Tunisia - Third Urban Sewerage Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3482-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN THE AMOUNT EQUIVALENT TO US$34.0 MILLION TO THE REPUBLIC OF TUNISIA FOR A THIRD URBAN SEWERAGE PROJECT March 7, 1983 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Tunisian Dinar (TD) The exchange rate of the Tunisian Dinar is floating. The rate used in the Staff Appraisal Report, which approximates the rate as of January 1983, is: US$1.00 = TD.630 TD 1.00 = US$1.587 FISCAL YEAR January 1 - December 31 ACRONYMS EEC - European Economic Community GTZ - Deutsche Gesellschaft fUr Technische Zusanmienarbeit KfW - Kreditanstalt fur Wiederaufbau ONAS - National Sewerage Authority (Otfice National de l'Assainissement) SONEDE - National Water Authority (Societe Nationale d'Exploitation et de Distribution des Eaux)  FOR OFFICIAL USE ONLY REPUBLIC OF TUNISIA THIRD URBAN SEWERAGE PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Tunisia Beneficiary; Office National de l'Assainissement (ONAS) Amount: US$34.0 million equivalent, including a capitalized front-end fee Terms: 17 years, including four years of grace, at the standard variable interest rate Relending Terms: The Government would onlend the Bank loan to ONAS on the same terms and conditions as the Bank loan. ONAS would bear the foreign exchange risk. Project Description: The proposed project would help rehabilitate and expand the existing sewerage and stormwater systems, including the provision of sewage treatment, in 30 urban centers. It consists of investments in: primary, secondary and stormwater sewers, including pumping stations and related structures; sewage treatment plants; maintenance and data processing equipment and office accommodations for ONAS; consulting services for related design and construction supervision; and studies. About one iaillion people would benefit overall from improvements to the environment and public health; about 400,000 would benefit directly from new or improved sewer connections. Forty percent of the direct beneficiaries are at or below the urban poverty threshold. The risk of slippage in the construction program, and the consequent escalation of costs, is minimized by ONAS' continued improvement in implementing works. Consultant assistance for project preparation, construction and supervision, as well as the Bank's monitoring and guidance, would also assure achievement of project objectives. __--- I This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii3 - Estimated Project Costs: Local Foreign Total ----------- US$ Million ------- Primary Sewers 6.7 4.5 11.2 Pumping Stations 0.5 0.5 1.0 Secondary Sewers 9.9 6.b 16.5 Stormwater Drainage 2.8 1.0 3.8 Treatment Plants 5.0 4.2 9.2 Office Accommodations 2.5 1.5 4.0 Maintenance and Other Equipment 1.6 3.0 4.6 Consultant Services and Studies 1.5 2.2 3.7 Base Cost 30.5 23.5 54.0 Physical Contingencies 3.2 2.2 5.4 Price Contingencies 10.8 8.0 18.8 Total Project Cost 44.5 33.7 78.2 Front-end Fee on Bank Loan - 0.3 0.3 Total Financing Required 44.5 1/ 34.0 78.5 1/ Financing Plan; Local Foreign Total = --------- US$ Million ----------- Bank - 34.0 34.0 ONAS 12.8 - 12.8 Government 31.7 - 31.7 Total 44.5 34.0 78.5 Estimated Disbursements: Bank FY 1984 1985 1986 1987 1988 1989 1990 ------------- US$ Million -------------- Annual 2.7 4.8 6.4 6.8 6.8 4.8 1.7 Cumulative 2.7 7.5 13.9 20.7 27.5 32.3 34.0 Economic Rate of Return: Above 10 percent for ONAS' investment program Staff Appraisal Report: No.4225b-TUN, dated March 3, 1983 Map No. 16721 1/ Including $16.5 million of taxes and duties.  INTERNATIONAL BAhK FOR RECONSIRUClION AND DEVELOPMEN1 REPORT AND RLCOMiENDAllON OF IHE PRESIDENI OF IRE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA FOR A THIRD URBAN SEWERAGE PROJECT 1. I submit the following report and recommendation on a proposed Bank loan to the Republic of Tunisia for US$34.0 million equivalent to help rinance a Third Urban Sewerage Project. The loan, which includes a capitalized front-end fee of 0.75 percent on the Bank loan, would be repaid over 17 years, including 4 years of grace, at the standard variable interest rate. The proceeds of the loan would be relent to the Office National de l'Assainissement (ONAS) on the same terms and conditions as the Bank loan. ONAS would bear the foreign exchange risk. PARI I - THE ECONOMY I/ 2. The last economic report entitled "Tunisia - Country Economic Memorandum" (No.3399-TUN) was issued on September 05, 1981. Economlc missions visited Tunisia in October 1981 and March 1982 to review a draft of the Sixth Development Plan (1982-86); this part reflects their preliminary findings. Country Data sheets are attached in Annex I. 2/ 3. Much of Tunisia is arid or semi-arid. Onily three percent of arable land is irrigated, and areas where rainfed agriculture is possible are subject to severe year-to-year fluctuation in rainfall. Tunisia's most important raw materials are phosphates, petroleum, and natural gas. While the known exploitable reserves of oil and gas are approaching depletion, and the phosphate deposits are of relatively low quality, there have recently been promising indications of new reserves, although it is too early to assess their exact potential. There is also considerable tourism potential, and efforts have been made during the last decade to develop it rapidly. 