Docmiat of The World Rnk FoR OMCIAL USE ONLY X,V. ps>33TnaW R1pwt N.. P-4082-TUN . REPORT AND RECONNENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON- A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$22.0 MILLION TO THE REPUBLIC OF TUNISIA FOR AN IRRIGATION NANGEMENT IMPROVEMENT PROJECT May 13, 1985 dwk _fid dei l nmb O 9Otwwb dsdd Ir _w u CURRENCY EQUIVALENTS CY 1984 - February 1985 Currency Unit = Tunisian Dinar (TD) TD US $1 T TD 0.7768 TD 0.9037 TD 1 = US$ 1.2873 US$ 1.1066 Exchange rate used in the Appraisal Report is US $ = TD 0.75 Fiscal Year = Calendar Year ACRONYMS AND ABBREVIATIONS AIC = Association of Common Interest BNT = National Bank of Tunisia DCOMVPI = Department of Coordination of Irrigation Development Offices DPSAE = Department of Planning, Statistics and Economic Analyses HEM = Hydro/Electromecbanical MOA = Ministry of Agriculture 0&M - Operation and Maintenance oMV = Irrigation Development Office ONVUM = Irrigation Development Office of the Medjerda Valley PC = Program-Contract PPI = Public Irrigated Perimeter WUA = Water User Association FOR OFFIMCL USE ONLY REPUBLIC OF TUNISIA IRRIGATION MANAGEMENT IMPROVEMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Tunisia Amount: US$22.0 million equivalent Terms: 17 years, including 4 years of grace, at the standard variable interest rate. Project Description: The proposed project would support nationwide improvements of the operation and maintenance (O&M) of about 105,000 ha of existing irrigation systems as well as policy and institutional reforms to increase the efficiency and self-financing of the Irrigation Development Offices (OMVs). The project would (a) reduce the need for major costly investments for the rehabilitation of existing irrigation systems by improving maintenance operations; (b) ensure the sustainability of agricultural development in public irrigation schemes; (c) improve the incomes of about 42,000 farmers and create employment opportunities; and (d) aim at eliminating the OMVs' operating deficits. The project would consist of: (a) provision of equipment and vehicles for O&M activities and of safety stocks of spare parts, rehabilitation of hydro/electromechanical equipment, and execution of rehabilitation works; (b) setting up an efficient management information system and defining improved planning, financial and operating procedures in OMVs, upgrading the coordination between OMVs and their supervisory Ministries, strengthening Water User Associations, introducing adequate pricing policies for OMVs' services to promote a more rational use of resources and financial autonomy; (c) technical assistance and training; and (d) on-farm development. The risk of lower than expected rehabilitation cost savings or production response is minimized by the project design focus on technical assistance and training to improve irrigation O&M and overall management of the OMVs. This document ha a rstited distribution and may be used by recpients only in the perforan= of their ofricial duti Its contents may not otherwise be disclosed without Workl Bank authorization. - ii - Estimated Project Costs: Local ForeiFn Total ---(US$ million)--- Investment Costs - Irrigation Offices O&M equipment 3.0 3.5 6.5 Safety stocks 2.1 2.2 4.3 Rehabilitation of HEM equipment 4.2 3.2 7.4 Technical assistance and training 0.8 0.9 1.7 OMVVM's rehabilitation investments 4.0 4.0 8.0 Water management studies 0.4 0.5 0.9 Subtotal 14.5 14.3 28.8 - Ministry of Agriculture Strengthening of DPSAE 0.1 0.2 0.3 Strengthening of DCPPI 0.2 0.7 0.9 Subtotal 0.3 0.9 1.2 Total Investment Base Costs 14.8 15.2 30.0 Incremental Operating Costs - Irrigation Development Offices 4.6 3.2 7.8 - Ministry of Agriculture 0.9 0.1 1.0 - Onfarm development 4.2 2.3 6.5 Total Operating Base Costs 9.7 5.6 15.3 Total Base Costs 24.5 20.8 45.3 Physical contingencies 3.2 2.5 5.7 Price contingencies 5.8 4.2 10.0 Total Project Cost 33.5 1/ 27.5 61.0 1/ Financing Plan: Local Foreign Total --(Us$ million)- World Bank 22.0 22.0 Other Donors - 2.4 2.4 Government 13.7 - 13.7 Beneficiaries 4.6 - 4.6 Credit Institutions 1.5 3.1 4.6 Net Project Costs 19.8 27.5 47.3 Taxes and Duties 13.7 - 13.7 Total 33.5 27.5 61.0 1/ Includes $13.7 million of taxes and duties. - iii - Estimated Disbursements: Bank FY 1986 1987 1988 1989 1990 1991 1992 (USs million)- Anmnal 1.5 5.0 7.0 4.0 2.5 1.0 1.0 Cumulative 1.5 6.5 13.5 17.5 20.0 21.0 22.0 Economic Rate of Return: 29 percent Staff Appraisal Report: No. 5396-TUN, dated May 10, 1985 Map No. IBRD 18608 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA FOR AN IRRIGATION MANAGEMENT IMPROVEMENT PROJECT 1. I submit the following report and recommendation on a proposed loan for the equivalent of US$22.0 million to the Republic of Tunisia to help finance an Irrigation Management Improvement Project. The loan would have a term of 17 years, including 4 years of grace, at the standard variable interest rate. PART I - THE ECONOMY 1/ 2. A special economic report entitled "Tunisia - Review of the Sixth Development Plan (1982-86)" (No. 4137-TUN), in two volumes, was distributed to the Executive Directors on March 16, 1983 and June 29, 1983. An economic mission to review the performance of Plan implementation at mid-term visited Tunisia in April 1984; its findings are reflected in this part and the country data sheets, attached in Annex I. 3. Tunisia is a medium-size, middle-income country with a population of 7 million and a per capita income of about $1200-i' Much of Tunisia is arid or semi-arid. Only three percent of arable land is irrigated, and areas where rainfed agriculture is possible are subject to severe year-to-year fluctuation in rainfall. Nevertheless, agriculture still occupies nearly one out of every three Tunisians in the labor force. Tunisia's most important raw materials are phosphates, petroleum and natural gas. Known exploitable -eserves of oil and gas are approaching depletion, and new hydrocarbon reserves are limited and require costly off-shore drilling; priority is now given to slowing down the growth of domestic consumption by conservation and pricing measures. The low quality of phosphate deposits constrains the expansion of the highly efficient Tunisian phosphate processing industry. The country also has considerable tourism potential, but after a period of rapid expansion, the sector is experiencing difficulties in maintaining competitive prices and quality standards. I/ Part I is substantially the same as Part I of the President's Report No. P-3949-TUN of May 3, 1985 for a Second Electrical and Mechanical Industries Project. 2/ 1984 preliminary figure at current prices and current exchange rates. - 2 - 4. Tunisia has undertaken a massive effort to develop its human resources, paying special attention to family welfare, education, and technical and vocational training. As a result, between the early 1960s and the early 1980s, the infant mortality rate declined from almost 160 to 65, the expectation of life at birth rose from 48 to 61 years, the adult literacy rate increased from about 15 to about 62 percent, and average caloric supply per capita increased from 83 to 116 percent of minimum standard requirements. An active family planning policy pursued by the Government led to a decrease in fertility and birth rates. Even though mortality rates also decreased, the gross reproduction rate decreased markedly from 3.5 to 2.1 percent over che same period. However, since net emigration of Tunisians abroad was sharply reduced by restrictive measures taken in the EEC countries and Libya, the growth rate of the labor force accelerated, a main reason for the rapidly growing, serious unemployment problem. Open unemployment reached 14 percent in 1983 and underemployment is extensive. These problems are particularly serious among young school dropouts. 5. During the 1970s, the Tunisian economy did extremely well. Rapid growth in the range of 7-8 percent was accompanied by substantial structural transformation as manufacturing and tourism became more diversified, and their share in total exports increased. Economic performance benefitted from substantial terms of trade gains due to the rapid price increase of oil, allowing both consumption and domestic savings to increase and investment to remain high (over 30 percent of GDP). It also benefitted from improved economic management with a cautious shift toward a more liberal, market-oriented economy. The balance of payments current account deficit, averaging 5 to 6 percent of GDP over the period, was easily financed, much of it by direct foreign investment. The only major problem was a high rate of unemployment and underemployment. 6. During the Fifth Plan (1977-81), more than half of total investments was allocated to directly productive sectors, but the direct employment effects of the leading sectors (petroleum, phosphate mining and processing, and tourism) were small and unemployment continued to increase. These sectors, however, made a vital contribution to GDP, public savings and exports. They provided 52 percent of the country's foreign exchange earnings in 1983, while manufacturing activities, except phosphate-based chemicals, provided 19 percent. 7. The Sixth Plan (1982-86) proposed a number of policy reforms to face the consequences of rising unemployment and the progressive decline in net energy exports. Its main objectives were employment -eneration, export promotion, regional development and public sector efficiency. Investment priority was given to agriculture, engineering industries and tourism. The overall rate of investment was projected to decline during the Plan period. To minimize the effects on economic growth and employment, measures were proposed to increase the efficiency of existing investments and to encourage a shift to labor-intensive activities. These measures were to be accompanied by a substantially tightened incomes policy, in particular cautious wage and salary policies and a considerable slowdown in the growth of recurrent budget expenditures. 