rather long delivery pericds. In the coammercial area, marketing is mainly restricted to the follow-up of sales with SOFOMECA's fixed clients rather than active promotion. This is appropriate at present with production levels near capacity. However, with an increased capacity due to the Project and a diversification in product-mix, the Ccmpany needs to supplement the present activities of the sales organization with additional promotion activities and to adopt a more forward looking and aggressive orientation. Further, it needs to explore other foreign markets than its traditional export markets in Algeria and France, particularly in the Middle East, where potential outlets for exports exist (para 4.11). 3.06 SOFOMECA's top management is aware of the above deficiencies and has agreed with the Bank to take corrective actions. It has prepared a program for the improvement of its organization and management in financial, technical, -marketing and personnel areas. The program has been discussed with and approved by the Bank. In this respect, the newly appointed financial and accounting expert who heads the internal audit and management control department has prepared a program for improvements in the financial organization and systems of the Company. The program focuses on the establishment or reorganization and improvement of the following areas: (i) general accounting; (ii) cost accounting; (iii) pricing of SOFOMECA's products; (iv) budgeting and control; and (v) selected areas such as receivables recovery, inventory management and procurement. Certain measures under the program have already been implemented such as: the establishment of an internal audit function which reports directly to the General Director (para 3.03); strengthening of the unit for receivables recovery; the initiation of steps for autoaatic processing of SOFOMECA's accounting data which will allow a considerable reduction in present processing delays; and the establishment of an annual cash flow budget which will be updated monthly. 3007 For the implementation of the program, SOFOMECA has agreed to a timetable which is realistic and achievable. As a priority area, SOFOMECA has started to develop a cost accounting system which would allow the recording and analysis of actual costs by cost centre and by product. Such a system is expected to be fully operational by mid-1984, upon which a system of standard costing would be introduced to complement the cost accounting system. Also, the availability of actual costs by product would be followed by a review of SOFOMECA's selling prices and the establishment of a new pricing mechanism for its prcducts (para 7.02). During 1984, an adequate budgeting and control system based on inputs from the various operational units would be established and be operational by the end of 1984. To implement such a program, SOFOMECA has - 13 - foreseen a staff of 9 persons, of whcm 6 are already employed and the remaining 3 are expected to be employed by June 1983. These arrangements appear realistic and satisfactory. Improvements in technical, marketing and personnel areas would be completed by the end of 1984. 3.08 Apart fram these improvements in its organization, SOFOMECA has also agreed to establish a management performance evaluation system. The system would measure progress of the Ccmpany towards the achievement of agreed objectives for financial ard technical performance. An agreement has been reached on the financial and technical targets of the management performance evaluation system. To monitor the timely implementation of the program and the progress of its operations, SOFOMECA has agreed to furnish to the Bank for its review quarterly reports on these matters. If the implementation of the program or the achievement of the targets are behind schedule, SOFOMECA has agreed that further measures will be discussed and agreed upon with the Bank. SOFOMECA's future organizational structure is given in Annex 3-2. C. Present Facilities 3.09 SOFOMECA's present facilities consist of: (i) an iron foundry (3,400 tpy capacity); (ii) a steel foundry (1,800 tpy capacity); and (iii) a machine shop with an assembly area for railway bogies (70,000 man-hours per year capacity). The installed capacity in the iron and steel foundry is about 6,500 tpy but due to technical imbalance between soae equipment in different shops, the actual production capacity is only 5,200 tpy. The major production facilities for iron and steel castings are located in separate bays in the main prcduction building. The melting equipment for iron castings consists of two cupolas (2.5 ton per hour capacity each), and for steel castings of an electric arc furnace (3 ton capacity). The molding equipment for both the iron and steel castings, consists of three pairs of molding machines, with sand supplied from two sand plants. Additional work centers are provided for the production of large castings. The iron and steel sections of the foundry share common facilities for ferrous scrap preparation and charge make-up, as well as for core-making and finishing. other commcn support functions include the pattern shop, pattern storage, laboratory, quality control, maintenance, offices and employee welfare buildings. 3.10 The equipment installed generally dates back to the mid-1960s when the foundries were established. Since that time, only few improvements have been made, The relatively old equipment and production deficiencies and bottlenecks have led to low productivity and poor quality of the finished castings. The major reasons for low productivity and quality are: poor quality of the locally supplied casting sand, use of lower than desirable temperatures of the molten metal in iron castings, worn out condition of flask equipnent in molding, lack of auxiliary equipment for material flow, non-rational operations in the finishing shcp and poor environmental conditions. These contribute to a high rate of rejects, poor surface finish, burn-ins and as a result, to excessive grinding and finishing requirements to bring the castings to acceptable standards. A detailed technical evaluation of the existing facilities is - 14 - provided in the Project File. The proposed Project addresses these difficulties through the modernization of the existing iron and steel foundry, the establishment of a sard treatment plant, and the concurrent intrcduction of modern fourdry practices and technologies (para 5.02). D. Recent Operations and Financial Performance 3.11 SOFOMECA's operating and sales performance during the pericd 1975-82 is summarized in the following table. SOFOMECA - Historical Operating Performance and Sales, 1975-82 Average Annual Growth (%) 1975 1977 1979 1980 1981 1982 1975-82 Production Volume (tons) Iron Castings 2,347 2,880 3,036 3,096 2,974 3,058 3.9 Steel Castings 1,289 591 627 1,291 1,419 1,637 3.5 Total 3,636 3,471 3,663 4,387 4,393 4,695 3.7 Capacity Utilization (%) Iron Castings 69 85 89 91 87 90 Steel Castings 72 33 35 72 79 91 Total Production 70 67 70 84 84 90 Donestic Sales Volume (tons) Iron Castings 1,929 2,686 2,895 2,451 2,847 2,570 4.2 Steel Castings 198 561 514 749 915 961 25.3 Total 2,127 3,247 3,409 3,200 3,762 3,531 7.5 Export Sales Volume (tons) Iron Castings 237 36 432 794 174 412 8.2 Steel Castings 829 72 88 497 450 505 (6.8) Total 1,066 108 520 1,291 624 917 (2.1) Total Sales Volume (tons) 3,193 3,355 3,929 4,491 4,386 4,448 4.8 of which % exports 33.4 3.2 13.2 28.7 14.2 20.6 3.12 As shown above, SOFOMECA's prcduction and sales levels have gradually increased over the last 8 years. Variation in performance has been mostly due to changes in exports, particularly when exports declined from 1975 levels during 1977-79 as a result of a closure of the Libyan market and a cut-off of - 15 - the Moroccan market following the closure of the railway connection via Algeria. Following these years, exports picked up again representing 29% of sales in 1980, 14% in 1981, and 21% in 1982, mainly through increased sales to Algeria and France. Further, in recent years SOFOMECA production levels have practically reached capacity. This trerd has continued in 1983, and presently SOFOMECA can not keep up with demand and has had to decline potential orders for domestic and export markets. 3.13 Regarding SOFmMECA's recent financial performance, some key irdicators are given in the following table. Details of historical financial statements are provided in the Project File. SOFOMECA's financial statements of 1982 have been verified by an independent external auditor. Before 1982, they have been examined by the Government appointed Financial Controller and by Ccmpany appointed 'Ccnmissaires aux Ccmptes', as well as by an accounting expert consultant that was attached to the Company, and all of them found the accounts satisfactory. SOFOMECA has agreed to appoint external auditors to audit its future accounts (para 7.11). SOFOMECA - Indicators of Historical Financial Performance 1975 1977 1979 1980 1981 1982 Income Statement Items ('000 TD) Sales Revenue a/ 1,433 1,967 2,313 3,316 4,280 4,227 Operating Profit 111 102 138 239 204 168 Net Profit 62 6 58 89 35 42 Cash Generation 141 105 177 299 295 342 Balance Sheet Items ('000 TD) Current Assets 2,190 2,028 2,115 2,685 3,135 5,032 Net Fixed Assets 1,270 1,552 1,915 1,815 2,096 2,186 Total Assets 3,460 3,580 4,030 4,500 5,231 7,218 Current Liabilities 1,870 1,698 2,186 2,613 3,423 3,379 Long-Term Debt 627 846 755 709 594 2,583 Equity 963 1,036 1,089 1,178 1,214 1,256 Ratios operating Profit/Sales (%) 7.7 5.2 6.0 7.2 4.8 4.0 Net Profit/Sales (%) 4.3 0.3 2.5 2.7 0.8 1.0 Personnel Costs/Op. Costs (%) 48.5 47.8 42.9 34.4 32.8 39.5 Current Ratio 1.2 1.2 1.0 1.0 0.9 1.5 Long-Term Debt/Equity Ratio 39:61 45:55 41:59 38:62 33:67 67:33 Receivables (months of sales) 6.2 4.8 4.8 4.5 3.2 4.5 Inventories (months of sales) 11.1 7.7 5.1 4.6 4.4 8.7 a/ Including sales tax. - 16 - 3o14 overall, financial performance of the Company is quite satisfactory. There are however 3 financial problems, which will be addressed during the implementation of the Project, namely (i) low profitability and cash generation; (ii) relatively high levels of receivables and inventories; and (iii) a deteriorating liquidity position. Regarding the Ccmpany's low profitability and cash generation during 1975-82, for most years the net profit of the Campany woas below 3% of sales revenue and cash generation remained under TD 300,000 per year. The two main reasons for its marginal profitability performance are: (i) a weak price-cost relationship, and (ii) poor productivity of the existing facilities. Concerning the first reason, SOFOMECA's present prices are ccmpetitive with imported prices (table, para 4.16). However, the costs of inputs are higher than those paid by foundries in industrialized countries (para 7.03). Practically all of SOFOMECA's major material inputs are imported in relatively small quantities at high costs and until recently SOFOMECA could not recuperate taxes on its material and energy inputs. On productivity, SOFOMECA requires presently double the man hours to produce one ton of castings ccmpared to similar foundries in Europe, primarily due to constraints in its present facilities. The Project would improve SOFOMECA's prcductivity substantially (para 5.14), and thereby ameliorate its ccmpetitiveness and financial performance (paras 7.03 to 7.05), as personnel charges represented almost one third of SOFOMECA's cperating costs in 1982. 3.15 Although SOFOMECA made considerable improvements in the turnover of its -main working capital categories during 1975-81 (table, para 3.13), the levels deteriorated in 1982, particularly concerning its clients' receivables, and its inventories of materials and consumables. The high levels of domestic receivables (5 months of sales in 1982) are related to the apparent poor financial discipline among the public enterprises in Tunisia which form SO3FOMECA's main domestic clients and the lack, until recently, of a systematic recovery of receivables (para 3.05). The high level in 1982 resulted particularly from the inability, due to financial problems, of the Ateliers de Constructions Metalliques et de Maintenance de Gabes (ACMG,), a public enterprise, to make its timely payments to SOFOMECA. SOFOMECA has already initiated steps to regulate these payments and expects to recover these by the end of 1983. Concerning the high levels of foreign receivables (5 months of sales in 1982), SOFOMECA's main Algerian client has a poor payment performance, which is considered in setting prices for castings sold to Algeria. The high level of material inventories (9 months of sales in 1982) is related on the one hanr to SOFOMECA's small operations in comparison with high minimum order quantities for material inputs. On the other hand they reflect a weak management of inventories (para 3.05). In 1982, the inventories were particularly high due to stoppage of deliveries to ACMG. In 1981, the level of inventories was only 4 months of sales. SOFOMECA management is aware of these high levels ard their implications for the additional fund requirements with the implementation of the Project if these levels are not reduced. SOFOMECA has already started writing-off obsolete inventories ard non-collectable receivables. Also, it has agreed with the Bank to establish certain targets for various workirn capital categories as part of a management performance evaluation system for the Conpany, and to improve management of its receivables and inventories as part of the program of improvements in its organization and - 17 - management (para 3.08). The targets for working capital are shown in the context of the financing requirements for the Project (para 6.04) and are reflected in the financial projections for the Company (para 7.05). 