4. Since independence in 1956, Tunisia has undertaken a massive effort towards development of its human resources, paying special attention to family welfare, education, and technical and vocational training. As a result, the infant mortality rate declined from 150 in the early 1960s to 90 at the end of the 1970s, the adult literacy rate increased from under 15 percent to about b2 percent, and average caloric supply per capita increased from about 80 to 115 percent of minimum standard requirements. The sharp decrease in mortality rates was not fully compensated by the simultaneous decrease in fertility and birth rates, despite an active family planning policy pursued by the Government. Therefore, the annual natural demographic growth rate decreased only slightly from 2.6 percent in the 1960s to 2.4 percent in the 1970s. Moreover, after 1976, the net emigration of Tunisians abroad was sharpLy reduced by restrictive measures taken in the EEC countries and Libya. As a consequence, the residential population of 6.57 million by the middle of 1981 exceeded the level projected five years earlier by 130,000. 1/ Part I is substantially the same as Part I from President's Report No. 3440-TUN of January 3, 1983, for a Central Tunisia Irrigation Project. 2/ Country data have been updated on the basis of this review, ana thus sometimes differ from the Country Data sheets.  -2- 5. Agriculture still occupies nearly one out of every three Tunisians in the labor force. To accelerate job creation, more than half ot the total investments of the Fifth Plan (1976-81) was allocated to directly productive sectors, but the direct employment effects of the leading sectors (petroleum, phosphate mining and processing, and tourism) are small. These sectors, however, make a vital contribution to GDP, public savings, and exports. They provided 65 percent of the country's foreign exchange earnings in 1980 while manufacturing activities, except phosphate-based chemicals, provided 17 percent. 6. Recent Economic Developments. During the Fifth 'Plan the growth performance differed from the impressive growth achieved from 1971 to 1976, not so much in terms of overall growth as in terms of the underlying growth factors: output in agriculture and in food industries has grown on average below the demographic rate since 1976, partially as a result of bad weather conditions; textile production and tourism development grew at a slower pace than projected mainly because of the slump in European markets. By contrast, manufacturing industry other than textiles, as well as energy, phosphate processing, construction, and construction materials expanded at a fast pace. 7. In spite of the considerable increase in domestic demand, particularly in investments, the balance of payments situation remained favorable from 1976 to 1981. Imports in current prices grew at a slower pace than exports, and the terms of trade improved significantly due to sharply higher post-1974 export prices for crude oil. As a result, the resource gap remained relatively small, and domestic savings financed on average over 76 percent of investment, which increased from an average of 23 percent of GDP for 1972-76 to 30 percent for 1977-81. The current account deficit averaged $450 million per year (1977-81), and was easily financed; grant aid and i~ private investments (mainly for oil exploration) provided about 3U percent, while the remainder was mainly covered by long-term foreign borrowing. Thus, during the 1970s total foreign debt increased little relative to GDP, and the debt service ratio dropped. 8. The public sector has played a major role in mlobilizing and redistributing domestic resources. Central Government revenues were equivalent to about one-third of GDP on average for the Fifth Plan period, one of the highest shares among middle-income countries. Over 30 percent of these revenues was saved, and public savings financed close to two-thirds of total Government capital expenditures. This comfortable public finance situation permitted a rapid increase in subsidy payments to private consumers and public enterprises. Such tranfers including those for social security accounted for 19 percent of total current budget outlays and over 7 percent of GDP in 1981. 