8. The Sixth,Plan started poorly. In 1982, a prolonged drought depressed agricultural output and agro-industrial production, technical problems plagued the phosphate and cement industries, and tourism and exports of manufactured goods were adversely affected by the recession in Europe. The economy recovered in 1983 and 1984 due to buoyant growth in manufacturing output, stimwlated by rapidly growing local demand. This brought the average annual growth of GDP in the first three years of the Plan to 3.5 percent, compared to 5.3 percent targeted. This performance is nonetheless commendable in view of the world recession and compared with other countries. 9. More worrisome than the slowdown in economic growth are the macroeconomic imbalances, which have worsened over the last years. "In contradiction to the Plan's macroeconomic scenario, the investment rate remained high rather than declined, mainly due to high public enterprise investments in energy and transportation, and consumption expanded rapidly, fuelled by sharp increases in wages and salaries. The corresponding strong demand pressure, facilitated by rather liberal credit policies, was reflected in rising inflation: 13.6 percent in 1982, compared to a 7.8 percent average over 1977-81; it was slowed to 8.4 percent in 1984 through increased price controls. Lower than planned overall economic growth, higher capital intensity of new investments, and the sharp increase in labor costs combined to keep employment creation below Plan goals, and unemployment further increased. 10. Despite a virtual stagnation of imports (in constant prices) due to tightened import control, the current account deficit of the balance of payments deteriorated to 8.9 percent of GDP by 1984. A fall in exports of petroleum and of agricultural products, and a slowdown in tourism, depressed export receipts. Direct foreign investment (mainly in the oil and gas sector) stagnated in 1983-84. Nevertheless, Tunisia's net foreign exchange reserves increased substantially to reach 1.7 months of imports at end-1984, as compared to 1.1 at end-1980. This reflects, inter alia, a revaluation of the Central Bank's foreign exchange assets, as well as the Government's drawing down part of a syndicated Eurodollar loan contracted in 1982. 11. The budgetary situation has also deteriorated since 1981; the Central Government's overall budget deficit jumped from 2.7 to over 7 percent of GDP between 1981-84. This reflected increases in public investments and in recurrent expenditures due to wage and salary increases, higher subsidy payments to households and public enterprises, and growing dollar-denominated debt service payments caused by a 36 percent dollar appreciation vis-ai-vis the Tunisian dinar between 1981-84. On the other hand, this latter factor helped keep petroleum revenues from falling, and total revenues showed a continuous growth despite the recession. In 1984, recurrent expenditure growth slowed considerably, however, as a result of a freeze in Government salaries and wages and of lower consumer subsidies. 12. Medium-term prospects depend on two main factors: future developments in the hydrocarbon sector; and the speed with which tae Government implements the far-reaching macroeconomic policy changes outlined in the Sixth Plan. Oil and gas exploration programs under way have not 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 could be stabilizee at about its present annual level of 5-6 million tons of oil equivalent until the end of the decade. Barring large new oil or gas discoveries, and given the rise in domestic demand for energy, Tunisia would turn into a net importer of oil in the early 1990s. 13. Making the necessary adjustments to prepare the economy for the post- hydrocarbon era is made more difficult by increasing financial and balance of payments constraints. While there is little disagreement about the desirability or objectives of economic reform, the appropriate implementation measures and particularly the speed of reform are more controversial. While undeniable progress has been made since the early 1980s in several respects, other factors have worked in the opposite direction (para. 14). Over the last years, the Government has focussed with some success on administrative type measures. Legitimately concerned with immediate economic and social problems, it resorted to short-term measures and direct, quantitative controls such as mandatory price reductions and import restrictions. Among longer-term policies, only export promotion was addressed by a sufficiently broad approach (tax rebates, foreign exchange risk insurance, special credit, trade companies). The price liberalization process has moved slowly, with some reductions in price subsidies (particularly for agricultural inputs, transportation and energy) and some liberalization in the price regimes for manufactured goods. Economic incentives have been modified to promote regional development and stimulate smaller firms, but the existing bias in favor of capital-intensive investment rather than employment has little changed. Finally, fiscal reform has been initiated. 14. Policy reforms to address the root causes of the structural imbalances identified by the Sixth Plan have been less actively pursued. Specifically, major areas that need greater attention are: (a) wage and salsry policies, which should become more restrictive, so as to slow down growth of public and private consumption and stimulate labor-intensive investments and exports and, thus, increase employment creation. As mentioned before, trends during the early 1980s were in the opposite direction. In 1984, however, no salary increases were granted and the Government has decided to continue tD pursue cautious salary policies in 1985 and beyond; (b) subsidy policies, with consumer subsidies to be reduced so as to dampen private consumption and stimulate public savings. Some encouraging first steps have been taken in-this respect, but more action is needed; (c) interest policies, to make interest rates positive in real terms, so as to stimulate savings and labor-intensive investments. A thorough reassessment of these policies is underway. As a first step, rates were increased in late April 1985 by 1-2 percentage points on average; (d) public enterprise reform, to stop the drain of public enterprisa deficits on the Gcvernment budget. First steps have been taken in this direction, and a number of enterprises have been closed; (e) public investments, which should be reduced to decrease the budget deficit, but made more efficien. and reorieuted so as to increase their contribution to economic growth and employment creation. A particularly careful screening of projects will be necessary in the future; (f) domestic protection and pricing policies so as to create more incentives for exports, particularly for manufactured products; and (g) exchange rate policies, so as to ensure that exports (including tourism) become more competitive. -5- 15. Even if the Government moves more rapidly in implementing all or most of the above measures, the delays incurred so far in meeting the Sixth Plan macroeconomic targets and in implementing its policy recowmendations will probably not be recovered by 1986. It is unlikely therefore that medium-term GDP annual growth will match the 6 to 8 percent rate achieved in the past. A growth rate not exceeding 4 percent would be more commensurate with the need to control current account deficits without a systematic recourse to quantitative protection measures or excessive external '-orrowing. This 4 percent growth rate takes account of the projected stagnation or even decline of hydrocarbon production. It also assumes that while agriculture will remain sensitive to weather conditions, marnufacturing will perform well as the full impact of the export promotion policies is felt. 16. Social Issues. Since independence, the country has gone a long way towards meeting the basic needs of its population. Over 16 percent of GDP is now devoted to social programs, and the number of absolute poor declined from 17 percent of total population in 1975 to 13 percent in 1980. This improvement was largely concentrated, however, in urban areas. Since 1981, social issues have faced a different context than in the 1970s, when an easy financial situation seemed to allow a relatively unconstrained expansion of so-ial service.. On one hand, the Tunisian population has become increasingly aware of and sensitive to the issues of income distribution and the Government's responsibility for redistribution. Furthermore, the beneficial effects of past rapid expansion in social services, reflected in the improvement of the country social data (see Annex I). have created a demand for improved standards in social services delivery. On the other hand, the provision of adequate social services - education, health, town infrastructure, housing - is being increasingly hampered by budgetary constraints. Attempts to respond to protect the workers by raising the levels of minimum legal wages and social insurance has discouraged private business from increasing employment. 17. To reduce internal differences, in particular between rural and urban areas and among workers in the modern sector and those precariously employed in informal activities, the Government is channelling more resources into regional development and youth employment. Integrated rural programs _e being developed to stimulate productive job creation and grassroots participation. Subsidies and credit facilities are granted for young technicians to create their own enterprises and for entrepreneurs to create new projects in underdeveloped regions. More efforts are needed, however, to strengthen the coordination of vocational and on-the-job training with market demand. To reduce the financial burden of social services, the aaministration is reviewing the cost structure of the various types of social services, including free or below-cost delivery and the introduction of some user fees. Special efforts are needed to improve social infrastructure management, in particular as regards hospitals. Also, decentralization of social facilities in deprived zones will have to be assessed carefully because costs for servicing and maintaining them could become rapidly prohibitive. 