3.16 Finally, the third financial problem concerns SOFOMECA's liquidity position, as reflected by the current ratio which has steadily declined from 1.2 in 1975 to 0.9 in 1981, arnd which is related to the marginal profitability of the Company. This is mainly due to overdue payments to the Government for duties and taxes (TD 0.82 million) and to the Caisse Nationale de Securite Sociale (CNSS) for social security contributions of employees (TD 0.48 million), and arrears on repayments of two Government loans (TD 0.93 million including interest) which are included in the current liabilities. Regarding the social security payments, SOFOMECA has reached an agreement with CNSS for the repayment of the overdue amount in 4 years during 1983-86. Concerning the amounts due to the Government, the Government has made no efforts to collect the overdue debt, and thus effectively these represent "quasi equity" although they are listed as short term obligations in SOFOMECA's balance sheet. On request from .SOFOMECA, the Government has agreed to reschedule these payments so as to provide SOFOMECA with a sound financial position in the future. Under the agreement, SOFOMECA will be obliged to repay TD 1.37 million during 1988-92 at an annual interest of 10% on the outstanding balance from 1983, but will be exempted of repayment of TD 0.38 million which represents primarily penalties on the overdue tax payments. Due to rescheduling of these debts, SOFOMECA's current ratio improved to 1.5 in 1982, whereas the debt equity ratio increased to 67:33. The repayment of CNSS and Government debts on the above terms and conditions have been assumed in the financial projections for SOFOMECA with the Project (para 7.06). IV. THE MARKET A. Supply arnd Demand of Castings in Tunisia 4.01 A detailed analysis of the market for castings in Tunisia is provided in the Project File. The historic supply and consumption of ferrous castings in Tunisia is summarized in the table on the following page. Foundry production in Tunisia with an average annual growth of 7% during 1977-82 kept a gocd pace with the demand (4.8% per year during 1977-82) and amounted to about 7,800 tons in 1982 (82% capacity utilization). It represents at present one third of dcmestic consumption of foundry products with the balance being imported in rough or finished form. of the total consumptior. of about 21,000 tons of ferrous castings in 1982, about 39% was for infrastructure-related requirements, 50% for mechanical industries, and 11% for housing-related requirements. - 18 - TUNISIA - Supply and Consumption of Ferrous Castings (tons) Average Annual Growth 1977 1978 1979 1980 1981 1982 1977-82 (%) Production 5,585 5,845 6,170 7,082 7,338 7,835 7.0 of which: SOFOMECA 3,470 3,770 3,665 4,387 4,393 4,695 6.2 REUNIES 2,025 1,890 2,225 2,325 2,595 2,740 6.2 others 90 185 280 370 350 400 34.8 Plus: Imports 11,234 12,684 13,845 14,535 16,942 a/ 14,172 4.8 Minus: Exports 108 445 520 1,291 624 917 53.4 Domestic Consumption 16,711 18,084 19,495 20,326 23,656 21,090 4.8 Domestic supply as % of consumption 32.8 29.9 29.0 28.5 28.4 32.8 a/ Import figures, distorted by a large advance purchase of iron pipes by the Tunisian Water Authority SONEDE, have been corrected to reflect nonmal imports. b/ Estimated on the basis of consumption in the first ten months of 1982. Decline in 1982 is due to the relatively high imports in 1981 of indirect castings in CKD-kits. Sources: Reports of Atkins Planning (UK) and SOTINFOR (Tunisia), consultants on the foundry development strategy in Tunisia and SOFOMECAls foundry project respectively. 4.02 The historic imports shown in the table above are composed of either direct casting imports such as iron pipes, or indirect imports based on estimates of the shares of ferrous castings in overall imports based on engineering gocds. The latter include indirect imports of ferrous castings in completely knocked down (CKD) kits for locally assembled vehicles, as these represent a potential market for the foundry industry in Tunisia. Exports of ferrous castings from Tunisia have not been very significant in the past. These started in 1972, declined during 1977-79 and picked up during 1980-82 (about 900 tpy in 1982) to a few clients in Algeria and France (para 3.12). However, due to an increasing local demand, exports are expected to remain at a low level in the next few years. The growth in domestic consumption of ferrous castings at an annual rate of 4.8% during 1977-82 was marked by an equal import growth (4.8% per annum) against a higher annual increase in local production of 7% per annum. However, the market share of local foundries remained the same during - 19 - this period ard the supply deficit amounted to about 14,000 tons in 1982. There is therefore an ample scope for import substitution. It is estimated that of the total supply deficit in 1982, about 46% was for infrastructure-related castings, 44% for mechanical castings and 10% for housing-related castings. 4.03 Future demart for ferrous castings in Tunisia has been projected as foilows (details by main product group are given in Annex 4). TUNISIA - Projected Demand for Ferrous Castings by Main Consuming Sector (tons) Average Annual Growth 1982 a/ 1984 1986 1988 1990 1982-90 (%) Iron Castings Infrastructure 8,180 9,100 10,140 11,280 12,550 5.5 Mechanical Construc- tion & Engineering 8,730 10,080 11,660 13,470 15,570 7.5 Housing 2,420 2,670 2,940 3,240 3,580 5.0 Sub-total 19,330 21,850 24,740 27,990 31,700 6.4 Steel Castings b/ 1,760 2,040 2,350 2,720 3,140 7.5 Total 21,090 23,890 27,090 30,710 34,840 6.5 a/ Estimated on the basis of consumption in the first ten months of 1982. b/ only for mechanical construction and engineering sector. Source: Report of Atkins Planning (UK). 4.04 The projections of ferrous casting demand are based on a review of the Tunisian market for ferrous castings, ard are derived from both future demard identified by major consumers ard expectations for the overall growth rates of consumption in the main consuming sectors. The market review included a market survey of major customers for ferrous castings; a review and updating of forecasts set out in various earlier market studies; forecasts for the engineering subsector set out in the Tunisian Sixth Development Plan (1982-86); and an examination of historical and projected trends of relevant racro-economic variables. This task was carried out in early 1982 by Atkins Planning (UK), a consulting company retained by the Rank. The overall growth by the main consuming sectors, as shown in the table above (para 4.03) is in line with expectations of future growth in these sectors and priorities assigned to them in the Sixth Development Plan. - 20 - 4.05 Whereas the structure of ferrous casting demarxd in the infrastructure and housing sectors is expected to remain relatively stable in the future, the pattern of demand within the mechanical construction and engineering (MCE) sector (7.5% per year growth during 1982-90) is expected to change significantly. This would be caused by a rapid growth (10.2% per year during 1982-90) in the ferrous casting requirements for locally assembled vehicles and related intermediate products. These castings would form the potential market for the Project (para 4.14). Within total MCE sector demand, the share of castings for vehicles and related intermediate products would thereby increase fran about 57% (or 5,950 tons) in 1982 to about 69% (or 12,890 tons) in 1990. In contrast, the demand of another major consumer of castings, the railway sector (cast iron and steel railway canponents ard spare parts), is expected to stagnate due to a reducing railway fleet size, and its share would decline from 10% in 1982 to 6% in 1990. The shares of other major consauers in the MCE sector (spare parts for cement and steel industry, agricultural implements, public works, and pumps) would remain stable. The growing casting requirements for locally assembled road vehicles would also increase the share of the MCE sector in overall ferrous casting demand, fran 49% in 1982 to 54% in 1990. 4.06 The demand for ferrous castings in locally assembled vehicles is directly related to the expansion of assembly and production plants in Tunisia and the implementation of an integration strategy for local castings in their prcducts. New projects include the expansion of Societe Tunisienne d'Irdustrie Automobiles (STIA) for prcduction of trucks, buses and pick-ups, the implementation of the Camplexe Mecanique de Tunisie (CMT), which will produce tractors, agricultural implements and diesel engines, ard the establishment of the GM/ISUZU plant for production for pick-ups. STIA is the major vehicle assembly plant in Tunisia, assembling private cars, pick-ups, trucks, buses and coaches based largely on imported CK)-kits, under licensing arrangements with various foreign partners. In 1981, it produced about 1,500 trucks, buses and coaches and has planned to increase its capacity to about 3,500 units in 1988 and 5,000 units in 1990. Expansion of STIA's facilities is already well advanced and the expanded prcduction is expected to begin in mid-1983. STIA's production is completely for the dconestic market, where for trucks ard buses STIA's market shares were about 80% and 90% respectively in 1982. Although these shares are high, it is expected that STIA can maintain these, given that it will remain the only producer of trucks and buses in Tunisia. STIA's prices are in line with prices of imports for its trucks and lower than import prices for its buses. Protection levels for these vehicles are relatively low with import duties for trucks of 13-25% and for buses of 32%, which have been decreased consistently over the past few years. For its trucks, STIA has licensing arrangements with FIAT of Italy and RVI Berliet of France. The current contracts of STIA with RVI and FIAT will expire in 1984. The Government has already initiated steps in inviting proposals frcm different international manufacturers of vehicles to provide licensing arrangements and technical assistance to STIA beyond 1984. Negotiations with the prospective partners are planned to start in 1983. As the Government's decision on the selection of new partners of STIA is indirectly linked to the Project (para 4.14), it has been agreed with the Government, that by March 1984 proposals for the integration of diesel engines and castings into products produced by STIA under future - 21 - technical assistance and licensing agreements with foreign partners will have been negotiated ard provided to the Bank. 4.07 The CMT project, prepared by BDET, in partnership with Kloeckner Humboldt Deutz (KHD), is part of the Sixth Development Plan. KHD is a well known German diesel engine and equipment manufacturer with wide experience in developing countries. KHD participates in CMT's capital with 35% and will provide technology, technical, training and commercial assistance. The CMT project, to be implemented in 3 main stages 10/, would produce in 1988 at full capacity 6,000 diesel engines, 2,200 tractors and 750 agricultural machines ard implements. Prcduction of the engines beyond the requirements for tractors will be sold to STIA - 3,000 engines -- (para 4.06) for incorporation in the production of trucks and buses and to other industrial users (800 engines). Based on an analysis of tractor market in Tunisia, CMT expects to cover about 75% of the market in the CMT's horse power range. The phased 3-stage project implementation and a well developed marketing organization would help CMT to achieve the target. Moreover, KHD has recently asked C.KT to prepare itself to produce 500 tractors per year for exports (to replace the production of a KHD assembly line in Gernany for an export tractor model to be closed down). Assuming such exports, CMT's tractor production for the domestic market would represent in 1988 a market share of only 58%. 4.08 CMr's present management is efficient and competent. Further, the company has hired qualified staff trained in France arnd the Federal Republic of Germany to build up its middle management. As a result, in advance of the schedule contained in the contractual agreement with KHD, it has started, at present ir rented facilities, with the assembly of tractors based on knocked-down components supplied by KHD. Simultaneously it is constructing new facilities to complete the project, which will start production in 1984. The company has already completed the basic engineering of its new facilities and has initiated the first steps towards the construction of the project 11/. The implementation of the CMT project ard realization of its production program appear adequately prepared and realistic. Further, the Government has assured, that it will cause CMT to carry out CMT's investment program for the period 1983-88 according to the schedule agreed with the Bank. 10/ The three stages are--stage 1: assembly of tractors in new buildings in 1984; stage 2: introduction of assembly of engines arnd machining of engine parts (including castings) in 1985, and stage 3: assembly and production of all parts ard components in 1987. The three stages require 52%, 29% ard 19% respectively of the total project cost of US$77 million. 11/ CMr has established the financing plan for the project. Financing for the first stage is already secured, while that for the second stage is expected to be secured by March 1984. - 22 - 4.09 Regarding the integration of CMT's diesel engines in STIA's vehicle production, which has a direct impact on the SOFOMECA Project (para 4.14), the first prototype truck with the adapted engine is under preparation. Following the development of the prototype, adaptation of engines in STIA's trucks and buses would start in 1984. A satisfactory adaptation schedule for the engines from CMT has been established between CMT and STIA which is based on the timely decision of the Government on STIA's future licensing partners (para 4.06). The CMT project is expected to set prices for its products 12/ in line with the policy agreed under the Bank EMI-sector loan (para 2.12). Further, the viability of the project is in line with eligibility criteria for subprojects established under the EMI-sector loan which stipulates a minimum rate of return of 10% (a detailed analysis is provided in the project File). 