9. The main objectives of the Fifth Development Plan were achieved, except for the employment target. The actual GDP growth fell short by 1.2 percentage points of the planned rate of 7.3 percent p.a., mainly because of poor performance in agriculture, while the investment objective of $9.8 billion in current prices, or 30 percent of GDP, was fully met. Completion of some large projects in the public sector (steel, expansion of the oil refinery) were, however, delayed, but private sector investments, both foreign and national, exceeded Plan targets.  10. Open and hidden unemployment is a serious problem for thie Tunisian economy at present. During 1977-81, although job creation objectives were achieved in all non-agricultural sectors except construction, these sectors could only absorb 90 percent of new job seekers at a time when migration to Libya and Europe slowed down. The overall unemployment rate, estimated at about 13 percent of the labor force in 1980, has therefore not declined. 11. Medium-term Prospects. The Sixth Development Plan (1982-86) was approved by the Parliament in July 1982. The main objectives are employment generation, export promotion, and more rapid growth in the three least developed regions of the country (North-West, Center-West, and South). Sectoral priority is to be given to agriculture, tourism, and electrical and mechanical industries. 12. The outlook for investment and growth during this period and beyona will partly depend upon future developments in the oil and natural gas sector. Oil and gas exploration programs under way have been encouraging. Based on known reserves, and with the possible exploitation of smaller fields that recently became profitable, it is generally expected that domestic oil and gas production would at best be stabilized at about its present annual level of 5-6 million tons of oil equivalent until the end of the decade. However, barring large new oil or gas discoveries, and given the rapid rise in domestic demand for energy, Tunisia will have to face tne conisequences of a relative decline in energy revenues. The Government considers that the situation requires immediate policy changes and is analyzing the most urgent ones to be included in the Sixth Plan. By introducing these changes on time, Tunisia expects to reduce the associated economic and social strains, and avoid major balance-of-payments problems. 13. The Sixth Plan recommends a GDP growth objective in the range of 5.9 to 6.1 percent depending on agricultural performance. This growth rate is in line with recent trends. Projected growth of traditional exports Utourism, textiles, and phosphate-based chemicals) is insufficient to compensate for the projected decline in oil export revenues; these exports should be supplemented by new ones, in particular electrical and mechanical products. Production diversification and export promotion will, however, take time to bear fruit given, in particular, the depressed world market prospects. The Plan strategy therefore rightly aims at containing domestic demand in order to control import growth. The macroeconomic scenario assumes no improvement in terms of trade, as was brought about by oil price rises in 1973-74 ana in 1979-80. This would not only affect the external account but also result in slower growth of domestic savings, particularly public savings. 14. Consequently, the Sixth Plan projects a drop in the fixed investment rate from 30 percent of GDP in 1977-81 to about 25 percent for the Plan period. This would still imply an increase of 24 percent in constant prices relative to the Fifth Plan investment. A major objective is to correct recent capital intensive biases in projects by appropriate sectoral allocation of investments. More resources would be allocated to small and medium manufacturing enterprises in the underdeveloped regions, in order to ease the unemployment problem and reduce income disparities between rural and urban areas. Since June 1981, a new set of policy measures has targeted the incentive system toward this objective. The Investment Code was modified to offer free industrial zones and direct subsidies to job creation for new  - 4 - projects in underdeveloped zones, and a Promotion Fund for Handicrafts and Household Workshops was created. In order to promote a more efficient technical and financial management of the public and private modern sector, the Plan assigns a major role in project promotion and supervision to an expanded network of new Development Banks (two opened in 1981 and three are planned for 1982); they are to be joint ventures with foreign investors and should alleviate the pressure on the budget to finance too large a share of public investments. 