18. External Assistance and Foreign Debt. During the second half of the 1970s, foreign borrowing was modest and a large share of foreign funds was -6- provided by public sources at relatively soft terms. At the end of 1979, debt outstanding and disbursed was estimated at $3 billion, or 42 percent of GDP; debt service was 10 percent of export revenues. For reasons mentioned earlier (para. 10), the balance of payments deficit has increased substantially since then, as has foreign indebtedness. Total public foreign debt outstanding and disbursed at the end of 1983 reached nearly $3.7 billion, equivalent to about 45 percent of GDP; according to preliminary estimates, it reached nearly $4.2 billion (52 percent of GDP) at the end of 1984. The relative burden of debt servicing reached almost 22 percent in 1984. However, a relatively cautious debt management policy has been followed by the -Tunisian authorities. While the share of short-term borrowings has increased slightly since 1980, Tunisia's overall foreign debt remains overwhelmingly long and medium-term, and debt service requirements are projected to increase only slowly. During 1978-82, 65 percent of foreign loan commitments were from official sources and about 30 percent on concessional terms. Just over half of official commitments came from bilateral sources (mainly France, Japan, the Federal Republic of Germany and some Arab oil-producing countries), and about 24 percent each from the Bank Group and from other multilateral sources. Overall borrowing terms were favorable, averaging 7.4 percent interest and 15.9 years maturity, including a grace period of 4.2 years. These terms hardened, however, in 1983 and 1984. 19. In the medium-term, external capital requirements will clearly remain manageable. In the longer-term, much will depend on the policy changes to be initiated during the next few years, and on developments in the hydrocarbon sector. The Government's medium-term objective is to maintain the present level of indebtedness; this prospect strongly depends on a timely implementation of policy measures to accelerate exports, reduce public investments, lower domestic demand growth, and liberalize regulation and controls. On this basis, the current account deficit is projected to fluctuate around $630 million until 1986, but decline thereafter. New loan commitments from abroad could be kept at little over $1 billion per year on average (in current prices at the 1984 exchange rate), while net foreign borrowing might average about $360 million between now and the early 1990s. 20. Tunisia, after a decade of outstanding performance, is facing the major challenge of adapting its economic structure at a time of external and internal financial constraints. A strategy of demand restraint combined with more liberal economic policies is called for to preserve the country's financial stability and creditworthiness. Considering its long record of prudent and skillful balance of payments and external debt management, there are good grounds to assume that Tunisia will implement the necessary policy changes, and remain creditworthy for a continued high volume of Bank lending. -7- PART II - BANK GROUP OPERATIONS IN TUNISIA 21. Since 1962, the Bank has committed to Tunisia sixty-six loans and ten IDA credits amounting respectively to $1,387.0 million and $75.2 million (net of cancellations) of which forty-one loans and credits have been fully disbursed. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1985. Project implementation is generally satisfactory. As of March 31, 1985, overall disbursements amounted to 51 percent of appraisal estimates, which is in line with experience in other countries in the region. Disbursement performance for irrigation, industrial finance and port projects has generally been above the country average, while longer than average disbursement delays have been experienced for agricultural credit, education, highway, urban and fisheries projects, due to project-specific problems that are being addressed through supervision missions and sector discussions. In a number of sectors, important institutional improvements have been achieved, and autonomous agencies have been created or strengthened to ensure the efficient management of the related sectors or subsectors. 22. The Bank's lending strategy in Tunisia aims at supporting the country's transition from a situation of reliance on petroleum exports to a sectorally-balanced post-hydrocarbon era through appropriate changes in economic policies and programs. This adjustment process, as outlined in the Sixth Development Plan, will require further diversification of exports, greater savings efforts, reduction in consumer subsidies, gradual liberalization of all sectors of the economy, and stronger incentives to the private sector particularly in agriculture and industry, while taking measures to increase employment and target developmuent to low-income groups. In support of the above, the overall objective of Bank lending is to emphasize projects which have a direct and rapid impact on production, employment and exports (or import savings) and which minimize Government net contributions. The focus of lending for agriculture and industry meets this objective. In addition to the above, proposed Bank lending would focus on improvement of public enterprise performan.e, development and conservation of energy resources, and continued support to the social sectors and operations targeted to low-income groups. For the latter, attention would be given to increased efficiency and cost-effectiveness of institutions and investments and to linkages with directly productive sectors (e.g., education reforms stressing vocational training). We envisage only marginal lending for basic economic infrastructure, focussed in areas where Bank guidance would still be useful, such as rural water supply and highways maintenance. 23. Past Bank lending emphasized support for long-term investments in infrastructure and social development, each of which accounted for about one-third of Bank/IDA commitments since 1971. The rest of the commitments were almost equally distributed between agriculture and industrial financing. In addition, the Bank has made two loans for technical assistance. Within the broad framework noted in para. 22, we expect a significant shift in our lending, with well over half going to agriculture and industry. In addition to the proposed Irrigation Management Improvement Project, proposed lending in the next couple of years would include projects for irrigation in the Gabes area in the South, urban development, grain storage, a credit line for small-scale industry, energy, and sector loans for agriculture and industry. -8- 24. The Bank's economic and sector work will continue to focus on strengthening the macroeconomic and sector base for our lending program. It vill be centered on the analysis of economic issues and policies related to the necessary adaptation process from a petroleum-exporting to a petroleum- importing country. This analysis, which was included in the special economic report entitled "Tunisia - Review of the Sixth Development Plan (1982-86)" (No. 4137-TUN), dated March 16, 1983 and June 29, 1983, is being pursued through a number of studies. A mid-term performance review of the Sixth Plan is being discussed with the Government, as are studies on industrial employment creation and on the financial sector. A number of key studies resulted from provisions in Bank loans, for example on the insLitutional and incentive framework for electromechanical industries and for exports in general. In time, the recommendations of these studies, and of those currently in progress (Industrial Policy Study, Agricultural Sector Discussion Paper) will provide the basis for policy action programs. Further economic and sector work includes studies of educational finance and administration, housing finance, and a review of public enterprise performance. 25. The Bank and IDA accounted for about 17 percent of total commitments from official sources to Tunisia during 1982-1984. Their share in total debt outstanding and disbursed at the end of 1984 (including loans from private sources) was an estimated 11.5 percent, and their share in debt service during 1984 was 11.5 percent. The share of the Bank and IDA in Tunisia's disbursed external debt is expected to increase to about 16 percent and their share in the debt service to about 13.7 percent through 1986. 26. As of March 31, 1985, IFC's net commitment in Tunisia totalled about $14.0 million. IFC has invested in the Economic Development Bank of Tunisia (BDET), in 1966, 1970, and 1978; in the National Bank for Tourism Development (INDT) to promote and invest in tourism projects; in the Societe Touristique et Hoteli&re (RYM), a large hotel development; in the Industries Chimiques du Fluor (ICF), a producer of aluminum fluoride from local fluorspar for export; and in the Societe d'Etudes et de D6veloppement de Sousse-Nord for an integrated tourism development project. In FY84, IFC approved two new equity investments in Tunisia: (i) Fluobar, a project to privatize, rehabilitate and expand an existing fluorspar mine; and (ii) Tunisia Leasing Company, the first leasing company in Tunisia to provide financing to the industrial sector. IFC is considering the following activities: (i) participation in an expansion program under study by ICF; (ii) purchase of additional share capital under expansion programs planned by BNDT and BDET; and (iii) at the Government's request, privatization of certaiu state-owned industrial projects. PART III - THE AGRICULTURAL SECTOR 27. Background. Tunisia has a total land area of 16.4 million ha of which 8.4 million ha are suitable for agriculture and grazing. The country can be divided into three main ecological zones. The northern 25 percent is the most fertile, receiving adequate rainfall (400-1,000 mm). The central zone (15 percent) receives between 200 and 400 mm of rainfall, and the southern part (60 percent) is a predesert zone receiving less than 200 mm of rainfall. Of the 5.0 million ha of cultivable land, 34 percent is planted in - 9 - cereals. 