4.10 The projected demand for ferrous castings in Tunisia shows ample scope for expansion of present foundry capacity for import substitution (para 4.02). However, to meet the entire domestic supply deficit, such expansion is constrained by the econcmies of scale required to justify financially and economically the production of specific castings. For example, within traditional castings, the production of cast iron pipes and bathtubs, given the limited size of the domestic market for them, is econcmically not viable in Tunisia. For the remaining traditional castings, the supply gap could easily be covered by the expansion of the existing facilities of SOFOMECA and Fonderies Reunies, since the additional volume falls in the prcduct-mix already being manufactured by these foundries. Within the total MCE sector demand, however, there are prcducts involving similar casting technologies and having sufficient demand, which justify the construction of a new foundry geared at producing such types of castings. The prcduction of these castings in Tunisia would increase the local integration rate in vehicle assembly frcn 8% in 1982 to 53% in 1990. 4.11 With a program aimed at improving the quality of its castings and increasing the level of productivity, planned under the development strategy of the foundry subsector (para 2.15), the Tunisian foundries would also be able to demonstrate ccmpetitive performance in export markets. Due to lack of quality and limited domestic foundry capacity, Tunisian foundries have not been seeking exports in a systematic way and their exports so far have not been very significant (para 4.02). However, possibilities of exports of castings fran Tunisia to European, North African and Middle Eastern countries exist. The contracts of STIA with RVI and FIAT (para 4.06) indicate a provision that the foreign partner would buy back goods (including castings) as ccmpensation for imports f ran the foreign partner for about 30% of the value of the imported CKD-kits. Under the contract between KHD and CMT, KHD has expressed its willingness to buy castings fram the foundry supplying castings to CMT. A recent study 13/ showed that the demand of all types of castings excluding spun 12/ The prices set in the present planning of CMr are 10% higher than the landed prices of imported products excluding any duties and taxes. 13/ The Market for Castings in the Middle East, study conducted in March 1982 by Foundry Management Design (United Kingdom) and Shamir Management Services (Jordan) . -- 23 - pipes in eleven major Middle East countries is in the order of 200,000 tpy, with a local supply of a maximum of 30% of this demani. It is estimated that the demand fron various sources could be over 5,000 tpy. However, it is assumed that after an initial pericd of complying with the increasing local demand, exports in the order of 2,5C0 tpy in 1)90 could be achieved but have not been considered in the financial ird economic analysis of the Project. 4.12 Based on the development plans in the Tunisian foundry industry (para 2.16 ), including the proposed SOFXOMECA Project and its second stage expansion as well as the expansion of Fonderies Reunies ard excluding export-oriented foundries, the projected demand and supply of ferrous castings in Tunisia through 1990, as discussed in the preceding paragraphs, is reflected in the following table. As shown in the table, with the implementation of the current development plans in the foundry industry, not only would the domestic supply of ferrous castings increase significantly to meet over 50% of the projected domestic consumption in 1990, but also exports are expected to gain in importance in the second half of this decade. Production of castings to meet an even larger share for the domestic market is not justified due to economies of scale and technologies involved for specific products (para 4.10). TUNISIA - Projected Demand/Supply of Ferrous Castings (tons) Average Annual Growth 1983 1986 1990 1983-90 (%) Dcmestic Demand 22,500 27,100 34,800 6.4 Prcduction 8,400 13,300 20,500 13.6 Exports 700 600 2,500 19.9 Imports 14,800 14,400 16,800 1.8 DoEmestic supply as % of Dcmestic demand 34.2 4.9 51.7 B. SOFOMECA'S Market Position and Marketing Arrangements 4.13 SOFOMECA is the largest producer and the only exporter of castings in Tunisia. In 1982, the Company's production of around 4,700 tons accounted for about 60% of Tunisian total output of these products. In the domestic market, SOFOMECA represents a share of 18%. Its major domestic clients are primarily public enterprises such as the railway company, water distribution authority, housing authority and some machine building enterprises. Its main clients abroad are located in France and Algeria. Due to the relatively poor quality of its products and other constraints (para 3.10), and an increasing local demand, SOFOMECA's ability to increase its export to France and other countries has been limited; specifically, demand enquiries from Iraq and Syria can not be met at present. - 24 - 4.14 With the implementation of the proposed Project and that of Fonderies Reunies, SOFOMECA's market position would change significantly, raising its share in the domestic market to 40% in 1988. SOFOMECA's market for the mechanical castings of the new fourdry would be largely connected to the demand of CMT and STIA (paras 4.06 and 4.07). CMT wouM be SOFO4ECA's major direct client of mechanical castings with annual requirements of about 4,000 tons in 1990 (57% of the mechanical fourdry's final output and 29% of SOFOMECA's total final production or 24% of SOFOMECA's total sales revenue). STIA would consume directly about 1,200 tpy in 1990 (17% of the mechanical foundry's final output and 9% of SOFOMECA's total final production or 10% of SOFOMECA's total sales revenue), and indirectly an additional 2,000 tpy through the purchase of diesel engines frcon CMT. Concerning the integration of mechanical castings frcm the Project in CMI's and STIA's production, programs have been finalized by SOFOMECA in collaboration with these enterprises. Further, it has been agreed with the Government that it will cause CMT to operate the facilities included in its investment program (para 4.08) for the machining of castings produced by SOFOMECA according to a schedule agreed with the Bank. 4.15 Further to meeting the demand of CMT and STIA for the domestic market, SOFOMECA has the possibility of exporting mechanical castings (para 4.11). Along with the implementation of the Project, SOFOMECA will be strengthening its marketing department to explore foreign markets (para 3.06). The Company has already initiated activities in the Middle East countries to develop contacts with prospective clients and the first results are very encouraging (para 4.13). However, due to high domestic demand in the initial years of operation of the Project, SOFOMECA plans to increase its exports through further expansion of its capacity to 12,000 tpy in a second phase (para 5.02). C. SOFOMECA's Prices and Campetitiveness 4.16 Due to an inadequate cost accounting system, SOFOMECA does not have an appropriate mechanism for pricing its castings (para 3.05). The prices, presently based on experience of technical and ccmmercial senior staff, are almost ccmpetitive with imports 14/ in case of iron castings (except for sanitary products) but are lower than imports for steel castings as shown in the following table. The low level of SOFOMECA's prices for steel castings is mainly due to the relatively low quality of products. SOFOMECA intends to implement a gradual real price increase for prcducts which have lower prices than the estimated imported prices once the existing foundry is modernized, enabling SOFOMECA to provide better quality castings within a competitive delivery schedule. Such an increase has, however, not been assumed in the financial analysis. 14/ The import prices should be treated with some reservations since it is difficult to establish the traded prices for most type of castings, which depend on design, complexity, piece weight, size of orders, and commercial arrangements. - 25 - SOFOMECA - Comparison of SOFOMECA 1982 Prices with Prices of Imports (TD per ton) Estimated SOFOMECA European Price as % SOFOMECA Price of European Prcduct Price (CIF Tunis) a/ Price Iron Castings Sewage prcducts 495 490 101 Heavy Pieces 380 430 88 Special Pieces 1,080 1,040 104 Sanitary Pieces 950 670 142 Valve Castings (machined) 1,460 1,400 104 Steel Castings Grindilng Media (Chrcmium) 650 850 76 Lining Products (Manganese) 1,080 1,220 89 Mechanical Castings 1,080 1,160 93 a/ Based on infoimation collected by GF in Spain, Italy ard Greece, anJ by the Bank in the Federal Republic of Germany and USA. 4.17 Concerning SOFOMECA's competitiveness 15/, a broad comparison shows that SOFOMECA's cost of production is almost at the same level as that of European foundries producing similar types of traditional castings. Materials costs are higher (41% of the average SOFOMECA price in comparison to 31% for European foundries) due to low import quantities and transport costs (para 7.03). The cost of labor, despite low wage levels, is almost equal (40% of the average price) to that in a European foundry due to low productivity (para 5.14). Therefore, SOFOMECA's present price competitiveness is mainly due to low capital charges (depreciation and interest charges) on their old facilities and low levels of profitability. The modernization of the existing facilities aims at improving productivity anJ quality, thereby improving SOFOMECA's cost competitiveness (para 7.03). 15/ For details, see the 1ounJry Strategy Paper in the Project File. - 26 - 4.18 The fourdry irdustry, with its high labor intensity, offers an appropriate production area for cost ccmpetitiveness in Tunisia, provided that a project achieves internationally comparable prcductivity levels and an acceptable quality of castings. The production of mechanical castings in rmedium series needed by CMT ani STIA falls in this category of fourdry products. The prices assumed in the Project correspord to those prevailing in Western Europe plus cost for insurance ard freight to Tunisia. These prices are lower than the present value of castings contained in CKD-kits supplied by RVI and FIAT to STIA an1 are competitive with those of KHD-castings planned to be supplied to CMT. The integration programs (para 4.14) include these price levels as reference prices for future prices of SOFOMECA's castings to STIA and CMT. In any case, the prices would be well below the limit of 118% of ccmparable foreign prices reflected in the Government's ccmmitnents to the Bank in the context of the EMI sector loan (para 2.12). V. THE PROJECT A. Project Objective and Scope 5.01 The objective of the Project is to contribute towards the development of the Tunisian foundry industry by: (i) meeting efficiently the growing iamestic dernand for foundry products; (ii) improving the quality, productivity and cost competitiveness of castings; and (iii) creating a sourd basis for exports. The Project would contribute to this objective through mcdernization and extension of SOFOMECA's present facilities, installation of new casting facilities, arnd strengthening of its technological ard management capabilities. 5.02 The proposed Project inclndes three major components: (i) modernization and extension of SOFOMECA's existing iron and steel foundry capacity from 5,200 tpy to 7,500 tpy; (ii) construction of new facilities for mechanical iron castings (grey and ductile) with a capacity of 7,800 tpy (with scope for a future expansion in a second phase to 12,000 tpy); and (iii) installation of two sand quarries along with a sand preconditioning plant with a capacity of 20,000 tpy to service SOFOMECA's requirements as well as those of other Tunisian foundries. Further, it includes a program for improvements in SOFOMECA's organization and management, ard transfer of technical know-how and assistance for training frcn KHD, the technical partner in the CMT project (para 4.07) to produce castings efficiently arnd econcmically. In addition, the Project provides additional machining capacity and installations for pollution control in SOFOMECA's existing operations. The Project has been designed by GF (para 5.17) with technical assistance provided by KHD. The concept and design of the Project as well as of equipment and machinery was discussed extensively by the Bank with SOFOMECA and GF. The major features of the Project are described below. - 27 - B. Project Description 1. Mcdernization of Existing Facilities 5.03 In the existing iron fourdry, the main modifications under the modernization will be in three principal areas: molding, material handling and sand preparation. In the molding section, a modern molding system will permit the econcEical prcduction of large series of castings with improved quality. This new system will be capable of producing approximately 50% of the total castings in the modernized iron foundry. Further, the existing three molding centers will be overhauled and mechanized to a higher degree than at present by the provision of improved conveyor systems and an additional shake-out facility. The provision of improved material handling would facilitate scheduling, improve pattern handling and enable use of standardized molds. In addition, the present sand preparation plant would be modified by increasing and improving sand capacity ard installing a return sand cooler to raise the general quality of the molding sand. Finally, to permit higher rnelting capacity to meet the increased mold prcduction ard to improve the quality of the molten metal, a new cupola blower with accessories would be installed. These mTTdifications would lead to higher quality, lower rate of rejects, simpler maintenance, lower tooling and resultant higher productivity. 