15. Increasing budgetary constraints will require a reassessment of the present policies of subsidies for energy, basic foodstuffs, transportation, and public sector enterprises. In addition, interest rate policy and a better-adjusted fiscal system should be used to restrain final consumption and stimulate savings. As first encouraging steps in 1981 and in early 1982, sizeable price increases in energy and agricultural products were implemented, and the whole interest rate structure was revised upward, rates on saving accounts and term deposits being increased by 1.5 to 2 points. There was a sizeable increase of the legal minimum wage (30 percent) in March 1982, mainly to improve the low-wage earners' living conditions, but the Government recognizes that overall wage and salary policies should keep labor cost increases (including social costs chargeable to enterprises) in line with productivity increases, particularly since Tunisia wants to stimulate tourism, and improve its international competitiveness for exports of manufactured goods. 16. Social Issues. Tunisia's social performance has been impressive since independence, and the country has come a long way towards meeting the basic needs of its population and reducing absolute poverty. About 16 percent of GDP is now devoted to social programs. However, unemployment among the young and regional pockets of poverty still present serious social problems. 17. Recently published data show that the continued attention of the Government to poverty oriented social programs resulted in a reduction of the ratio of people under a minimum standard income from 17 percent of the total population in 1975 to 13 percent in 1980. During this period, the overall number of this group declined in urban areas but remained the same in some rural zones in the center of the country, as a consequence of poor agricultural performance. Income differentials between the coast (East) and the interior (West) widened, in part because the system of price controls and subsidies as well as budgetary expenditures had a weak redistributive impact. The Government is using the forthcoming Plan to focus on the largest zones of poverty, with a view to eradicating them before the end of this century. Reducing the demographic growth rate is considered an important factor in this endeavor. 18. Education expenditures rank first among budgetary outlays. The comprehensive education system provides free access to all students, and the gross enrollment rate has reached 100 percent for primary education, and 30 percent for secondary education. The performance of the system could, however, be improved by expanding vocational training programs, improving their relevance and responsiveness to labor demand, and to the special needs of the poor and rural groups.  - 5- 19. Public health services are second among social expenuitures, and their overall beneficial effect is reflected in the improvement of the vital statistics (para. 4). There remain, however, regional disparities in the availability of hospital beds, doctors and nursing personnel; health services have concentrated largely on curative medicine, and the medical referral system is not functioning properly. As a result, the rural poor are often excluded. Closely linked to nutritional deficiencies, infant mortality remains high relative to middle-income countries. 20. In the Sixth Plan, investment in education, health, housing and water supply is focussed more on deprived areas, provided at lower costs (health, shelter), and made more relevant to the needs of the economy (training). In education, two reforms are under discussion: the first one would provide a nine-year schooling period for all children, and the second would create polytechnical high schools combining basic and technical education. In health, the Sixth Plan allocates more resources to preventive medicine and nutrition education. Finally, as regards housing, public subsidized programs will be directed to the neediest population groups. The housing demand trom households above the minimum standard income limit will be satisfied by the private sector. 21. External Assistance and Foreign Debt. As mentioned above, the growth of foreign borrowing was modest during the second half of the 1970s, and a growing share of foreign funds was provided by public sources at reiatively soft terms. During the 1977-80 period, foreign loan commitments averaged about $700 million per annum, 62 percent of which in the form of official assistance (ODA). About 65 percent of ODA commitments came from bilateral sources, chiefly France, the Federal Republic of Germany, Canada, and some oil-surplus countries. About 24 percent of total ODA was committed by the Bank Group, and some 11 percent by other multilateral sources. Borrowing terms were favorable, averaging 5.8 percent interest and 18.5 years maturity, including a grace period of 5 years. At the end of 1981, debt outstanding and disbursed was estimated at about $3.4 billion, or 40 percent of GNP; debt service was 12 percent of exports of goods and services, as compared with 17.7 percent in 1970. 