35 percent in fruit trees and the remainder in forage crops, vegetables. grain legumes and industrial crops; 20 percent is normally left fallow. Givtn the high variability in rainfall, important efforts have been made to develop irrigated agriculture (paras. 32-34). 28. Past Perforuance. Tunisia's agricultural sector performed well during the 1970s. The value of production grew at 4.4 percent p.a. in real terms between 1970 and 1979, compared to 3 percent p.a. for middle income countries as a group. However, the pace of growth slowed down considerably near :he end of the period and early 1980s (0.5 percent p.a. for 1977-82), mostly because of drought which has repeatedly affected the country. While the more rapid growth in other sectors, particularly petroleum and tourism, induced a decline in the relative role of agriculture, it still represents 13 percent of Tunisia's GDP and employs about one-third of the labor force. The continued growth of agricultural production and rural migration has resulted in an increase in average per capita income in agriculture (from US$173 in 1960/62 to US$380 in 1979, measured in 1979 US dollars) and a reduction in the percentage of rural population living below the absolute poverty level (from 17 percent in 1975 to 13 percent in 1980). 29. National Development Plans and Government Strategy. Under the Fifth Development Plan (1977-81), the Government's main objectives for the sector included a balanced agricultural trade and increased rural employment and incomes. Partly due to the drought, Plan targets were in most cases not met. Agricultural value added increased at an annual rate of 1.0 percent between 1976 and 1981, well below the Plan target of 2.5 percent. Potential exports were diverted to local consumption and imports, in particular of cereals, increased. As a result, the ratio of food imports to exports increased from 1.2 in 1976 to 1.8 in 1981. The basic objectives for agriculture under the Sixth Development Plan (1982-86) have not changed. The need to resolve key issues such as employment, regional income disparities as well as increased efficiency of investments has become even greater due to the necessity of adjusting the economy to a post-hydrocarbon situation. The Government is aiming to achieve this adjustment in agriculture through, inter alia: (a) a shift toward smaller, less capital intensive -nvestments generating employment opportunities; and (b) the creation of a more favorable economic environment, including the introduction of a more realistic price structure for agricultural products. Investments in agriculture are planned to increase from 13 percent of total i1ivestments during the last Plan to 19 percent. The Bank-financed Technical Assistance Project (Loan 2197-TUN) is assisting the Government in the preparation of high priority projects and subsectoral strategies, including policy reforms. 30. Previous Bank Involvement in Agricultural Projects. Bank Group lending for agriculture in Tunisia started in 1967, and to date 15 projects have been approved for a total of US$358.2 million of Bank/IDA funds, including the recently-approved Northwest Agricultural Production Project. Of these, eight are ongoing including three irrigation projects. Performance under these projects has been mixed reflecting institu-tional constraints. The First Fisheries Project (Credit 270-TUN) was completed at the end of 1979 witb considerable delays and low loan recoveries for boats. These problems were addressed under the Second Fisheries Project (Loan 1746-TUN), which is now progressing satisfactorily. The First and Second Agricultural Credit Projects (Loan/Credit 779/263-TUN and Loan 1340-TUN) financed lending of the - 10 - National Bank of Tunisia (BRT) for on-farm development. While the projects achieved good rates of return, the continuing problem of higher interest rates on Bank funds than on Government-supplied credit and the lack of decentralization of BNT caused disbursements to be slower than anticipated. The Third Agricultural Credit Project (Loan 1885-TUN) is addressing priority credit problems. Action has been taken to decentralize BNT's operations and raise interest rates. On the basis of financial and agricultural sector discussions to take place during the first half of 1985, the Government is expected to prepare a plan of action to achieve positive interest rates and improve loan recovery ratios. The physical implementation of the poverty-oriented Northwest Rural Development Project (Loan 1997-TUN) is proceeding satisfactorily. The Government is now preparing milk price reforms which should help sustain the favorable impact of the project. The Grain Storage Project (Loan 2052-TUN) is also progressing well after initial delays and the recruitment of new consulting engineers. Under the Technical Assistance Project (Loan 2197-TUN), strategies have been or are being developed for improvements in several subsectors including farm input distribution, farm mechanization, produce marketing, research and extension, and improved operation and maintenance of existing irrigation infrastructure. These strategies will contribute to increasing the efficiency of investments under the Sixth and Seventh (1987-91) Development Plans. 31. Implementation of the irrigation projects -- First Irrigation Rehabilitation Project (Loan 1068-TUN), Sidi Salem Multipurpose Project (Loan 1431-TUN), Southern Irrigation Project (Loan 1796-TUN), Medjerda/Nebhana Irrigation Project (Loan 2157-TUN) and Central Tunisia Irrigation Project (Loan 2234-TUN) -- has been satisfactory. However, these projects have been more concerned with rehabilitating and expanding irrigation infrastructure than with institutional development. OED's draft audit of the First Irrigation Rehabilitation Project (Loan 1068-TUN), dated November 5, 1984, determined that the economic rate of return of the project was highly satisfactory (32 percent). A major finding was that the increased reliability of water supply brought about by rehabilitation works carried out under the project had a major impact on farm production and incomes in the project area, by increasing farmers' willingness to take higher risk with higher value crops. The Irrigation Development Offices (OMVs), the public entities which manage the projects, have demonstrated their ability to carry out construction works efficiently, but their management still needs improvement and their performance on operation and maintenance of irrigation infrastructure has been mixed. THE IRRIGATION SUBSECTOR 32. Background. The mobilization and efficient use of scarce water resources for irrigation has been and remains a major preoccupation of the Government. Since the early 1960s, major shares of public and private investments in agriculture have been allocated for that purpose: 30 percent between 1962 and 1971, 23 percent from 1972 to 197& and 44 percent from 1977 to 1981. The Government invested heavily in irrigation infrastructure (nine major dams, 20 smaller dams, more than 800 deep wells and about 250 pumping stations have already been constructed), while the private sector invested mostly in shallow wells (about 23,000) and related equipment. Currently, out of 250,000 ha with irrigation potential, some 205,000 ha (85,000 in Public Irrigated Perimeters (PPIs) and 120,000 in private areas) are equipped for irrigation against 120,000 ha in 1972. - 11 - 33. In 1984,-about 160,000 ha were actually irrigated out of the 205,000 ha equipped, giving an overall average irrigation intensity (annual irrigated crop area over area equipped) of 78 percent. In the PPIs, the average intensity is about 66 percent while it is 86 percent for the private perimeters. In terms of use of water resources, in 1981, of the about 1.9 billion m3 of water developed and available for beneficial use, 0.4 billion m were for domestic and industrial use and 1.5 billion m3 for agricultural purposes, but only some 60 percent of water developed for irrigation was being used. The main reasons for low irrigation intensity in PPIs are: (a) inadequate operation and maintenance of irrigation systems due to a lack of equipment, a shortage of adequately trained staff and inadequate allocation of resources, resulting in low network efficiencies (about two-thirds of planned efficiencies on average); (b) the scarcity of water for PPIs located in the southern and eastern areas; and (c) the underutilization of available resources for PPIs in the northern part of the country, mostly due to farmers' unwillingness to use irrigation fully because of problems of size of land holdings and land tenure as well as preferences for farming systems with low labor requirements (cereals). 