5.04 In the existing steel foundry, the improvements include ffudernization of molding centers and reorganization of coremaking and finishing shops. The nachine molding centers are to be semi-mechanized in the same manner as in the existing iron foundry. In the large molding area, an additional overhead crane would resolve the present bottlenecks in molding, pouring and shake-out, as the existing single crane can no longer service the increased number of work centers without subsequent delay in other work areas. Further, a large shake-out machine is included for the above production which will permit improved material flow through rationalization of the work processes. In addition, the existing corerocm and the coresand drying and cooling equipment plant are to be relocated, consolidated and improved by the provision of new machinery with mnodern coremaking technology (para 5.09). 5.05 Included in the mcdernization is also a total reorganization of the finishing and heat treatment shops. This is required to service the increasing demand of grinding media for the mining and cement industries. Also, substantial improvements are planned through the provision of quality centers in various grinding and finishing operations, material handling equipment and Lmproved work stations. The above rationalization will reduoe in-process inventory as well as facilitate production scheduling. Concurrently with the increased casting production capacity, the machine shop capacity is to be increased with additional machine tools. 2. New Foundry for Mechanical Castings 5.Or6 rhe new foundry, to be constructed adjacent to the existini founilty (para 5.08), is designed to prcduce 7,000 tpy of iron castings at full - 28 - production. The buildings and the layout take into account, however, possible further expansion of the capacity to 12,000 tpy in a secord phase. The proposed plant will include a single building which will house the following new facilities: (i) induction furnaces for molten metal supply; (ii) one large and one medium modern molding system; (iii) a green sand preparation plant to service the two molding systems; (iv) a coremaking department with modeLn process technology to supply eventually all iron casting core requirements; and (v) a finishing department to shotblast, grind, finish, inspect and paint all grey iron castings including those produced in the modernized existing foundry. The planned facilities permit a large amount of flexibility with regard to changes of prcduct-mix. The existing auxiliary departments and facilities such as the pattern shop, raw material yard, laboratories, maintenance, quality control, and employee welfare will be shared with the modernized existing foundry. Improvements ard enlargement of these facilities are planned only to the extent necessary to meet the new technologies and increased capacity of the combined facilities. 3. Sand Treatment Plant 5.07 To permit the improvement of casting quality for the mcdernized existing foundry and to meet the required specifications for mechanical castings, the Project includes a sand treatment plant which will receive two types of surface mined raw sand. Two quarries in Bizerte and Hammamet, at distances of about 60 km frcm SOFOMECA, have been selected to supply the sand. The sand treatment plant is divided into two separate sections: the first section is to screen the sand at a rate of approximately 20 tons per hour to remove oversize particles, refuse, vegetation and other extraneous matter. The raw sand from Hammamet would require no further processing and would be used for steel molding. The Bizerte sand, after screening in the first section, is processed further through a thermal drier, a cooler to reduce the sand temperature and is then scrubbed pneumatically for further cleaning and removal of deleterious fines. This sand is then stored in silos and distributed pneumatically to work centers as required. The second section is designed to process approximately 5 tons of sand per hour or a capacity of 20,000 tons per year in a two-shift operation. 5.08 The plant layout showing the modernized and new facilities is presented in Annex 5-1. The new foundry is to be built alongside the existing foundry on SOFOMECA's property. Due to the poor soil conditions at the site and groundwater at less than 1 meter depth, the new foundry will be constructed by elevating the prcduction area by 5 meters, thereby minimizing the expensive foundation work (tanking, waterproofing and pumping equipment) which would otherwise be required. A further substantial advantage would be the improved maintenance and repair procedures possible by having easy access to the machinery and equipment below the operating platform level. C. Process, Technology and Technical Assistance 5.09 The proposed high pressure green sand molding process for the modernization and the new foundry are new for SOFOMECA, although similar to the presently employed medium pressure green sand molding process. The main - 29 - difference is in the control of the molding media (green sard) and adjustments in patterns and coreboxes because of the more rigid molds. The present technical staff of SOFOMECA is fully familiar with the necessary adjustments to be made. The only other new process being introduced in the modernized foundry is in the coremaking operations where the present two coremaking processes are to be supplemented with two new types of binding materials for cores. These processes are well proven in the foundry industry with the proposed equipment identical to the machinery presently used by SOFOMECA. No difficulties in operating these processes are expected. Concerning the prcduction of mechanical castings in the new foundry, technical assistance, proposed to be financed by the Bank (para 6.09), is essential to meet their quality specifications and criteria. Due to close association of SOFOMECA's Project with the CMT project (para 4.14), SOFOMECA has engaged KHD for technical assistance to help ensure that SOFOMECA will produce the mechanical castings at the high quality required for the production of CMT diesel engines under KHD license. The selection of KHD by SOFOMECA complies with the Bank guidelines. SOFOMECA has concluded discussions with KHD to acquire technical assistance which would include verification of the technical concept and design of the Project, an1 the specifications of equipment; provision of the technical know-how for prcduction technology, training of SOFOMECA personnel at KHD, and assistance for installation of equipment and prcduction start-up. Conclusion of a satisfactory technical assistance agreement with KHD is proposed as a condition for effectiveness of the Bank loan. Further, SOFOMECA already has licensing arrangements with Amstead Industries of the US for the production of railway bogies and is discussing arrangements for technical assistance with Bayard (US) for the machining and assembly of valves. With the inclusion of the technical assistance program and the existing know-how agreement, no major difficulties are expected in the operation of the modernized and new fourdries. D. Raw Materials and Utilities 5.10 The main raw materials for the foundries are steel scrap, pig iron, ferro-alloys, fourdry type sard, refractory materials, electrodes, and chemicals and additives for molding and coremaking. The present major problem of the poor quality of the locally available sands has been addressed by provision of a sard treatment plant in the Project scope (para 5.02). Steel scrap will be purchased locally as at present. The main imported materials are coke, pig iron, ferro-alloys, bentonite, steel shot and chemicals for coremaking. In addition, component parts for the assembly of bogies are purchased overseas. Over the past few years, SOFOMECA has developed sufficient contacts with several sources in Europe to ensure their procurement at competitive prices. Availability of the raw materials ard components is expected to pose no difficulty, 5.11 As shown in Annex 5-1, the layout permits the sharing and more intensive utilization of various service facilities. Increased requirements of infrastructure and utilities for the new foundry will be readily available. A new high tension sub-station is foreseen to convert the 32,000 volt primary supply for plant use. Power is available for the estimated additional connected load of approximately 10,000 KVA. The present gas lines are sufficient to absorb - 30 - the additional load, while new air compressors are included in the Project to meet the increased demand. E. Ecology 5.12 At present, environmental ard occupational health standards do not exist in Tunisia. Nevertheless, the design of the new foundry includes adequate provisions for fume and dust pollution control, sound pollution abatement arnd adequate safety arnd health facilities provisions to meet generally acceptable standards comparable with those of the Occupational Safety ard Health Administration (OSHA) of the US. These include: (i) adequate dust ard fume collectors for all sard systems, shake-outs, shotblast units, coremaking machinery, welding and arc-air stations, as well as grinding ard cut-off stations; ard (ii) noise reduction devices in the grinding ard finishing areas, and protective noise absorbing walls in the shot-blast areas. The various environmental protective devices incorporated in the design are planned to keep the pollution levels at comparable Threshold Limit Values of OSHA-codes. The present foundiry is also to be provided with additional dust, fume ard noise pollution abatement devices on existing equipment so as to achieve improved working, ecological arnd environmental conditions. These devices will significantly improve working conditions of operating personnel which would provide the environment for achieving higher productivity and quality. The above measures are judged to provide adequate and satisfactory environmental and safety control facilities; nevertheless, assurances have been obtained that the facilities under the Project be properly designed, constructed and operated in accordance with safety, health and ecological standards satisfactory to the Bank. F. Emnployment, Training and Prcductivity 5.13 The Project will create additional employment for 245 people. Further, it will consolidate employment of another 542 people in the present foundry with the proposed rmodernization measures. The investment cost per job created (or consolidated) equals US$53,000 (1982 prices) for the Project as a whole. The labor force for the new foundry will be provided from the surplus generated in the present foundry as a result of productivity increases, SOFOMECA's training program and graduates from the Tunisian technical vocational school. For the introduction of new techniques in the present foundry, normal training of SOFOMECA personnel by the machinery manufacturers is sufficient. However, for the technology of the new facilities, particular training would be required. Training of key personnel at manufacturers facilities in electrical, hydraulic and mechanical aspects of equipment and machinery would be included in all major procurement documents. Further, the training component in the technical assistance agreement discussed with KHD (para 5.09), would include training of 5 key prcduction people of SOFOMECA for about 4 months at KHD facilities and appointment of 5 KHD production people for about 3 months at SOFOMECA during the production start-up. These arrangements are regarded as satisfactory as SOFOMECA's present production staff is already well trained. Nevertheless, the technical assistance agreement with KHD will include the possibility of increasing the specified man-months for the training if deemed necessary. In - 31 - case of any further training needs, SOFOMECA has the possibility to train its personnel in the well established training center of GF in Switzerlar.d. 5.14 Of the present 542 personnel, 288 represent "direct" production workers. The production of 4,700 tons in 1982 implies a productivity of 98 man hours per ton. This compares unfavorably with European foundries, where the productivity is twice as high for the same type of product produced. After ccmpletion of the proposed mcdernization program, the labor productivity is expected to improve to 64 man hours per ton, an improvement of about 35%. The productivity of the new foundry, with a direct production requirement of 183 workers, is estimated at 42 man hours per ton. This canpares favorably with the productivity in European foundries producing similar castings at approximately 32 man hours per ton. In view of the differences in relative wages, this would lead to a labor cost advantage for SOFOMECA of about US$200 per ton of castings. G. Project Implementation Schedule and Management 5.15 The schedule for Project implementation is shown in the following chart. Project Implwemation Sdcedule 1983 1984 1985 1986 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 Dnail.d D.ign Cnrfiter. ThjtlEngi-.adg Oi E,og-nniniI .. ... Snd Tretnnt Plant V :onnnnt,.li Pnroductnon GF prepared the schedule based on the timing for various steps involved in the engineering, procurement ariA installation of each major package, as well as in the construction. of the buildings and other facilities. It was reviewed by the Bank andA is judged to be realistic. The early realization of the mcdAernization of the existing foundry is highly desirable because of the expanding local market adA the necessity to improve the quality of castings. The mR.ernization - 32 - component is therefore scheduled to be completed in advance of the new foundry and the sand plant. The details of the modernization measures has been finalized. Formal equipment specifications arnd corresponding tender documents for critical items are expected to be completed by mid-1983, with order placement beginning soon thereafter. As presently planned, delivery of equipment will ccmnence in early 1984 with start of production at the end of 1984. The works under the modernization component will be carried out in such a way that interruption of production in the existing foundry will be minimized. For the new foundry, the detailed engineering is practically completed. Equipment specifications and tender documents will be prepared with order placement of critical items starting in the fourth quarter of 1983,for delivery of major equipment items from 1985 and start of production in the beginning of 1986 with full production being reached in 1988 (para 7.01). The sand treatment plant, which is an important element for quality ard productivity improvements for the existing arid new foundries, will become operational in the second half of 1985. 