22. The external trade deficit reached $608 million in 1981, and is projected to grow to about $1.2 billion in 1986. New loan commitments from abroad, projected at $1.2 billion per year on average (at present dollar exchange rates), should not be difficult to obtain, with ODA providing half of the total. Leaving aside the possibility of major oil and gas discoveries, external debt service would be about 13 percent of total export revenues in 1986. 23. These relatively favorable prospects would depend on a timely implementation of the already mentioned policy changes to curb domestic demand, promote exports, and improve public sector savings. It should be noted, however, that the Sixth Plan recommends a low growth scenario in order to preserve the country's relatively high financial stability and creditworthiness. This objective is even more crucial if the country is to succeed in mobilizing the large inflows of direct foreign capital assumed in the Plan. Foreign investments were small during most of the 1970s but have gained momentum during the last three years in line with increased activities in the oil sector, and new incentives offered to foreign investors in  -6- manufacturing. Such investments have increased from $50 million in 1976 to about $200 million in 1981, and have been equivalent to 1) percent of total investments for 1977-81. The Plan's growth scenario estimates that about 15 percent of total investment could be financed by foreign capital, equivalent to an annual inflow of $400 million. The newly created Development Banks (para. 14) are expected to play a significant role in this context. 24. In conclusion, the balance-of-payments outlook can be considered favorable in the medium term. In the longer term, much wllJ depena onl the policy changes to be initiated during the next few years, and on developments in the hydrocarbon sector. Considering its long record of prudent aria skillful balance-of-payments and external debt management, there are good grounds to assume that Tunisia will formulate and implement the necessary policy changes and will continue to be creditworthy for future Banik lending. The Bank's close dialogue withi the Government on several policy aspects at the macro and micro levels will be pursued in connection with the implementation of the Sixth Development Plan. PART II - BANK GROUP OPERATIONS IN IUNISIA _/ 25. Since 1962, the Bank has committed to Tunisia fifty-four loans and eleven IDA credits amounting respectively to $1,124.8 million and $70.0 million (net of cancellations) of which thirty-one loans and credits have been fully disbursed. Annex II contains a suramary statement of Bank loans, IDA credits and IFC investments as of September 30, 1982, and notes on the execution of ongoing projects. Project implementation is generally satisfactory. As of December 31, 1982, overall disbursements amounted to 55 percent of appraisal estimates, which compares favorably with other countries in the region. Disbursement performance for irrigation, industrial finance and port projects has generally been above the country average, while larger than average disbursement delays have been experienced for agricultural credit, education, highway, urban and fisheries projects, due to project specific problems that are being addressed through supervision missions and sector discussions. In a number of sectors, important institutional improvements have been achieved, and autonomous agencies have been created or strengthened to ensure the efficient managemenit of the related sectors or subsectors. 26. The Bank's lending strategy in Tunisia aims at supporting Government efforts to; (a) increase employment; (b) encourage more balanced growth and distribution of income among regions and income groups with particular emphasis on rural areas, and on operations targeted to low-income population groups; (c) promote export-oriented policies, technological changes and labor productivity; and (d) provide selective support for the development of basic infrastructure and for institution building in key public services. An important feature of this strategy is to support the Tunisian authorities in the timely and well-coordinated preparation of projects through missions ana advice by Bank staff, the assistance of the IBRD/FAO Cooperative Program, the use of the Bank's Project Preparation Facility, and the Technical sissistance Project (para. 27). The Bank is also supporting the Government in its efforts 1/ Part II is substantially the same as Part Il from President's Report No. 3440-TUN of January 3, 1983, for a Central Tunisia Irrigation Project.  to increase the mobilization of domestic resources, and to secure cofinancing for the projects it assists. The latter is particularly important in view of the extent of Tunisia's external resource needs. 