34. The irrigated sector contributed significantly to the rapid growth of Tunisian agriculture during the 1970s. In 1980, it accounted for about 25 percent of the country's total agricultural GDP. About 50 percent of total irrigated area is used to produce vegetables, 35 percent is under fruit trees and about 8 percent under fodder crops. The balance (7 percent) is used for cereals and industrial crops (mostly sugar beet). However, the subsector's contribution could have been higher if more intensive use had been made of the irrigable areas. The Government's main objectives during the Sixth Development Plan are: extension of irrigable areas; and intensification of water utilization and crop production on existing irrigable areas. It is envisaged that D 610 million or about 40 percent of total planned investments in agriculture during the Plan period will be allocated to irrigation. These investments would increase the total equipped area to about 245,000 ha (of which about 125,000 ha in PPIs). The Plan also envisages efforts to improve the intensity of use of existing facilities through: (a) renewed efforts to implement Agrarian Reform in the PPIs; (b) more efficient extension services, leading to more effective encouragement of recommended cropping patterns and promotion of water saving technologies and agricultural practices; and (c) more efficient water management through greater involvement of Water User Associations (WUAs) and improved operation and maintenance of public irrigation systems by OMVs, and more efficient provision of commercial agricultural support services through greater involvement of the private/cooperative sector. Issues related to (a) and (b) are discussed in the following two paragraphs, while those related to (c), which will be dire-'ly addressed under the proposed project, are analyzed more fully in para. 37. Issues 35. Land Ownership and Agrarian Reform in PPIs. In Tunisia, the size of holdings is a major constraint to the intensification of irrigation. Studies carried out by the Ministry of Agriculture have indicated a strong inverse correlation between the size of holdings and irrigation intensities. To - 12 - rationalize the use of available water resources and ensure the fuller exploitation of its investments in irrigation infrastructure, the Government has enacted Agrarian Reform Laws providing for land ownership limitation; land consolidation; inducement to irrigate; and farmers' contribution to investment cost. While some progress has been made, particularly in the area of consolidation in some PPIs, farmer resistance and inadequate penalties have limited implementation of the Agrarian Reform Laws. A study on land issues is being done under the Technical Assistance Project (Loan 2197-TUN) and an internal Government comission has been established to review this matter. The lack of a proper national cadastre has affected the Government's ability to address land issues, and it is therefore preparing a National Cadastre and Cartography Project. Farmers' contribution to investments is discussed in more detail in the framework of cost recovery (para. 37 (f)). 36. Extension and Applied Research. Since 1973/74, OMVs have made considerable efforts to set up effective extension services, supported by Applied Research Stations, to cater to the specific needs of the farmers in their sphere of influence. Although their impact on production is difficult to assess, OMVs' extension and research services seem to have performed reasonably well. They have been instrumental in selecting and introducing new high yielding varieties, in particular for vegetables, and promoting fodder crops with pure-bred milk cows. However, the present system still has drawbacks: (a) applied research by OMVs lacks linkages and coordination with other existing research services and programs, and concentrates mostly on providing advice on specific crops, without taking into consideration the whole farm system or farmers' different needs, motivations and capabilities; (b) little attention has so far been given to improved water management at farm level; and (c) OMVs' extension agents are burdened by additional tasks (input supply, credit, marketing, collection of statistics, etc.) that have diverted them from their principal role. The Government is preparing a National Extension and Research Master Plan under the Technical Assistance Project (Loan 2197-TUN), which will propose the measures necessary to improve Tunisia's extension and research systems, including irrigated agriculture and is planned to be implemented in 1986 and beyond. Under the present Project, measures would be taken (para. 51) to divest OMVs of some of their commercially oriented activities, which will facilitate the future reform of the extension sygtem by allowing OMVs' extension agents to devote more time to their primary function. PART IV - THE PROJECT 37. Background on Irrigation Development Offices (OMVs). OMVs were created to: operate and maintain public irrigated perimeters (PPIs); provide extension services for irrigated crops; provide other support services (e.g., input distribution, tractor services, produce marketing, credit distribution) when not available from other sources; and promote the creation of farmer groups or cooperatives to assume responsibility for the operation and maintenance (O&M) of irrigation systems and for commercial setvices. OMVs are State-owned enterprises with a separate legal entity, which are to be run as financially-autonomous commercial enterprises. The main problems regarding OMVs' operations and performance include: _ 13 - a) Relationship with Government: Current planning, financial management, cost accounting and budgeting systems are inadequate to provide OMVs with clear development objectives or allow their supervisory ministry (the Ministry of Agriculture) to monitor OMVs' activities and performance. b) Management. Poor management performance is due both to inadequate management information systems (MIS) and to problems with staff structure and skills - OMVs are characterized by overstaffing, a relatively low level of technical and managerial skills and the lack of an effective staff incentive system. Poor management contributes to inadequate budgeting for and attention to maintenance of irrigation facilities, resulting in frequent breakdowns and poor service which, in turn, discourages water use by farmers and their willingness to pay water charges, and obliges OMVs to undertake frequent, costly rehabilitation investments. c) Relationship with Water User Associations (WUAs). The most prevalent form of WUA - the Association of Common Interest (AIC) - has gradually ceased co play an active role in water management in many areas due, inter alia, to the higher technology of modern irrigation systems and the resulting increased financial and managerial skills involVed, and to the AIC's complex and bureaucratic operating procedures. In consequence, simple O&M tasks are carried out by OMVs at a higher cost. d) Financial Situation. The revenues that OMVs derive from water sales and commercial services are not sufficient to cover the costs of these services, and the balance is covered by annual Government operating subsidies. Over 1981-84, OMVs' internally-generated income represented on average less than 40 percent of their total income. This lack of financial autonomy has fostered inefficiency and caused a significant drain on the Government budget. e) Commercial Activities and the Role of the Private Sector. The support services provided by ONVs were originally meant to be a temporary solution until alternative delivery mechanisms could be promoted. However, actions have not been taken to promote the private/cooperative sector's involvement and Government subsidization of OMVs' activities in these areas has effectively blocked out the private sector. OMVs are diverted from their most important tasks - O&M of irrigation systems and extension - in order to provide other services, which they do less efficiently and less well than the private sector. f) Irrigation Cost Recovery. Government policy for recovering investments in PPIs is embodied in the land reform legislation (para. 35), which calls for betterment levies aimed at recovering part of the increase in land value due to irrigation. Actual recovery of farmers' contribution to investment costs has, to date, been very limited. As regards irrigation O&M costs, Government policy is to achieve 100 percent cost recovery. Water charges have been substantially increased since 1980, with average annual increases in various OMVs ranging from 15-36 percent in current terms, or from 3-24 percent in constant terms. However, despite this major effort, water charges currently cover on average only about 40 percent of O&M costs (these charges are, however, paid in advance, resulting in recovery of dues close to 100 percent). This represents recovery of 14-37 percent of total irrigation - 14 - costs, depending on the OMV involved. Further increases in water charges are required to increase the financial. autonomy of the OMVs and encourage a more rational use of available water. 38. Rationale for Bank Involvement. Past Bank involvement in irrigation projects has led to progress on subsector issues, most notably cost recovery, and laid the basis for the introduction, nationally, of a number of reforms needed to ensure efficient use of existing infrastructure and improve return on past and future investments, and bring about important improvements in the management and efficiency of the institutions operating in the sector. The proposed project, in addition to providing the physical investments needed to ensure improved O&M of irrigation facilities, will focus on these required reforms. A continued Bank presence is valuable in view of the institutional and policy orientation of these reforms. To minimize project complexity, the proposed project would concentrate on the improvement of O&M and not directly tackle other constraints to onfarm development such as applied research, extension or agricultural support services. These constraints are being addressed through separate ongoing projects financed by the Bank or through other projects being prepared under the Technical Assistance Project (Loan 2197-TUN). 39. Background. The project was identified in the 1982 Agricultural Sector Survey (Report No. 3876-TUM, September 29, 1982) and prepared by consultants under the Technical Assistance Project. The project was appraised in September 1984. Negotiations were held in Washington from April 29 to May 3, 1985. The Tunisian delegation was led by the Director General of International Cooperation, Ministry of Planning, and included representatives of the Departments of Coordination of Irrigation Development Offices (DCOMVPI) and Planning, Statistics and Economic Analyses (DPSAE) of the Ministry of Agriculture (MOA), and the Irrigation Development Office of the Medjerda Valley (OMVVM). The Staff Appraisal Report entitled "Irrigation Management Improvement Project", No. 5396-TUN of May 10, 1985 is being distributed separately to the Executive Directors. The main features of the Project are sunmmarized in the Loan and Project Summary and in Annex III of this President's Report. A map showing the location of the areas covered by the Project is attached. 