5.16 For the execution of the Project, SOFOMECA has established a Project Management Group (PMG). The organization of the Pw:, is shown in Annex 5-2. The present technical director of SOFOMECA, who has extensive operational and implementation experience, has been assigned primary responsibility as project manager. The Company has also appointed a graduate engineer to assist the project manager in the day-to-day work. It has started seeking qualified personnel in technical, budget and project control functions and plans to staff the PMG with 10-12 persons at full strength. Assurances with respect to the maintaining and adequate staffing of the PMG have been obtained. To support the technical director in his existing operational responsibilities, SOFOMECA has engaged production engineers in the existing foundry, who would be taking on various functions in the proposed new fourdry. 5.17 For the preparation of the Project, the Bank extended in July 1982 a US$600,000 Project Preparation Facility (PPF) to the Government for SOFOMECA to retain qualified foundry consultants to review and complement the prefeasibility study prepared by SOTINFOR, a Tunisian consulting company, and, upon satisfactory preparation of the feasibility study, to undertake the detailed engineering of the Project. SOFOMECA selected GF for this work from among a number of firms that submitted proposals. The selection procedures followed were in accordance with Bank guidelines. In addition to the detailed engineering, GF will also assist in the procurement of equipment, construction management, supervision of foundry erection anr start-up of prcduction. It is also responsible for the coordination and supervision work for the civil engineering which would be undertaken as subcontract frcm GF by a consortium consisting of the Swiss company Suter and the Tunisian ccmpany STUDI. Assurances have been obtained from SOFOMECA, that in order to implement the Project, it will maintain engineering consulting services, satisfactory to the Bank. Civil construction work will be undertaken by Tunisian contractors. The responsibility for the equipment erection will be undertaken by the respective suppliers, who have the possibility to subcontract a part of erection work to local contractors. - 33 - VI. PROJECT COST, FINANCING PLAN AND PROCUREMENT A. Project Cost Estimate 6.01 The total financing required for the Project is estimated at US$54.1 million, of which US$40.7 million or 75% would be in foreign exchange. The detailed cost breakdown by principal Project components is given in Annex 6-1 and the overall cost of the Project as a whole and of various components are summarized below: Capital Cost Estimate Cost Item Local Foreign Total Local Foreign Total % - (Million Dinar)--- -- (US$ million)a/ - Civil and Building Works 2.15 0.64 2.79 3.41 1.02 4.43 11.7 Equipment and Spares 0.44 12.57 13.01 0.70 19.95 20.65 54.7 Freight and Installation 0.61 3.62 4.23 0.97 5.74 6.71 17.8 Taxes and Duties 1.38 - 1.38 2.19 - 2.19 5.8 Engineering, Tech. Assistance arnd Training b/ 0.21 1.56 1.77 0.33 2.48 2.81 7.4 Project Management and Preoperating Expenses 0.50 0.12 0.62 0.79 0.19 0.98 2.6 Base Cost 5.29 18.51 23.80 8.39 29.38 37.77 100.0 Physical Contingencies 0.53 1.85 2.38 0.84 2.94 3.78 10.0 Price Contingencies 1.00 3.28 4.28 1.59 5.21 6.80 18.0 Installed Cost 6.82 23.64 30.46 10.82 37.53 48.35 128.0 Working Capital c/ 1.40 0.57 1.97 2.22 0.90 3.12 8.3 Total Project Cost 8.22 24.21 32.43 13.04 38.43 51.47 136.3 Interest during Construc- tion and other Charges 0.20 1.40 1.60 0.32 2.22 2.54 6.7 Front-end fee on Bank loan - 0.03 0.03 - 0.05 0.05 0.1 Total Financing Required 8.42 25.64 34.06 13.36 40.70 54.06 143.1 Of which: Modernization 2.19 6.01 8.20 3.47 9.55 13.02 24.1 New Foundry 5.94 18.62 24.56 9.43 29.55 38.98 72.1 Sand Plant 0.29 1.01 1.30 0.46 1.60 2.06 3.8 8.42 25.64 34.06 13.36 40.70 54.06 100.0 a/ Converted frcn the Dinar estimate at an exchange rate of US$1.0=TD 0.63. b/ Includes services financed under PPF totalling US$600,000. El Incremental due to the Project during 1983-86. - 34 - 6.02 The base cost estimates were prepared by GF in September 1982 on the basis of its extensive experience and quotations obtained fram equipment suppliers in Europe. A major portion of the foreign component of fixed asset costs was estimated in Swiss Francs and converted to Tunisian Dinars at an exchange rate of TD 1 = SF 3.45 (September 1982). The estimates were discussed extensively with SOFOMECA and GF. Equipment cost estimates include a year's requirement of spares equivalent to around 5% of the equipment value. Insurance, freight and inland transportation are estimated to account for around 12% of the cost of equipment and spares. The estimate for civil and building works are based on an estimate by Suter (para 5.17) of the total volume of work required and unit prices, following tests on the site. under the existing tariff regulations in Tunisia for projects in priority sectors, SOFOMECA will be obliged to pay 6% for duties and 5% for taxes or. the imported equipment which have been included in the cost estimate. The estimate for installation has been established for each individual equipment package and represents on average around 17% of the value of equipment. This is in line with the experience of similar foundry projects. The amount included for consulting services (US$2.81 million) reflects the contract value for the engineering services with GF for the preparation of the feasibility study and for the detailed engineering, estimates for procurement and supervision services to be provided by GF, the cost of the technical assistance and training to be provided by KHD, and estimates for any additional training ard assistance required by SOFOMECA (para 5.13). Engineering, procurement and supervision services, (US$1.48 million) are estimated to require 90 man-months of foreign and 30 man-months of local consultants which are costed at US$15,400 and US$3,100 per mar-month respectively, including fees, travel, overhead and other expenses. The relatively high cost for foreign consultants is explained by industry standards for specialized services and by the fact that much of the work will be carried out in Tunisia. The cost of engineering services includes the cost of the feasibility study and engineering for the Project to be financed under the Bank's US$600,000 PPF (para 5.17). The estimates for technical and training assistance (US$1.33 million) include the amount provided in the proposal made by KHD to SOFOMECA (US$0.8 million). The pre-operating expenses provide adequately for project management. 6.03 In view of the detailed work undertaken by GF in preparing the cost estimates, a physical contingency of 10% on both civil and building works and equipment has been added to the base cost estimate and is considered adequate. The base cost estimate has been updated to March 1983 levels. Price contingencies for foreign costs were calculated on the basis of expected annual increases in international prices of 6% for 9 months of 1983, 7.5% for 1984, 7% for 1985 and 6% for 1986 and thereafter; and for local costs on the basis of expected local annual inflation of 7.5% for 9 months of 1983, 9% for 1984, 8% for 1985 and thereafter. The price contingencies represent about 18% of the base cost estimate. The installed cost estimate of the Project including contingencies is in line with the known costs of similar plants, and is considered reasonable and adequate. 6.04 The incremental working capital requirements have been estimated at US$3.1 million, taking into account price escalation as described in the preceding paragraph. This is based on the understanding that SOFOMECA will - 35 - improve its working capital management over that existing presently in its operations (para 3.15). Details of annual working capital requirements incluiing assumptions are shown in Annex 6-2. Interest during construction is estimated at US$1.9 million, based on the investment schedule ard at an interest rate of 12% (in Dinar terms) for all debt except the Bank, from both local anr foreign sources (para 6.06). In determining the total financing required for the Project, ccmmitment and front-end fees estimated at US$0.7 million have been included. In line with accounting practices of SOFOMECA, interest during construction ard other charges will be capitalized and are therefore included in the capital cost estimate. B. Financing Plan 6.05 The financing required for the Project is proposed to be covered as follows: Financing Plan Source Local Foreign Total Local Foreign Total % --(Million Dinar)---- --(US$ million) a/--- Equity Cash Generation 2.17 0.16 2.33 3.45 0.25 3.70 6.8 Share Capital Tunisian Shareholders: STUSID 1.50 - 1.50 2.38 - 2.38 4.4 BTKD 1.00 - 1.00 1.59 - 1.59 2.9 BTEI 1.00 - 1.00 1.59 - 1.59 2.9 Subtotal 3.50 - 3.50 5.56 - 5.56 10.2 Foreign Shareholders: ARMIIO 0.20 2.45 2.65 0.32 3.88 4.20 7.8 AIIC 0.20 2.45 2.65 0.32 3.88 4.20 7.8 IDB 0.14 2.16 2.30 0.21 3.45 3.66 6.8 Subtotal 0.54 7.06 7.60 0.85 11.21 12.06 22.4 Subtotal Share Capital 4.04 7.06 11.10 6.41 11.21 17.62 32.6 Total Equity 6.21 7.22 13.43 9.86 11.46 21.32 39.4 Long-Term Debt IBRD - 10.58 10.58 - 16.80 16.80 31.1 STUSID 0.69 3.36 4.05 1.09 5.34 6.43 11.9 BTKD 0.46 2.24 2.70 0.73 3.55 4.28 7.9 BTEI 0.46 2.24 2.70 0.73 3.55 4.28 7.9 Ccmmercial Bank 0.60 - 0.60 0.95 - 0.95 1.8 Total Long-Term Debt 2.21 18.42 20.63 3.50 29.24 32.74 60.6 Total Financing 8.42 25.64 34.06 13.36 40.70 54.06 100.0 a/ converted from Dinar at US$1.0 = TD 0.63. - 36 - 6.06 The Project would be cofinanced with three locally established joint-venture development banks, STUSID, BTKD and BTEI which would provide US$5.56 million as equity and US$14.99 million as long-term loans. It is expected that the loans of these banks would be provided to SOFOMECA at 12% interest, to be repaid over 9 years following 4 years of grace. SOFOMECA would bear the foreign exchange risk. These banks have indicated that their loan agreements with SOFOMECA might include the provision that instead of financing foreign equipment frcm their own resources, they might arrange and guarantee export credits/financing from suppliers' countries which would carry these banks' usual terms and conditions for the Project as mentioned above. Additional share capital amounting to US$12.06 million would be raised from ARMICO, AIIC and IDB. A contribution frcm SOFOMECA's cash generation of US$3.7 million and a mnall ccnrerrcial loan of US$0.95 million would provide the balance of the financing. The contribution f ran cash generation for financing has been mostly assumed during 1985-86 following the start-up of the mcdernized facilities at the end of 1984. During 1983-84, Project financing would be almost completely from infusion of new capital arnd loans. The boards of four of the cofinancing institutions have already approved their contributions, and approvals by the remaining two institutions are expected by September 1983. No problem in the conpletion of the financing plan is expected. The effectiveness of loans froam the local development banks and the subscription by the new shareholders to their full capital for the Project, as well as the paying in of 25% of their total share capital upon subscription, are proposed as conditions for effectiveness of the Bank loan. An understanding was reached with SOFOMECA that an additional 50% of the share capital will be called by June 30, 1984 and the remaining 25% by March 31, 1985. A Colenders' Agreement among the Bank ard the local development banks specifying mutual obligations of coordination, exchange of information and consultation regarding Project execution would be signed around signature of the Bank loan. With the change in the ownership structure of the Ccmpany, it is important that the new shareholders be responsible for the timely provision of any necessary deficiency funds resulting frcm a cost overrun and/or a shortfall in available financing for the Project. In this respect, assurances have been obtained fram SOFOMECA that in case of inadequacy of funds to complete the Project 16/, SOFOMECA will take all actions to make arrangements with its shareholders or others to obtain such funds on terms satisfactory to the Bank. SOFOMECA's present shareholders have already, through the SOFOMECA General Assembly, undertaken to ensure the provision of all funds to ccmplete the Project. SOFOMECA has indicated that it expects the future shareholders to accept the same undertaking. In addition, the Government has agreed to cause to provide or provide SOFOMECA with the necessary funds to ccmplete the Project. 6.07 The Bank loan of US$16.8 million would be provided directly to SOFOMECA and will be guaranteed by the Government. The loan would be provided for a period of 15 years including 3.5 years of grace at the standard variable interest rate 17/ plus a fee of 10% on the Bank's lending rate payable to the 16/ Ccnpletion of the Project is defined as the achievement of prcduction at 80% of capacity for at least 2 continuous months. 