27, Within this broad framework, past lending emphasized support for long-term investments in infrastructure and social development. Lending for urban and social development, including water supply, sewerage, education, health, urban development, and the Tunis planning and public transport project has accounted for 28 percent of Bank/IDA commitments in Tunisia since 1971. Lending for transport, power and tourism infrastructure has accounted for 31 percent. Agriculture and fisheries have received 24 percent, and industrial and hotel financing, mostly through the Economic Development Bank of Tunisia (BDET), 17 percent of total commitments. In addition, earlier this fiscal year, the Bank made a first loan for technical assistance aimed at improving the Government's capability for project identification and preparation. 28. In line with its lending strategy, the Bank will pursue its efforts in key sectors of the economy that offer prospects for economic and social development. It will also assist projects which address the needs of the least developed regions of the country, develop research capabilities, increase productivity, and help reduce the gap between income groups, and between urban and rural areas. Particular attention will oe paid to employment creation, institution building, and agricultural development. In addition to the proposed urban sewerage project, proposed tuture lending would include projects in agriculture, industry and mining, energy, health and water supply. 29. The Bank's economic and sector work will continue to focus on strengthening the macroeconomic and sector base for our lending program; it will be more centered in the future on the analysis of economic issues and policies related to the necessary adaptation process from a petroleum exporting to a petroleum importing country. A preliminary analysis of this issue was included in the last Country Economic Memorandum (Report No. 3399-TUN of September 15, 1981). The analysis is pursued in more depth in a Plan Review Report to be issued in early 1983, as well as in a recent Agricultural Sector Survey (Report No. 3876-TUN) of Septemnber 29, 1982. Further economic and sector work will include a review of employmernt issues, of incentive and pricing policies (in association with the study on effective protection), of the long-term energy strategy and of the education, transport, and small scale industry sectors. 30. The Bank and IDA accounted for about 19 percent of total public commitments to Tunisia during 1979-1980. Their share in total debt outstanding and disbursed at the end of i980 (including loans from private sources) was 11 percent and their share in debt service during 1980 was 9 percent. The share of the bank and IDA in Tunisia's disbursed external debt is expected to remain at about 10 percent and their share in the debt service to increase to about 13 percent through 1986. 31. IFC has invested in NPK Engrais (a fertilizer plant), in BDET, in Compagnie Financi6re et Touristique (COFIT, a company to promote and invest in tourism projects), in Socidt6 Touristique et Hoteliire RYM (a large hotel development), in Industries Chimiques du Fluor, which procuces aluminum fluoride from local fluorspar for export, and in the Sousse-Nord integrated tourism development project. IFC's net commitments in Tunisia totalled $10.6  -8 - million, as of September 30, 1982. IFC has recently arranged a $40 million loan package to COFIT, of which about $20 million equivalent for IFC's owl account, and is looking into the possibility of loans for the expansion of a phosphoric acid fertilizer plant and of technical assistance to the recently established development banks. PART III - THE WATER SUPPLY AND SEWERAGE SECTOR 32. Water Supply. The volume of water available in Tunisia for urban, industrial and agricultural use is limited. At present, about 58 percent of total exploitable water resources is being used; this figure will rise to over 90 percent by the year 2000. In southern parts of the country, demand for water already exceeds available regional water resources and some water is brought in from the north. It will ultimately become necessary to resort to desalination of brackish or sea water to supplement potable water resources and recycling of wastewater for industrial and agricultural purposes. Water tariffs in Tunisia increase with the amount consumed so as to promote water conservation. 33. The Ministry of Agriculture (MA) manages all water resources in the country. The production and distribution of potable water in all agglomerations over 500 inhabitants are the responsibility of SONEDE, the national water authority, an autonomous public utility established in 1968 under the MA. Presently, about 97 percent of Tunisia's urban population has access to safe piped water, of which about 80 percent is supplied through private house connections. The MA's Rural Construction Directorate is responsible for water supply in rural areas not covered by SONEDE. Only about 25 percent of the population in villages below 500 inhabitants has access to safe public water supply, about one in five of these through private house connections. Investments in rural water supply will greatly increase during the Sixth Plan period (1982-86) in accordance with the Government's policy of improving the living conditions of rural Tunisians. 