40. The main objectives of the Project are to: increase and ensure the sustainability of agricultural production within some 105,000 ha of land in the PPIs; improve the incomes of farmers living in PPIs and create employment opportunities; eliminate the OMVs' operating deficits, thereby reducing the burden of annual operating subsidies on the Government's budget; and reduce the need to regularly undertake major investments for the rehabilitation of existing irrigation systems by improving regular maintenance operations. These objectives would be achieved through: a) improving OMVs' capabilities to provide increased water delivery, in a timely and cost-effective manner, and to maintain existing irrigation systems; b) introducing pricing and cost recovery policies for OMVs' services, aimed at a more rational use of available resources, increased competition from the private and cooperative sectors, and greater financial autonomy of OMNs; c) setting up an institutional framework providing for improved management efficiency and greater accountability for OMVs, and strengthened planning and control capabilities for Government services in charge of monitoring OMVs' operations; and d) increasing the role and responsibilities of Water User Associations (WUAs) in the O&M of irrigation systems. - 15 - 41. The-Project would be implemented over a five-year period (1986-1990) and would support the development of eleven OMVs covering the following areas; Gafsa-Jerid, Gabes-iedenine, Jendouba, Kairouan, Lakhmes, Medjerda (OMVVM), Nabeul, Nebhana, Kasserine, Sidi Bouzid and Souassi. It would consist of: (a) an investment component comprising the provision of heavy equipment, vehicles, workshops and radio and computer equipment for O&M actiJities; rehabilitation, regular preventive maintenance and repair of hydro/electromechanical (HEM) equipment; establishment of safety stocks for equipment and irrigation networks; and for OMVVM, rehabilitation of part of the irrigation and drainage networks and support for the delayed maintenance of the feeder road system; b) an institutional/policy reform component aimed at strengthening the coordination between OMVs and their supervisory Ministries; strengthening the role of WUAs; improving the technical, planning and financial management of OMVs; and introducing improved pricing policies for OMVs' services; c) a technical assistance, training and support action component including: technical assistance to OMVs to set up a new MIS, reform their accounting, financial, planning and technical operating procedures, carry out the necessary related training programs, set up a system to monitor agricultural and productivity development at farm level, prepare detailed engineering of proposed project works, and carry out water management studies in a number of OMVs, including establishment of a water flow monitoring system and a 500 ha pilot sector in OMVVM to test alternative water delivery and management technologies, and conducting experiments on water saving technologies and cropping methods in OMV Gafsa-Jerid; and technical assistance to DPSAE and DCOMVPI to strengthen their capabilities to plan and monitor OMVs' activities; and d) on-farm development associated with the proposed project investments. 42. Project Cost and Financing. The total estimated cost of the project is $61.0 million, of which $27.5 million is in foreign exchange. Base Costs are estimated in February 1985 prices. Taxes and duties estimated at $13.7 million are included, as well-as physical contingencies representing about 13 percent of base costs (10 percent for technical assistance, equipment and vehicles, 15 percent for civil works, and 20 percent for studies, maintenance contracts and the OMVVM and OMV Gafsa-Jerid pilot irrigation schemes) and price contingencies totalling about 20 percent of base costs plus physical contingencies (8.0 percent for 1985, 9.0 percent for 1986-88, and 7.5 percent thereafter for foreign costs; 10.0 percent for 1985-88 and 9.0 percent thereafter for local costs). The project includes 156 staff-months of long-term and 152 staff-months of short-term consultant services for technical assistance and studies. 43. The proposed Bank loan of $22.0 million would finance the foreign exchange cost of the project, with the exception of on-farm development costs and part of the technical assistance component. The Bank loan would represent 36 percent of the total cost, or 47 percent of the total cost net of taxes, - 16 - and 80 percent of the foreign exchange cost. The Government would allocate about 96 percent of the loan proceeds to the OMVs, through their respective annual budgets, with the balance used by the Ministry of Agriculture (MOA) to finance technical assistance, training and studies. Incremental on-farm development costs would be financed by beneficiaries (10 percent of total cost net of taxes and duties) and credit institutions (10 percent), under standard terms and conditions for seasonal credit (interest rates ranging from 6.75-8.5 percent). Cofinancing amounting to $2.4 million equivalent (5 percent of total net costs) would be provided by bilateral and/or multilateral sources for technical assistance. The Government has already started making contacts in this regard and prospects are favorable. It was agreed at negotiations that cofinancing arrangements would be finalized by January 1, 1986 (Loan Agreement, Section 6.01 (b)). If cofinancing should not materialize, the Government has indicated it would provide the financing from its own resources. The Government would finance the balance of total project net costs (28 percent). Retroactive financing of up to $500,000 of the Bank loan is proposed for foreign expenditures incurred after February 1, 1985 for consultant services and computer equipment to help set up the OMVs' accounting system and MIS. Details of project costs and financing are contained in the Loan and Project Summary. 44. Procurement. Procurement arrangements are summarized in the table below. Equipment and vehicles would be procured by ICB. Qualifying domestic manufacturers would be granted a margin of preference equal to 15 percent or the actual customs duties, whichever is lower. When bulking is not feasible, contracts not exceeding $150,000 equivalent, and totalling no more than $300,000 equivalent for each OMV and $3.0 million equivalent in aggregate, may be awarded on the basis of local competitive bidding procedures. Contracts for building OHV workshops and civil works for establishing OMVVM's pilot sector would be awarded on the basis of LCB, as the scattered nature of these works would not interest foreign contractors. LCB procedures are generally consistent with the need for economy and efficiency in the execution of the project. Laws and regulations regarding these procedures in Tunisia are being reviewed in the Bank in order to reach a judgement as to whether they are acceptable for Bank-financed contracts. The findings of the review will be discussed with the Tunisian authorities and agreements will be sought regarding requiree changes. Civil works for rehabilitating OMVVM's irrigation, drainage and feeder road systems would be carried out on force account, since the quantities of work involved are difficult to define in advance and the works are scattered and must be carried out without disrupting irrigation operations. Equipment for OMV Gafsa-Jerid's water saving experiments, as well as office equipment and furniture for the project unit in MOA, easil! obtained off-the-shelf, would be procured through local shopping. Contracts for Bank-financed consultant services would be awarded in accordance with Bank guidelines. All bidding packages and contract awards for works and goods estimated to cost the equivalent of $500,000 and $150,000, respectively, as well as for computer and radio equipment and Bank-financed technical assistance, would be subject to prior Bank approval, resulting in prior Bank review of about 86 percent of total contract value. 45. Disbursements. The proposed Bank loan would be disbursed over a period of seven years as follows: 50 percent of local and 100 percent of foreign expenditures for pipes, flumes, workshops and OMVVM's pilot sector; 65 percent of local and 100 percent of foreign expenditures for equipment and vehicles for irrigation O&M and the project unit; 75 percent of local and 100 percent of foreign expenditures for electromechanical equipment and rehabil- -17- Procuremrnt Method Project Element ICLB. OJther N.A. Total Cost ---------------(US$ million)-------------- Buildings (workshops) - - 0.7 (D.2) - - - 0.7 (0.2) Stock pipes & flumes 1.9 (0.8 - - - - - 1.9 (0.8) Stock electra- mechanical equipment 3.7 (2.8) - - - - - 3.7 (2.8) Heavy UH equipment 3.0 (1.8) - - - 3.0 (1.8) Vehicles & other equipment 6.5 (4.0) - - - - - 6.5 (4.0) Rehabilitation & iantenar,ce contract 10.4 (7.8) - - - - - 10.4 (7.8) Technical assistance. training. studies - - - 1.4 (1.1) - 1.4 (1.1) Rehabilitation works Equipment 2.5 (1.6) - - - - - 2.5 (1.6) Works - - - - 2.6 - - 2.6 Water flow monitoring system 0.3 (0.2) - - - - - 0.3 (0.2) Pilot sector 1.6 (0.8) 1.S (0.5) - - - 3.1 (1.3) Gafsa Water saving experiments - - - - 0.2 (0.1) - 0.2 (0.1) Hinistrv of Aariculture Technical assistance & training - - _ _ 2.7 (0.2) - 2.7 (0.2) vehicles & equipment 0.2 (0.1) - - 0.1 - _ 0.3 (0.1) On-farm Development - - - - - - 9.2 9.2 Oneratina cost OAVs - - - - - - 10.9 10.9 OD. cost Ministry of Agriculture - - -Z-- - . 