17/ Assumed in this report to be 11.0% per year. - 37 - Goverrment by SOFOMECA as a guarantee and administration fee, bringing the total cost of borrowing to the Conparny (excluding the ccmmitment and front-erd fees) to 110% of the actual Bank lending rate. The foreign exchange risk will be borne by the Conpany. Thus the total cost of the Bank loan, 12.1% based on the present interest rate of the Bank, and SOFOMECA bearing the foreign exchange risk, will be in line with that charged by the local development banks (para 6.06). The Bank's USS600,000 PPF provided to finance the feasibility study and engineering for the Project (para 5.17), the cost of which has been included in the capital cost estimate (para 6.02), would become part of the Bank loan at its effectiveness at the same term and corditions. 6.08 The allocation of funds by sources of financing and by different cost categories, shown in Annex 6-3, has been designed to cptimize the use of available sources of funds consistent with the Project's requirements. C. Procurement 6.09 The Bank loan is proposed to finance 7 foreign packages of the 18 major packages of equipment and machinery, including installation for the new foundry ard the sand treatment plant and the consultants' services. These packages, totaling US$13.7 million, are listed in Annex 6-4 and will be procured by international campetitive bidding (ICB). In the procurement of these packages, foreign suppliers may wish to seek the participation of local suppliers in providing structures, other items ard installation services. However, in view of the need to assign single contractor responsibility for these related items/services, they have been included in their entirety under single packages to be financed by the Bank loan. The total amount of local currency expenditures arising fran such local participation in these packages is expected to be under US$1.5 million. A margin of preference of 15% or the actual custom duties (which ever is lower) is allowed, but such margin of preference is unlikely to be applicable to these packages, as the type of equipment required for the Project is not produced in Tunisia. Prequalification reports, bidding documents, bid evaluation reports and contract award recormendations for these packages will be subject to prior review by the Bank and will follow procedures consistent with the Bank's Guidelines for Procurement. Procurement of all the items for the modernization component ard of the remainder items for the new foundry, financed by the development banks (para 6.06), would be made in accordance with their guidelines which are acceptable to the Bank. These include ICB for machinery and equipment and local competitive bidding for civil works. Civil works would be procured locally after competitive bidding among local contractors. The capabilities of these contractors are considered adequate for timely and efficient completion of these works. Consultants to be financed under the Bank loan were selected in accordance with Bank guidelines (paras 5.09 and 5.17). D. Allocation and Disbursement of Bank Loan 6.10 The allocation of the proposed Bank loan of US$16.8 million will be as follows: - 38 - Allocation of Bank Loan (US$ million) Categoty Amount Application Machinery, Equipment 13.70 100% of foreign and Spares expenditures and 100% of local expenditures (ex- factory cost) Consultants' Services 1.45 100% of foreign expenditures and 90% of local expenditures of local consultants Refunding of Project Preparation Advance 0.60 100% of amount due Front-end Fee 0.04 100% of amount due unallocated 1.01 Total 16.80 6.11 The projected schedule for the disbursement of Bank funds is shown in Annex 6-5. A payment of around US$200,000 under the PPF is expected to be disbursed prior to the Board presentation (para 6.07). The projected period of disbursement of about 3 years is favorable in conparison with the typical Bank profile of 6 years for industrial projects in EMENA countries, and about 7 years for all projects in Tunisia. The shorter disbursement period is based on the following factors: (i) the advanced state of preparation, engineering and procurement activities; (ii) reliance on disbursement profiles of the Bank-financed foundry projects in Yugoslavia and Portugal; ard (iii) the relative simple nature of the Project, with Bank financing of only 7 key packages. VII. FINANCIAL ANALYSIS A. Production Buildup, Revenues and operating Costs 7.01 The expected production buildup of the Project is based on discussions with SOFOMECA and GF and on the experience of similar Bank-financed facilities. Concerning the modernization component, production in the existing foundry would start increasing fran the last quarter of 1984 fran a level of 4,800 tpy during 1983-84 to reach full production of 7,000 tpy in 1986, of which 4,800 tpy of iror castings and 2,200 tpy of steel castings. Interruption in the production of the existing foundry are expected to be minimal as the installation of the new moulding line will be outside the present prcduction areas, ard this new lirne would compensate for an eventual reduction in production of the other - 39 - lines during their -modernization work. Full production would represent 93% of exparded capacity of the rnodernized existing foundry (para 5.02). The new foundry for mechanical castings is expected to start production at the beginning of 1986, to reach full production of 7,000 tpy in 1988 following a conservative production build-up of 30% of full production in 1986, 70% in 1987, and 100% in 1988. Full production would represent 90% of the capacity of the new foundiry (para 5.02). Of total production of the new foundry, 6,000 tpy would consist of grey iron castings, of which 4,900 tpy would be rough and 1,100 tpy machined, and 1,000 tpy would be GS iron castings, of which half would be machined. The sand plant would be operational in the seconJ half of 1985, when it would start supplying the nKodernized existing foundry. The sand plant would reach full production of about 16,000 tpy in 1988, of which almost half would be consumed in SOFOMECA's existing and new foundries. The other 8,000 tpy would be sold to other local foundries anr sand-using industries such as glass factories. Based on experience in other facilities and production start-up assistance by GF, and in view of adequate experience of SOFOMECA in operating similar equipment, these prcduction levels, summarized below, are considered realistic anA attainable. S,OFOMECA - Production Build-up and Capacity Utilization by Facility Frcm 1983-84 1985 1986 1987 1988 (per year) A. Production (tons) Existing Foundry Iron Castings 3,150 4,000 4,800 4,800 4,800 Steel Castings 1,650 2,000 2,200 2,200 2,200 Subtotal 4,800 6,000 7,000 7,000 7,000 New Foundry Grey Iron Castings - - 1,800 4,200 6,000 GS Iron Castings - - 300 700 1,000 Subtotal - - 2,100 4,900 7,000 Total Castings 4,800 6,000 9,100 11,900 14,000 Sand Plant Production for SOFOMECA - - 3,920 5,795 7,770 Production for Sale - - 4,000 8,000 8,000 Total Sand - - 7,920 13,795 15,770 B. Capacity Utilization (%) Modernized Existing Foundry 64 80 93 93 93 New Foundry - - 27 63 90 Sand Plant - 40 69 79 - 40 - 7.02 The existing foundry would continue to produce almost the same preluct-mix as at present, with the addition of small ard large machined valves from 1985 (300 tpy). Exports from the existing fourdry would be kept at a low level during 1983-85, due to the large domestic demand (para 4.13). Production of the new fourdry would be geared Tnostly to the local market with only 500 tpy of GS iron castings foreseen for expoLt in 1988. Revenues for SOFOMECA with the Project are derived from the sales volume forecast and projected selling prices. For the existing foundry, selling prices have been based on existing prices. With the implementation of the moderrization component, prices for castings from the existing foundry are expected to increase with the impact on the quality of the castings due to the Project. Such price increases have not been considered for the financial or economic analysis of the Project. For the new foundry, price levels are projected to be below or in line with prices now paid or expected to be paid by SOFOMECA's major clients of the new foundi.y (STIA and CMTr) to their foreign partners for comparable castings. These prices have been discussed by SOFOMECA with CMT and STIA ard form part of the integration programs between them (para 4.18). Export prices for existing castings are based on present export price levels. For the new foundry, the export price for rough GS iron castings is estimated at 85% of the equivalent domestic European price or 75% of Tunisian domestic price. For the sale of sand, the price is set at TD 23 per ton in 1982 prices to allow full recovery of the sard plant's operating costs as well as a 15% profit margin. This price is in line with the price prevalent in Europe. Concerning SOFOMECA's future pricing policy, assurances have been obtained from SOFOMECA that it will set prices that (i) are in line with similar imported or locally produced castings, (ii) are reasonably related to operating costs, and (iii) enable compliance with financial covenants (para 7.07). Details of sales revenues, including product-mix ard domestic and export sales are given in Annex 7-1. The following table gives a summary of sales revenue by facility. SOFOMECA - Sales Revenue with the Project (Current million TD) From % of Total 1983 1984 1985 1986 1987 1988 in 1988 Existing FoundLy 5.65 6.15 8.38 10.41 11.17 11.99 53.3 New Fourdry - - - 2.76 6.75 10.20 45.4 Sand Plant - - - 0.12 0.27 0.29 1.3 Total Sales Revenue 5.65 6.15 8.38 13.29 18.19 22.48 100.0 7.03 The operating costs for the Project have been assessed in detail by GF. Annex 7-2 contains a summary of SOFOMECA's operating costs with the Project and incremental due to the Project, as well as the unit prices of the main operating inputs, including a comparisorn with European levels. The following table shows the comparative operating cost structure before and after the Project for the existing foundry and for the new foundry. - 41 - SOFOMECA - Operating Cost Structure Before and After the Project (1982 prices) Cost Item Existing Foundry New Foundry Difference Present 1986 a/ (1988) a/ New vs. TD/ % of TD/ e of TD/ % of Existing ton Total ton Total % change ton Total Foundries Materials & Consumables b/c/ 207 31.1 199 38.5 (3.9) 188 44.7 (5.5) Energy d/ 79 11.9 77 14.9 (2.5) 80 19.0 3.9 Personnel e/ 264 39.7 182 35.2 (31.1) 103 24.5 (43.4) Administration Cost 115 17.3 59 11.4 (48.7) 50 11.8 (15.3) Total 665 100.0 517 100.0 (22.3) 421 100.0 (18.6) a/ at full production. b/ before tax. c/ excl. merchandise for steel bogies, incl. machining sub-contracting costs. d/ before tax. e/ includes direct ard indirect prcduction related personnel only. 7.04 For the existing foundry, the existing operations formed the basis for the operating cost projections with improvements in prcduction yields and consumption coefficients, following the implementation of the mcdernization component. Other improvements in the costs per ton of the existing fourdry result frcm the reduced labor costs following a transfer of part of the labor to the new foundry (para 5.13) as well as fran gains in labor productivity after completion of the modernization. Administration expenses will be reduced in a similar manner. For the new foundry, improvements during the learning pericd are reflected in declining unit consumption rates where appropriate. The main difference in the operating costs of the existing and new foundries after the Project lies in the personnel costs. The personnel cost advantage of the new foundry of 43% is due to lower manpower requirements for production and maintenance in the new foundry (256 persons) than in the existiny foundry (457 persons). The new foundry's energy costs are about 4% higher per ton than the existing foundry due to high electricity requirements because of higher melting temperatures for the relatively refined prcduct-mix. These higher energy costs are however offset by the reduction of 6% in the costs for materials and consumables and 15% in administration costs. The new foundry's cash operating costs per ton are therefore 19% lower than for the mcdernized existing foundry. - 42 - B. Financial Projections ard Analysis 7.05 The projected financial statements for the Conpany based or. the sales revenue ani cost assumptions discussed above are given in Annex 7-3 (including assumptions) and summarized below. SOFOMECA - Summary of Financial Projections (Current '000 TD) 1982 1984 1985 1986 1987 1988 (act.) Income Statement Items a/ Revenues 4,286 6,154 8,381 13,288 18,189 22,476 Gross Operating Incone 1,188 1,923 3,526 6,086 9,033 11,607 Net Income 42 343 659 (1,166)b/ 914 1,276 Funds Flow Items Internal Cash Generation 342 577 1,608 2,511 4,574 6,166 Long-Term Debt Repayments 141 283 283 369 2,219 2,493 Balance Sheet Items Current Assets c/ 5,032 3,946 4,682 6,872 9,051 10,975 Total Assets 7,218 18,968 31,264 36,658 35,975 35,301 Current Liabilities 3,379 1,446 1,677 4,196 5,092 5,489 Long-Term Debt 2,583 7,369 16,000 20,041 17,548 15,201 Share Capital 1,029 9,538 12,313 12,313 12,313 12,313 Reserves & Retained Earnings 227 615 1,274 108 1,022 2,298 Total Equity 1,256 10,153 13,587 12,421 13,335 14,611 Financial Ratios Gross Operating Income/ Sales (%) 27.7 31.2 42.1 45.8 49.7 51.6 Net Inccme/Sales (%) 1.0 5.6 7.9 (8.8) 5.0 11.4 Long-Term Debt Service Coverage 2.3 1.6 2.6 1.8 1.5 1.8 Current Ratio c/ 1.5 2.7 2.8 1.6 1.8 2.0 Long-Term Debt7Equity Ratio 67:33 42:58 54:46 62:38 57:43 51:49 a/ Before inlirect taxes. b/ Start-up loss. c/ Before surplus cash. 7.06 The financial projections for SOFOMECA with the Project show satisfactory financial ratios throughout the projection perind despite a net loss in 1986, the first year of operation of the new foundry, mainly due to increased depreciation and amortization expenses and