34. Sewerage. The development of sewerage facilities has lagged behind that of water supply. In rural villages, virtually no public sewerage exists; most of the houses with private water connections possess individual wastewater disposal systems. In urban areas, provision of sewerage infrastructure has not kept up with urbanization. Currently, the connection rate in urban areas is about 42 percent. In addition, existing sewers are often in serious disrepair due to inadequate maintenance. Obstructions in the systems cause overflow of sewage and consequent health hazards or flooding in the case of storm sewers. One of the reasons for this situation was the fragmentation of responsibility among municipalities, and in 1974 the Government created ONAS, a national sewerage authority under the Ministry of Equipment, to assume progressively responsibility for sewage collection, treatment and disposal, the reuse of treated sewage and storm drainage in urban agglomerations, industrial and touristic zones. In addition to managing the subsector, it handles the planning and implementation of future expansion. To date, ONAS has assumed responsibility for sewerage and sewage disposal in 26 municipalities and six touristic zones, and is planning to take over 54 additional systems over the next six years. In view of the dilapidated condition of many of these systems, ONAS must put considerable effort into rehabilitation before extending them to catch up with the existing service backlog. The situation in the areas already taken over by ONAS has  -9- changed dramatically, with the service level averaging 63 percent and exceeding 70 percent in larger urban centers. 35. Sector Objectives for Sewerage. The main objective for sewerage is to bring sewerage services to a level comparable to that of potable water supply. An additional objective is to promote the reuse of treated sewage for industrial or agricultural use in order to supplement the country's scarce water resources. Improved and extended sewerage services are to be achieved through the rehabilitation, upgrading and expansion of existing sewer systems, the provision of drainage facilities, and the development of treatment and disposal facilities to safeguard the environment and abate health hazards. Attention would also be given to helping people to connect up to the rehabilitated or expanded systems through continuation of an ongoing, successful credit program financed by ONAS to cover connection costs. The National Commission for Sewerage (NCS) had set target house connection rates of 60 percent in 1986 and 81 percent in 1990 for urban areas. However, because of financial constraints, ONAS had to considerably reduce its planned investments for the Sixth Plan period, 1982-86 (para. 36), with the result that it will not be able to assume responsibility for as many centers as had been envisaged and will not be able to achieve the NCS targets. Overall, the 1986 connection rate for all Tunisian urban areas is not expected to rise significantly above the present level of 42 percent. However, the 60 percent rate should be achieved by 1986 in the towis where ONAS takes over sewerage by 1984. In order to keep ONAS' task within reasonable limits and reduce public investments, the Government is also promoting the use of individual sewage disposal systems (seepage pits, septic tanks, pit latrines) in small towns and villages whenever appropriate. ONAS can thus concentrate its efforts on large, more densely populated areas where individual systems are not appropriate or are more costly than water borne sewerage. 36. In 1977, ONAS hired consultants (Netherlands Consulting Engineers) to carry out a general study of the sewerage subsector to establish a national program of rehabilitation and expansion works in order of priority in Tunisia's 162 urban centers, defined as those with over 2,000 inhabitants. Four main selection criteria were used: (a) the existence of a sewerage master plan and/or urban development plan which could speed up project preparation; b) the proportion of dwellings served by water supply systems but not connected to sewerage facilities; c) the percentage of dwellings discharging sewage into open ditches; and d) the potential for reuse of treated water for agricultural/industrial purposes. On the basis of these studies, investments in a number of cities have already been undertaken. The Sixth Plan foresees a TD 120.0 million program (in current prices) providing for continued expansion of works in major urban centers and medium-sized cities, as well as for necessary equipment, offices and workshops for ONAS. Due to overall budget constraints, this was reduced from the TD 210.0 million originally programmed by ONAS by rescheduling some investments of iower priority. Nonetheless, the funds allocated for this program are of the same magnitude in real terms and represent a 50 percent increase in noLlinal terms over those allocated under the Fifth Plan for sewerage. 