1.6 _ Total 30.1 (19.9) 2.2 (0.7) 7.0 (1.4) 21.7 61.0 (22.0) Mote: Figures in parentheses are the aounts to be financed by Bank loan. - 18 - itationlmaintenance/repair works; and 80 percent of local and 100 percent of foreign expenditures for- training, studies and Bank-financed technical assistance and related equipment. To ensure the efficient and timely implementation of the project, a revolving fund of $500,000 would be established in a special account at the Central Bank of Tunisia. This fulnd, corresponding to three months' project needs, would be used to pay e'ligible expenditures for civil works, goods and consultant services. The Bank would replenish the fund upon receipt of satisfactory evidence that expenditures paid were eligible for financing out of the fund. Project completion is expected by June 30, 1991. The loan closing date would be June 30, 1992. 46. Project Implementation. The project would be implemented through existing institutions whose activities would be strengthened and better coordinated. The MOA would have overall responsibility through two departments: the DCOMVPI, responsible for overall coordination and monitoring of project activities including recruitment of consultants for technical assistance, training and studies, and providing OMVs with required assistance in managerial and technical matters; and the DPSAE, responsible for negotiating with OMVs their medium-term development plans, reviewing and endorsing their annual operating plans and budgets, and monitoring their performance. The recruitment by DCOMVPI of a Deputy Director, who would act as Project Manager, would be a condition of effectiveness (Loan Agreement, Section 7.01(c)). Assurances were obtained at negotiations that two specialists (an irrigation lead advisor specializing in O&M and an electromechanical equipment engineer) to assist DCOMVPI, and a financial planning and control specialist to assist DPSAE, as well as related Tunisian counterpart staff, would be recruited by January 1, 1986 (Loan Agreement, Section 3.04 and Annex 4, Section II(b). The core team of experts for DCPPI is expected to be provided through a multiannual twinning arrangement between DCP1I and an institution actually in charge of the O&M of irrigation perimeters. In addition to the above specialists, consultants would be hired to help the OMUs with financial planning and control, accounting, and MIS design and set-up, and to help DCOMVPI with training and technical matters. Terms'of reference for all the project technical assistance are already available. An essential element of the technical assistance program would be to train DCPPI, DPSAE and OMV staff, at both managerial and technical levels, through action-oriented seminars and on-the-job training. 47. It would be a condition of effectiveness that a Coordination and Monitoring Committee be established (Loan Agreement, Section 7.01(b)), and assurances were obtained at negotiations that the following year's operating and development plans ard proposed budget and financial plans for the project and the OMVs, as approved by this Committee, would be presented to the Bank for comment no later than November 30, 1985 and September 30 of each year thereafter (Loan Agreement, Section 3.01(b)(ii)). Project activities would be carried out by the OMVs in their respective command areas. For the rehabilitation of their HEM equipment, the OMVs would enter into a multiannual (three year) contract with one or several enterprise(s) to rehabilitate OMUs' main pumping stations, ensure regular preventive maintenance and carry out necessary repairs, and train OMVs' staff. Terms of reference for this contract are available and detailed technical specifications would be prepared with the support of the project technical assistance. At the end of the first contract, OMVs would elect either to renew it or to take over all maintenance work if their staff has been sufficiently trained to do so effectively. As regards OMVVM's rehabilitation works, CMVVM, which has the necessary technical capacity and experience, has already prepared the preliminary engineering - 19 - designs and would prepare the detailed design and execute the works by force account. 48. Rehabilitation of the OMVs' Accounting and Financial System. The problems with the OMVs' financial and planning management were described in para. 37(a) and (b). Under the project, a comprehensive set of measures would be taken to improve the ONVs' MIS. Standard accounting principles and procedures for recording OHVs' operations have been agreed, and assurances were obtained at negotiations that a circular to the OMVs requiring their use would be issued by December 31, 1985 (Loan Agreement, Section 3.12). All OMVs would then establish their opening financial statements (as of December 31, 1985) before April 30, 1986 on the basis of these new accounting principles. As a second phase, an efficient MIS would be defined and set up by December 31, 1986 in three OMVs (OKVVM, OMVs of Kairouan and Gafsa-Jerid), chosen for their representativity. The new MIS would be introduced in the remaining seven OMVs by June 30, 1987. One result of this process would be the budgetary separation of the OHVs' different activities: public services (extension), commercial services and irrigation services, thus allowing annual operating allocations from the Government to be activity-specific and non-transferable. Funding for OMVs' irrigation maintenance operations would be clearly identified in their budgets, in amounts satisfactory to the Bank. Assurances on the above points were obtained at negotiations (Loan Agreement, Sections 3.01(b)(iii), 5.02, and Schedule 5, paras. 5 and 6). 49. Planning and Monitoring of the OMVs' Activities. A key feature of the project would be the preparation and implementation by three OMVs (those listed in para. 48) of program-contracts (PCs) negotiated with the Government. Each OV would prepare a medium-term development plan (through 1991), which would identify the OMV's investment objectives, projected evolution of activitiv.a and productivity improvement, and indicate the corresponding financial requirements and anticipated sources of financing. On the basis of this development plan, a PC would oe signed between the OV and the Government, setting forth the OMV's obligations with respect to goals and performance (including precise, monitorable performance indicators) and the Government's obligations concerning institutional and regulatory matters (in particular, staffing and pricing) as well as financial commitments (subsidies, grants). The PC experiment, if successful, would be later extended to the other OMVs which would, in any case, also prepare medium-term development plans to be discussed with and approved by the Government. An important element in preparing the OMV's respective development plans would be the definition of a staffing plan (number of staff and technical skills required) aimed at improving staff productivity and decreasing the cost of OMVs' services. (Salaries currently account for about two-thirds of OMVs' total operating expenses). The staffing plan would define the measures necessary to achieve the target structure within a specified period (by December 31, 1989), including attrition, restricted recruitment of certain categories of personnel, transfers and training programs. Assurances were obtained at negotiations that the medium-term development plans for all OMVs, and PCs where applicable, would be submitted to the Bank for review by September 30, 1986 and finalized by March 31, 1987 (Loan Agreement, Section 3.06). 50. Promotion of WUAs. As noted earlier (para. 37(c)), existing WUAs - the AICs - are cumbersome and ineffective. The Government is currently - 20 - revising the AIC legislation to decentralize operational respousibilities and simplify the present highly rigid management procedures. It is also, in connection with the ongoing Central Tunisia Irrigation Project (Loan 2234-TUN), defining the legal framework for the creation of smaller, more flexible WUAs in areas not covered by AICs to take responsibility for the O&M of small irrigated areas and act as counterparts of the OMVs for the management of PPIs and the resolution of disputes. Assurances were obtained at negotiations that the Government would take legal measures satisfactory to the Bank by December 31, 1985 to establish new decentralired operating procedures for the AiCs, and by December 31, 1987 to create new WUAs, and define their role and contractual relationship with the OMVs as well as specific measures to promote their creation, for example by granting a rebate on water charges for farmers who join WUAs. Assurances were also obtained that these measures would be implemented thereafter (Loan Agreement, Sections 3.09 and 3.10). 51. Cost Recovery. As noted in para. 37(d) and (e), the OMVs' commercial activities run at a loss. The ultimate objective is to divest the OMVs from these services, in favor of the private/cooperative sector which can provide them better and more efficiently. This divestiture would-be achieved by removing Government subsidies and raising prices to their real cost, thus allowing the private sector to compete. Assurances were obtained at negotiations as regards the full costing of commercial services, including overhead, by December 31, 1988 (Loan Agreement, Schedule 5, para. 9). The Government has also indicated its commitment to the introduction of interim price increases, starting in 1986, to immediately improve the OMVs' financial position, and to the ultimate divestiture of OMVs from their commercial activities. 52. As noted in para. 37(f), continued improvement in irrigation O&M cost recovery is essential. It would be a condition of effectiveness that the Government take all necessary measures to promote the adoption by che OMVs of a binomial water rate structure composed of a compulsory fixed charge to encourage water use up to a given level and guarantee OMVs a minimum revenue, and a volumetric water charge above this level (Loan Agreement, Section 7.01(a)). Assurances were also obtained at negotiations that the two OMVs with major problems of water underutilization - OMVVM and OMV Jendouba - would introduce the binomial structure by December 31, 1985 and June 30, 1986, respectively (Loan Agreement, Section 3.08). Assurances were also obtained that full O&M ce3st recovery would be achieved in all OMVs by January 1, 1995 (except in the center part of the country where ability to pay is a constraint - para. 53), and to this end that water charges for all OMVs would be increased by a minimum 9 percent p.a. in real terms (Loan Agreement, Section 3.07(ii)). The latter assurances are consistent with cost recovery covenants under ongoing Bank-financed irrigation projects, and should allow full OEM cost recovery over 65 percent of all PPIs by the end of the project period and over 95 percent by 1995. 