interest charges in that year. Although the projections show cash generation from existing operations, during 1983-84 these have been assumed to finance mainly non-project expenditures such as: the planned investments in social and office buildings outside the Project scope; working capital increases on existing operations; - 43 - long-term debt repayments on existing debt; and the reduction of short term debt. Mainly during 1985-86, it has been assumed that cash generation contributes to the financing of the Project (para 6.06). The projections include the repayment of the overdue CNSS debt (TD 0.48 million at the end of 1982) during 1983-86 in four equal annual installments, as well as the repayment of the overdue Government debt (TD 1.37 million at the erd of 1982) during 1988-92 in five equal annual installments, at an annual interest of 10% on the outstanding balance from 1983 (para 3.16). Dividends are assumed to start in 1988, the third year of operations of the new foundry by which time the Conpany is expected to reach full production. C. Financial Covenants 7.07 Based on the financial projections, it is expected that SOFOMECA will maintain a sound financial position during and after Project implementation. However to ensure the financial soundness of the Conpany, assurances have been obtained from SOFOMECA that it shall (i) maintain at all times a current ratio of at least 1.3; (ii) not incur, without prior approval of the Bank, any additional long-term debt if, after incurring such debt, its debt to equity ratio would exceed 60:40, or its projected debt service coverage would fall below 1.5 times; (iii) unless the Bank shall otherwise agree, not declare or pay dividends, unless, after payment of such dividends: (a) it would continue to maintain positive accumulated retained earnings, (b) its debt to equity ratio would be below 60:40, and (c) its current ratio would exceed 1.5; (iv) not undertake in any fiscal year prior to the completion of the Project any investment (outside the Project scope), exceeding TD 0.5 million; and (v) not engage in any subsidiaries, partnerships, etc. without prior approval of the Bank. Further, assurances have been obtained fram the Government that it will cause to provide or provide SOFOMECA with the necessary funds, including those for any cost overrun, to complete the Project on terms satisfactory to the Bank. D. Financial Return 7.08 The pre-tax financial rate of return (FRR) for the Project is estimated to be about 16% in real terms. For the modernization component, the FRR is estimated at about 21%, and for the new foundry at about 14%. The canparatively high rate of return for the mxcdernization component reflects the fact that a relatively small debottlenecking investment leads to a substantial increase in prcductive capacity. The FRR is calculated on an incremental basis, i.e. based on the incremental costs and revenues to SOFOMECA due to the Project. For the case without the Project, SOFOMECA production is expected to remain at the level of 4,800 tons per year, with constant revenues and operating costs in real terms frcm 1983. Some of the operating cost reductions in the existing foundry due to the implementation of the new foundry, in particular the reduced personnel costs due to transfer of labor and lower administration overheads, have been credited to the new foundry in the FRR calculation 18/. The costs and benefits of the sand plant have been taken into account with the new foundry, since the sand 18/ Excluding the transfer of these reductions, the FRR for the nrrdernization component and the new foundry is estimated at 24.6% and 12.4% respectively. - 44 - plant would not have been installed without the implementation of the new foundry. The cost ard revenue streams for the FRR analysis are shown in Annex 7-4. The return on equity (ROE) for the life of the Project, based on the projected dividend stream and residual book value is estimated at about 12% 19/. 7.09 Results of the sensitivity tests on the Project's financial rate of return arnd the Ccmpany's debt service coverage are shown in the following table. Financial Sensitivity Analysis Debt Service Financial Rate of Return (%) Coverage a/ Mcderni- New zation Fourdry of Existing and Sand Total Foundry Plant Project FY 86 FY 87 FY 88 1. Base Case 20.7 14.0 15.8 1.8 1.5 1.8 2. Output Price: (a) -10% 17.3 10.8 12.6 1.2 1.1 1.4 (b) +5% 22.4 15.5 17.4 2.1 1.6 1.9 3. Prcduction Level: (a) -10% 18.3 11.8 13.6 1.5 1.3 1.5 (b) +5% 21.8 14.9 16.9 2.0 1.6 1.9 4. Operating Costs: +10% 19.6 12.6 14.6 1.5 1.3 1.6 5. one Year Delay Start-up 17.6 12.2 13.8 1.0 1.1 1.5 6. Fixed Capital Costs: (a) +10% 18.8 12.5 14.3 1.7 1.4 1.7 (b) -5% 21.8 14.8 16.8 1.9 1.5 1.8 7. Combination of 2(a) and 4 16.1 9.3 11.2 0.9 0.8 1.1 8. Combination of 5 and 6(a) 16.1 11.0 12.5 0.9 1.0 1.4 a/ Cash shortfalls under the different scenarios are assumed to be covered by short-term debt at 10% interest. The FRR and debt ser-vice coverage urder the various cases are still quite satisfactory. The FRR is most sensitive to a reduction in sales revenue, particularly when ccmbined with an increase in operating costs. The debt service coverage would fall below 1.0 in FY 86-87 in the combined cases of reduction in price (10%) and increase in operating costs (10%) as well as delay 19/ Assuming no inflation beyond 1990 and a dividend pay-out rate of 50% of net inccme after taxes. The ROE would increase with further inflation, due to the fixed nature of debt and capital charges, and with a higher dividend pay-out. Assuming a 100% dividend pay-out, the ROE increases to 14%. The lower ROE (relative to the FRR) is largely explained by the impact of income tax on the net inccne of SOFOMECA on which the dividends (and hence the ROE calculation) are based, but which been excluded from the FRR calculation. - 45 - in production start-up (1-year) and increase in capital costs (10%). These cases are however considered unlikely (para 7.15). 7.10 Based on the operating cost structure of the Project, its profit break-even in 1988, the first year of full operation, is estimated at 82% of the projected selling price, and 73% of the projected output level. Cash break-evens (including debt repayment) amount to 77% ard 65% respectively. E. Auditing arid Reporting 7.11 Independent financial auditors have carried out an audit of the Company's financial statement of 1982 (para 3.13). The firm engaged by SOFOMECA is satisfactory to the Bank. Furthermore, SOFOMECA has agreed to have annual financial audits carried out by independent auditors from 1983. Assurances have been obtained from SOFOMECA that it will suhnit to the Bank (i) audited financial statements within four months of the end of each fiscal year; (ii) unaudited quarterly financial statements and 12 months cash-flow projections within 45 days of the end of each quarter, (iii) monthly project progress reports within 30 days of each month-end; ard (iv) upon ccmpletion of the Project, a comprehensive report on the Project, its implementation, initial operations, and costs ard benefits derived ard expected to be derived therefrom. F. Major Risks 7.12 The Project's main risk relates to the market for mechanical castings to be produced by the new foundry, with regard to both demand ard price. As explained earlier (paras 4.06 ar.d 4.07), the domestic market for mechanical castings is closely related to (i) the implementation of projects by SOFOMECA's main future clients STIA and CMT arid the marketing arrangements between these clients, and (ii) the integration of SOFOMECA's mechanical castings in the production programs of these two clients. STIA's expansion is almost completed. Concerning the CMT project, assurances for the timely ccmpletion have been obtained (para 4.08). New operations of STIA and those of CMT are expected to start in advance of the projected start-up of SOFOMECA's new foundry. Concerning the marketing arrangements of SOFOMECA's main future client CMT, it has already initiated steps for the integration of its engines into the production program of STIA (para 4.09). However, the risk relating to this concerns the timely decision of the Government on the foreign partners of STIA for the manufacture of trucks beyond 1984 (para 4.06). The Government has already initiated steps in the selection process and has assured the Bank, that it will make a timely decision to ensure the realization of the adaptation schedule for the engines agreed between STIA and CMT and thus the timely integration of SOFOMECA"S castings from the new foundry in 1986 (paras 4.06 ard 4.07). Furthermore, concerning the market for CMT's tractors, CMT has already started sales of tractors assembled by it (para 4.08), which represent 20% of - 46 - the Tunisian tractor market. Moreover, KHD has irdicated its intention to close dowr. its assembly line for one tractor model for export (500 units per year) ard to transfer the prcduction to CMT. 7.13 Con.cerning the integration of SOFOMECA's mechanical castings, STIA and CMT have agreed with SOFOMECA on detailed programs for integration of SOFOMECA castings in their production programs (para 4.14). If for unexpected reasons, the demard of the two major clients would not be forthcoming in line with the anticipated schedule, the Project design is flexible to permit changes in product-mix and can service other dcxnestic clients and realize exports. In this respect, other projects, apart from STIA and CMT, are presently being established in Tunisia, of which some have already shown a keen interest in the SOFOMECA Project and would be willing to buy its castings. Furthermore, the Project would be fully capable of exporting a larger portion of output and retain its viability (paras 4.11 and 4.15). Assuming an export of 50% of the new foundry's output at 75% of the projected donestic prices, the financial rate of return of the new foundry would still be quite acceptable at about 10%. Concernring the selling prices, SOFOMECA's present prices of its existing foundry formed the basis for the prices of the mczdernization component. For the new fouriry, price levels assumed in the financial and economic analysis, were extensively discussed and will form part of the finalized integration programs between SOFOMECA ard these firms (para 4.18). 7.14 An additional risk concerns a lower cash generation than anticipated for financing of the Project. In the fund flow projections for the Company, it has been assumed that cash generation during 1985-86 will be used for Project financing, when the modernization ccmponent would be or. stream. Cash generation prior to 1985 would be almost totally used for non-project expenditures. As a result, of total cash generation available during the implementation arnd start-up period of the Project, only 43% will be used for the Project or 65% of cash available after all non-project expenditures and repayments of Project loans, with the remaining 35% being used for reduction of SOFOMECA's short term debt. Shortfalls in internal cash gereration are expected to be minimized by agreements obtained fron SOFOMECA on adequate pricing of SOFOMECA's products (para 7.02) and limiting SOFOMECA's other investments (7.07). This is in additior. to the agreement obtained frcm the Government to cause to provide SOFOMECA with sufficient funds to camplete the Project (para 6.06). 7.15 other minor Project risks relate to the implementation period, capital ard operating cost estimates, and SOFOMECA's ability to achieve the quality of its new castings. Concerning the implementation period, the Project's schedule (para 5.15) takes into account the timing for various steps involved in the engineering and procurement of each major package. Progress to date on the detailed engineering and procurement of items for the modernization conponent is in line with the Project schedule. However, there is a risk relating to the capability of the PMG to control and manage Project implementation. While the project manager has extensive implementation experience in the foundry industry, the effectiveness of the PMG to manage a project of the proposed size has not been tested. This risk is minimized, however, by the provision of adequate technical assistance by GF (para 5.17), which has demonstrated its capability in - 47 - implementing similar projects in other developing countries. Therefore, a possible delay of more than 6 months is considered unlikely. The risk of a capital cost overrun has been minimized through a careful preparation of the cost estimates (para 6.02). Furthermore, a 10% physical contingency has been provided to meet the possible increases due to unforeseen circumstances. Concerning the operating costs, an increase of more than 10% is unlikely to occur, since these costs have been based on SOFOMECA's present operations and GF's experience in other developing countries in foundry operations similar to those in the Project. On the quality of SOFOMECA's castings, it has retained qualified technical consultants (KHD) who would help to ensure a high quality of castings (para 5.09). VIII. ECONOMIC ANALYSIS A. Econonic Costs and Benefits 8.01 For calculating the econamic costs and benefits of the Project, border prices have been used for all tradeable goods. In the econonic analysis, unit prices of incremental sales by SOFOMECA as a result of the Project have been based on their import substitution ard export benefits to the country. Therefore, SOFOMECA domestic sales, based on the prices mentioned earlier (para 4.16), have been valued at the projected landed prices in Tunisia of comparable prcducts. The table on the next page shows average unit prices used in the econcmic analysis and a comparison with financial unit prices. As can be seen, average econonic prices of all castings are about 3% lower than their financial levels. Econoxnic prices for the existing foundry are on average 6% below financial prices, due to the lower average prices for iron castings (-11%), which is partly offset by the higher economic prices (+4%) for steel castings (para 4.16). Econcnic prices for the new foundry are in line with financial prices. 