37. Bank Involvement in the Sector. The Bank's sector strategy is to help the Government attain its development objectives for water supply and sewerage and increase public enterprise savings through further improvements in management efficiency and tariff policy. The Bank helped establish and develop both SONEDE and ONAS and, through a number of projects, has engaged in  - 10 - close dialogue with these institutions and the Government on sector policies and operations. Projects in both subsectors suffered substantial delays in the early years following the establishment of SONEDE and ONAS, but the delays diminished under subsequent projects as the institutions matured and profited from their previous experience. The Bank Group has made five loans and one credit for water supply, totalling $124.5 million, and is considering a national rural water supply project as well as a flood protection project for Sfax. Three loans and one credit have been provided for sewerage under the following three projects. The Tourism Infrastructure Project (Loan 858-TUN and Credit 329-TUN, both of September 28, 1972, for $24.0 million) included $16.64 million for sewerage facilities in six tourism zones. The project was revised as the result of changes in the Government's tourism development objectives in 1975 and suffered further delays due to related changes needed in the detailed design and additional time needed to complete detailed land-use plans and acquire land. The revised project was completed in 1981. The First Urban Sewerage Project (Loan 1088-TUN of February 18, 1975, for $28.0 million), which has recently been completed, helped establish ONAS as an effective operating agency, improve sewerage facilities in the Greater Tunis area, and clean up Lake Tunis, where before the project more than half of Tunis' sewage was discharged with little or no treatment, by building a canal along its shores. The project has had a major impact due to the depollution of the Lake and, as a consequence, land value around the Lake has increased dramatically. The Second Urban Sewerage Project (Loan 1675-TUN of April 13, 1979, for $26.5 million), which will improve and extend wastewater collection, treatment and disposal facilities and stormwater systems in the Greater Tunis and Greater Sfax areas, is progressing satisfactorily, although three stormwater collectors need to be retendered as bids were considerably higher than anticipated and additional local funds have to be allocated. The Government is studying appropriate measures to provide these funds to complete the project expeditiously. In addition, three urban projects have contained sewerage components. The first (Loan 937-TUN and Credit 432-TUN, both of October 5, 1973, for $18 million) included several sewerage studies, and the second and third (Loan 1705-TUN of May 31, 1979, for $19 million, and Loan 2223-TUN of January 11, 1983, for $25 million) include $6.6 million for improving and expanding water supply and sewerage systems in low income settlements. The Second Urban Development Project also contains a solid waste component including a study to be executed by ONAS. 38. Project Performance Audit Reports have been prepared on the first two water supply projects (PPAR No. 1902 of February 13, 1978) and on the third water supply project (PPAR No. 3914 of May 14, 1982). The reports concluded that all three projects had met their objective of providing water of acceptable quality for the increasing requirements of the population in the areas served, and contributed greatly towards the development of SONEDE into a technically sound and financially viable institution. The audit for the third project concluded that more detailed engineering should have been carried out prior to Board presentation. As a result, subsequent projects have been appraised on the basis of well advanced final designs. The Operations Evaluation Department (OED) has also published a Sector Operations Review on the Water Supply and Waste Disposal Program in Tunisia (Report No. 4146 of October 20, 1982) which emphasizes the success of the Bank's involvenment in the water supply and waste disposal sector in Tunisia. This success is attributed to the Government's commitment to its sector policy objectives, and the harmony of the Bank's program with these objectives.  - I1 - PART IV - IHE PROJECI 39. Background. The proposed project was identified in January 1981, and was prepared by ONAS with the assistance of consultants under the Second Urban Sewerage Project. It was appraised in October