8.02 SOFOMECA presently imports most of its material inputs. To arrive at their border prices, custom duties which range fron 6 to 15%, as well as the 5% import tax have been exclucled fron the prices of imported material inputs. Financial prices of locally purchased steel scrap have been increased to US$110 per ton, or by 37%, to reflect their econconic opportunity cost. Concerning the Project's capital costs, taxes have been excluded fram the fixed investment. The materials and consumables, and work-in-progress inventories conponents of working capital are included as an economic investment, adjusted for duties and taxes on imported materials, which is recovered at the erd of the operating life of the Project. Finished goods inventory is assumed to replace stocks of imported castings that would otherwise be carried by the country. It is expected that Tunisia's inventory requirements for castings will be lower with a source of stable local supply than in case of imports. A useful operating life of 15 years after start-up of the new foundry and a residual scrap value of 10% of the plant investment is assumed. - 48 - Average Economic Unit Prices ard Comparison with Financial Prices (prices in 1982 terms) Comparison Economic vs. Economic Prices Financial Prices Financial TD/ton US$/ton TD/ton US$/ton Price (%) Domestic Prices Existing Fourdry: a/ Iron Castings 645 1,057 722 1,184 (10.7) Steel Castings b/ 1,167 1,913 1,121 1,838 4.1 All Castings b/ 775 1,270 822 1,348 (5.7) New Fourdry: Grey Iron Castings (Rough) 850 1,393 860 1,410 (1.2) Grey Iron Castings (Machined) 1,100 1,803 1,080 1,770 1.9 GS Iron Castings (Machined) 1,300 2,131 1,300 2,131 - All Castings 916 1,502 920 1,508 (0.4) Export Prices New Foundry: GS Iron Castings (Rough) 780 1,279 780 1,279 - All Prices of Castings 849 1,392 873 1,431 (2.7) a/ based on average revenue per ton in 1986 at full production of the mcdlernized existing foundry. b/ excluding steel bogies. B. Economic Rate of Return 8.03 As in the financial rate of return analysis, the economic rate of return (ERR) is based on the incremental costs and benefits of the Project (para 7.08), taking into account the adjustments in output ard input prices described above. On this basis, the ERR for the overall project is estimated at about 18%, for the mcdernization of the existing foundry at 23%, and for the new foundry and the sand plant at 17%. The ERR is slightly higher than the financial return since the adjustments of capital and operating costs in the economic analysis, mostly on account of taxes and duties (para 8.02), reduce the overall costs of the Project below financial levels, anJ more than offset the slight average reduction of economic output prices from their financial levels (para 8.01). Details of cost ard benefit streams for the economic rate of return calculation are given in Annex 8-1. 8.04 The sensitivity of the base case ERR to various changes in the expected costs anid benefits of the Project is illustrated in the following table. - 49 - Economic Rate of Return - Sensitivity Analysis Rate of Return (%) Modernization of New Foundry and Total Existing Foundry Sand Plant Project 1. Base Case 22.9 16.6 18.3 2. output Price: (a) -10% 19.4 13.3 15.0 (b) +5% 24.6 18.1 19.9 3. Production Level: (a) -10% 20.5 14.3 16.0 (b) +5% 24.0 17.6 19.4 4. Operating Costs: +10% 21.8 15.3 17.1 5. One Year Delay Start-up 19.2 14.3 15.7 6. Fixed Capital Costs: (a) +10% 20.8 14.9 16.5 (b) -5% 24.0 17.5 19.3 7. Combination of 2(a) and 4 18.2 11.9 13.6 8. Combination of 5 and 6(a) 17.6 12.9 14.2 C. Sectoral Impact and Other Benefits 8.05 The Project will have a major impact on the development of the foundry industry and the engineering subsector in Tunisia, both of which have been given the highest priority in the Tunisian Sixth Development Plan. Firstly, it will initiate an orderly development of the foundry industry based on a development program for the industry prepared with Bank assistance in the context of the Project (para 2.15). Secondly, the Project would address quality problems in the Tunisian foundry industry through the establishment of a sand treatment plant which will supply quality casting sand to the Tunisian foundries. Thirdly, the Project would be a key element in the development of engineering industries, as it would form, with the establishment of the new foundry, an important backward link for engineering industries which have been identified for their development potential in Tunisia (para 2.10). The Project would thereby promote integration within the engineering industries subsector, which is presently lacking and forms one of the main constraints for its development (para 2.09). Fourthly, the Project would also meet the Government's objective to promote private sector participation in industrial development, as with the implementation of the Project the ownership structure of SOFOMECA will change from a majority publicly owned to a semi-public and privately owned Ccmpany. 8.06 The Project would result in substantial foreign exchange savings and earnings through efficient import substitution and exports. The modernization and expansion of the existing SOFOMECA foundry would allow the efficient substitution of growing imports of traditional castings (para 4.10). Furthermore, the new foundry would replace efficiently the imports of assembly components and parts for the local autcmotive industry. The direct net foreign exchange savings of the Project (excluding debt service and dividends) are expected to amount to about US$162 million over the life of the Project (in constant 1982 prices), as compared to the foreign exchange component of - 50 - investment (including working capital) of about US$30.4 million. A detailed foreign exchange balance is presented in Annex 8-2. 8.07 The Project will generate benefits in social and environmental aspects. It will provide direct additional employment to 245 people. In addition, it will consolidate employment of another 542 people which would have been in jeopardy since, in the long term, it would be difficult for SOFOMECA to continue its operations with the poor condition of its existing facilities. Further, it will ameliorate the working conditions ir. the existing foundry through provision of dust, noise and pollution abatement devices (para 5.12). 8.08 Finally, the Project will serve to strengthen ard upgrade technological and management capabilities through technical assistance arnd the management improvement program including the management performance evaluation system (para 3.08). Such system would set ar. example for other Tunisian irdustries, particularly in the public sector. Further, the Project is expected to serve as a model for the execution of similar miedium-size projects in the engineering subsector. IX. AGREEMENTS 9.01 Conclusion of a satisfactory technical assistance agreement with KHD is closely linked with the implementation of the Project and is proposed as a condition for effectiveness of the loan (para 5.09). Further, the timely availability of the funds for the Project is regarded to be essential. Therefore, the effectiveness of loans fram the local development banks, the subscription by the new shareholders to their full capital for the Project, aril the paying-in of 25% of the total subscribed share capital, are also proposed as conditions for effectiveness of the Bank loan (para 6.06). 9.02 The following major agreements were reached: A. With the Government that it will: (i) consult with the Bank before amending directions and/or unJertaking any important project in the foundry industry (para 2.16); (ii) make available to the Bank proposals on the integration of engines arid ferrous castings negotiated with the future partners of STIA (para 4.06); (iii) cause CMT to carry out CMT's investment program for 1983-88 and to operate its facilities for machining SOFOMECA's castings in accordance with an agreed timetable (paras 4.08 and 4.14); and - 51 - (iv) provide or cause to provide SOFOMECA with the requisite funds (including those for any cost overrun), so as to enable SOFOMECA to complete the Project (paras 6.06 and 7.07). B. With the Ccmpany that it will: (i) implement the program for improvements in its organization and management systems according to the time schedule agreed with the Bank, review progress in this regard and implement necessary corrective measures (para 3.08); (ii) implement measures to achieve ard maintain the targets for financial and technical performance as part of the management performance evaluation system (para 3.08); (iii) design, construct and operate the facilities under the Project in accordance with safety, health and ecological standards satisfactory to the Bank (para 5.12); (iv) maintain a PMG with adequate staff to manage the execution of the Project (para 5.16); (v) maintain necessary consulting services to implement the Project (para 5.17); (vi) take all necessary actions to make arrangements, satisfactory to the Bank, with its shareholders for the necessary funds to carry out and complete the Project in a timely fashion (para 6.06); (vii) establish selling prices for its products which will be related to its operating costs (including financial obligations) and be competitive with those charged in the Tunisian market (para 7.02); (viii) ccmply with certain financial covenants (para 7.07); and (ix) ccnply with auditing and reporting requirements (para 7.11). 9.03 Based on the above agreements, the Project is suitable for a Bank loan of US$16.8 million equivalent for 15 years, including 3.5 years of grace, at the standard variable interest rate plus a guarantee fee (equal to 10% of the interest rate) payable to the Government. Industry Department May 1983 TUNISIA SOFOMECA FOUNDRY MODERNIZATION AND EXPANSION PROJECT SOFOMECA: Cunrent Organization Board of Administration President & General Director IM. Slfaouil Financial Controller - _ _ _ _ Technical Controller Deputv General Dlrector (Fl. Hadidanel ;;;:ial Director t ~~~~~Director | DeiCrhe tCoar Inera Audicto nM. Hamani) DBa Soguirr ( Hadidane) Managnement Controlr ProdLiction Manager 8 Prhsn r ay 1983 _ IBudget & _ Invoicing'. Accountng ahnn Production Maintenance | _ Mahng Facilities II (Equipment) _ Personnel _ Expedition Melin | j | J F~~~~~~~ ~ ~ ~ ~ ~ ~~~~~~ Molding ( Civil) l1 PtenSo j General | '1-~~~~~~~~~-Coremaking Administration | L F ttling l ~~~~~~~~~~ ~~ ~ ~ ~~~Production S ; turi es Planning & t Industry Department May 1983 TUNISIA SOFOMECA FOUNDRY MODERNIZATION AND EXPANSION PROJECT SOFOMECA: Future Organization Chart Board of Administration President & General Director Financial Controller t Technical Controller Deputy General Director Financial Commercial Technical Internal Audit & Department Department Department Management Control Existing Mechanical Fettling & Sericet Foundry Castings Foundry Machining Iron Finance ~~~~~~Sales astingsPrdcinrnQult Facilities Facilities Fettling Control St,eelSelMehd Accounting Marketing Cating:s Maintenance Fettling Studs& Facikgies~~~~~~~~~~~~~~~~~~tde C Bu dge t & Production Pattern Cost Control Purchges Maintenance Planning & Machining Making Control Production j Personnel l 4 _Invoicing Planning & Transport Control LEE _ .. | Sand Adminieration Expedition | Pin World Bank-24437 Industry Department May 1983 41~ - 54 - ANNEX 4 TUNISIA SOFOMECA FOUNDRY HODERIZATION AND EXPANSION PROJECT PROJECTED DEMA14D FOR FERROUS CASTINGS IN TUNISIA (tons) Average Annual Growth 1982 1984 1986 1988 1990 1982-90 (,) A. Infrastructure Special Pieces 1,370 1,530 1,700 1,900 2,110 5.5 Valves 670 750 830 930 1,030 5.5 Water Fittings 480 530 590 760 740 5.6 Pipes 2,220 2,470 2,750 3,060 3,400 5.5 Road Infrastructure Castings - Manholes 1,380 1,540 1,700 1,840 2,010 4.8 - Gratings 600 660 710 790 880 4.9 - Fittings - 400 440 500 550 n.a Other 1,460 1,220 1,420 1,600 1,830 2.9 Subtotal 8,180 9,100 10,140 11,280 12,550 5.5 B. Mechanical Construction and Engineering (MCE) Railways 500 500 500 500 500 - Road Vehicles - STIA and SETCAR 3,290 4,250 5,330 7,030 9,130 13.6 - Mechanical Complex (CGIT) - 1,190 1,410 1,940 1,940 n.a - GM/ISUZU - 690 920 1,270 1,820 n.a Agricultural Machinery 240 270 300 330 360 5.2 Public Works 190 220 240 260 290 5.4 Parts for Engines/Pumps a/ 170 290 360 470 610 17.3 Spare Parts _ 1,370 1,480 1,630 1,790 1,990 4.8 Other c/ 4,730 3,230 3,320 2,600 2,070 (9.8) Subtotal 10,490 12,120 14,010 16,190 18,710 7.5 C. Housing Sanitation 220 240 260 290 320 4.8 Heating 530 580 640 700 780 5.0 Bath tubs 1,270 1,400 1,540 1,700 1,880 5.0 Hardware 400 450 500 550 600 5.2 Subtotal 2,420 2,670 2,940 3,240 3,580 5.0 Total 21,090 23,890 27,090 30,710 34,840 6.5 a/ Excluding castings for Mechanical Complex. b/ For Railways and Road Vehicles. c/ These include castings which could not be identified in individual industries within lICE. Source: Report of Atkins Planning (consultant). Industry Department 2ay 1983 TUNISIA SOFOMECA FOUNDRY MODERNIZATION AND EXPANSION PROJECT General Layout Plan of Present and Future Facilities .4~~- 4'~1gSt31_;;,,,, / / ~~~~ ~ ~~~~~~SAND |STATION | .' SAD OR TREATMENT PLANT SHOP ___,__ _n_._I MOLDING LINE FETTLING SOCI AL : i SIRON) WELFARE ' t MOLDING LINE SION / / | | > MOLDING LINE (FUTUREI / / ~~~~~~~~~~~~~~~~~~~~~~~~~~~.. ,t ''...., ...................... / / MOLDING WO| STORES ~~~~~LINE (IRON) 0 I .1 STORES I;10=STORES J E UJ NEW j r --* Z w z~~I -*4 MOLDING I r -M A-1-N 1 -i LfNE IIRON) J - - - _OIC I FETTING SHOP (STEEL) OFFICE ~~~~~STEEL 1 ~~MOLDING PATTERN 1 SHN MACHINE SHOP P~~~~~~~~~P~PA /~~~~~~~~~~~~~~~~~~ . _ 41- PLANT SERVICES |. RAILWAY TRACK
Группа Всемирного банка · Staff Appraisal Report
Tunisia - SOFOMECA Foundry Modernization and Expansion (Fourth Industry) Project
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