53. An analysis of representative farm models shows that farmers' ability to pay may prove a constraint to full OM cost recovery within ten years in a few PPIs in the center part of the country (covering less than 5 percent of all PPIs) with present farming and cropping systems. However, future shifts to higher value crops and more productive technologies, due to extension efforts, could increase farmers' income and ability to psy and the possible level of OWM cost recovery. Under the project, OMVs would set up a permanent system to monitor farm incomes and ability to pay, with a view to establishing appropriate water charge levels. - 21 - 54. MonitorinR and Audits. DCOMVPI would submit semi-annual progress reports on thr physical and institutional aspects of the project, and DPSAE would submit annual reports on the implementation of the OMVs' medium-term development plans, annual operating plans, budgets and financial results, and on the evolution of performance indicators under their respective PCs or development plans. Assurances were obtained that the Government would undertake a mid-term review of physical and policy progress with the Bank by December 31, 1988. To this end, it would prepare a report outlining progress, issues and recommendations by June 30, 1988 based, in part, on a management audit it would undertake of the three OMVs participating in the PC process (Loan Agreement, Section 3.11). DCOMVPI would establish and maintain separate project accounts. These as well as the OMVs' overall financial statements would be audited annually by independent auditors acceptable to the Bank. Assurances were obtained that these audited financial statements and reports for both the project and the OMVs would be presented to the Bank within six months after the end of each fiscal year (Loan Agreement, Sections 4.01 and 4.02). 55. Justification. The dirict quantifiable benefits of the project arise mainly from: (a) cost savings from improved O&M, due to avoidance of repeated investments to rehabilitate irrigation infrastructure; b) increased agricultural and livestock production, farm incomes and employment, due to more reliable water delivery; c) foreign exchange savings; and d) improved financial situation and autonomy of the OMVs, which would have a favorable impact on the Government budget. At full development (Year 20), the value of annual incremental production generated by the project (in 1984 prices) is estimated at $29.8 million. This would consist mainly of fruits, vegetables, sugar beet, fodder, milk and meat, which would all be easily absorbed by the local or export markets. Prices of irrigated crops are either free or have been increasing faster than inflation and the price of related inputs; they provide adequate incentives. Using conservative estimates, income improvemerts for the 42,000 project farmers range from 17 to 196 percent. Employment increases would be equivalent to about 23,000 jobs; of this, two-thirds would be additional family labor and one-third additional hired labor. The net annual foreign exchange savings attributable to the project's incremental productibn and rehabilitation cost savings at full development is $15.2 million. The measures proposed under the project on pricing and cost recovery for OMVs' services and irrigation water would reduce fourfold the OMVs' cumulated operating deficit over 1986-1995. The net positive impact of the project on the Government's finances (revenues from project-related taxes and duties, Bank loan disbursements, and decreased outlays for OMVs' operating deficits, minus project-related investment costs, salaries, subsidies on farm inputs and debt service on the Bank loan) would be about $43 million in current terms over the first five years of the project; the net annual surplus would increase considerably thereafter, reaching about $33 million (in 1990 prices) by Year 20. The project economic rate of return (ERR), based on rehabilitation cost savings and incremental crop and livestock benefits, is 29 perc-ent. The ERRs for the 10 individual OMVs range from 20 to 36 percent. - 22 - 56. Risks. The main potential risks which could adversely affect the economic viability of the project are: (a) a lower than expected agricultural production response to increased availability and better timeliness of water delivery, and (b) lower than expected rehabilitation cost savings because of sub-optimal use by the OMVs of the technical assistance, training, organizational improvements and maintenance equipment and facilities provided under the project. Sensitivity tests carried out on the basis of these risks show that the resulting economic rates of return remain satisfactory and the project remains viable even in the unlikely event that all the OMVs would be affected simultaneously. Switching value analysis shows that crop and livestock benefits would have to fall by 90 percent or rehabilitation cost savings by 138 percent to reduce the ERR below 12 percent. Similarly, investment and O&M costs would have to jump by 236 and 247 pe:cent, respectively, to threaten the economic viability of the project. Such adverse changes are unlikely. PART V - LEGAL INSTRUMENTS AND AUTHORITY 57. The draft Loan Agreement between the Republic of Tunisia and the Bank and the Report of the Committee provided in Article III, Section 4(iii) of the Articles of Agreement are being distributed separately to the Executive Directors. Special conditions of the project are listed in Section III of Annex III. Special conditions of effectiveness wou-' be recruitment of the Project Manager; establishment of the Coordination and Monitoring Committee; and taking of necessary measures to introduce a binomial water rate structure. 58. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 59. I recommend that the Executive Directors approve the proposed loan. A.W. Clausen President Attachments May 13, 1985 Washington D.C. - 23 - T AD LK 3 IPAQ I 'TUNISIA - OCIAL JInCATM DATA BW TmunISIA HUREC maps (UfLOU- AVERAGED) p NOSY (HUT EmIT ETDIATE) Lb inoLk 197( RC1NTk XMIDL INCOME 21100K DEC '1960/b 1x7o STINAiE. W. AFRICA A NW ET T. MnHICA CO A a JTHUS Q. U) TOTAL 163.6 163.6 163.6 . AGRICULTURAL 68.8 70.3 72.2 QlP m CAPNIT (1050 21O 340.0 1390.0 1149.6 21WI.6 mNRG mwEnEmu P CAPI= (KILOGRAS OF OIL EQIlVAEZI) 119.0 230.0 497.0 622.1 g95.5 POPLAIO AND rmL XtISTC POPULATION.NID-TRAR (THOUSADS) 4221.0 5127.0 668L3 USUN POPtATIlOS (I OP TOTAL) 36.0 43.5 53.6 46.2 66.5 POPUATION FROJSCTIO POPUnAION IN TEUR 2WO (CHILL) 10.0 STATIONAY POPUIATION (HILL) 2L6. POPULTION KSISIII 1.8 POPULATION I 31? PU SQ. tl. 25.8 31.3 39.9 36.3 35.7 PER SQ. 1. AClL LAID 61.4 7Z.9 90.3 461.7 92.4 POPULATIO AGe SRIURu (Z) 0-14 IRS 43.4 46.2 39.9 43.6 39.9 15-4 us 525 50.0 56.2 53.1 56.0 65 AIID ASE 4.2 3.8 3.8 3.3 4.1 POPULATION CGlRT RATE (1) TOTAL 1.8 le 1.9 /k 2.2 e 2.8 2.4 URBAN 3.2 3.8 3.9 4.5 3.6 -mr1D5 SIM RATE (PM MMon) 46.6 39.4 33.9 40*4 31.3 CRUDE DEAT RATE (PE aNI) 19.1 14.3 9.2 11.5 8.1 ROSS REPROUCITII RATE 3.5 3.2 2.1 2.8 2.0 FAMILY PLANNIC ACCEPTOU* ANNLOf (R0US) .. 29.2 180.9 /d USES CZ OF mAID Hox) .. .. 41.0 K 2Z.2 40.3 FOOD AM1102IIIIXI IIImEX W FOOD P1OD. MCUITA (1969-71-100) 97.0 96.0 12LO 97.3 114.3 PER CAPITA SUPPY OF CAORIES C( OF RERITS) 83.0 8LC 116.0 110.8 110.6 PROMDEINS (RAS PE DAY) 32.0 57.0 74.0 70.1 67.3 OF lIUCH ANIMAL MD PULSE 13.0 14.0 23.0 If 17.8 34.1 'cII (ACGS 1-4) na'n UlT 36.1 20.G 6.0 14.o 5-J bAL LIE EXPECT. AT BIRTR (TEAlS) 48.3 53.0 61.1 57.5 64.7 INFART KURT. RATE (PR TOUS) 15a.9 121.0 65.0 101.5 60.6 ACCESS TO SAtE WATElt (EPM) TOTAL .. 49.0 70.0 I 59.7 65.4 Unm .. .. 91.0 84.5 78.1 RA .. 46.0 3B.4 46.2 ACCESS TO EXCSETA DISPOSAL (Z OF POPULATION) TOTAL .. 62.0 ._ .. 52.9 DWW 100.0 42.0 .. 67.0 RURAL .. 34.0 .. . .. 24.5 POPULATION PE PYSTiciN 10030.0 530.0 3690.0 4345.1 1917.7 POP. PElt NURSI PERSON .. 730.0 890.0 1631.1 815.8 POP. PER HOSPIAL RED TOTAL 410.0 410.0 460.0 /d 632.9 367.2 URmAN 230.0 /b 31L0 350.0 7f 545.5 411.S RURAL 1040.0 1270.0 1230.01K 2513.5 2636.3 ADEISSIO5 PER HOSPITAL n .. 24.1 23.0 hi 26.2 27.3 AVERAGE SIZE OF HOUSIHOLD TOTAL .. 5.1] L 5.5 A UmAN .. 5.1 5.5 . RURAL .. 5.1 5.6. AVEAG NO. OF PERSO9S/ROd TOTAL .. 3.2]/ 3.1k URBN .. 2.7 L2. RUAL 3. .6 l 3.8. ACCESS TO ELECT. CZ OF 51E.LL) TOTAL . 24.0 11 34.2 /k 46.2 UN .. .. 6a.2 7a 77.7 RURL .. .. 6.0 7LO 16.1 - 24 - TVALt 2W PACR 2 - TA IUNDCA! ATA lRT z~~~~~~~l WMES gw1 sX tuIu ^LU OT (MOSTSZCN ZSU1TE X} min zca newu mcinin 1960A 197,ot Rli L W. AnZCt NO U T. uMcA A CAR ADTUSD EDLINT RATOS 122KART TOTAL 66.0 101.0 106.0 08.3 105.4 PALS 11.0 121.0 119.0 1O0.S 106.3 IUIX 43.0 60.0 92.0 73.6 104.3 SZCOUDATs TOTAL 12.0 23.0 30.0 43.0 43.2 KALI 19.0 33.0 37.0 52.3 42.3 3N1L14 5.0 13.0 23.0 33.0 44.5 VOCATIOXUL (X oF 6SCONDAMY) 23.5 11.1 25.2 10.3 33.6 PUPTh-TEACRU RATIO P1U1AXY 61.0 47.0 38.0 30.3 30.1 sUcUDA1 16.0 21.0 21.0 23.1 16.8 ADULT LITERACY RATE (X) 15.5 24.0 . 63.0 j 43.5 79.5 PASEISR CARS/TDISAIND POP 10.5 13.0 16.3 ^ 17.8 46.0 RADIO RZCzxVZRS/TBUlAmD PO 40.3 75.7 157.0 136.6 225.6 TV REZCEIVERS/TUOSAND 10P 0.1 14.0 47.1 46.1 107.2 NSPA1 CLDAILY CmnUAL IHYSRES!") CIRCULATIO * PU TUODUND POPULAT 19.6 15.9 43.6 /d 31.2 63.5 CIN3I AIMRAL A STZUPANCE/CAPITA 1.6 - 1.5 1.7 2.8 LamFOCE TOTAL UAOS FORCE (TUOUS) 1138.0 1215.0 1751.0 vnlm OPcLuT) 6.0 7.7 6.5 10.; 23.2 AGRICULTURE (PECE) 56.0 50.0 35.0 42.4 31.5 INDUSTr (PERCENT) 18.0 21.0 32.0 27.9 23.9 PARTICIPATIOI RATE CPERCENT) TOTAL 27.0 23.7 26.2 26.2 32.2 HAL 50.2 4.2 47.3 46.4 49.3 KSL1: 3.3 3.6 4.5 .8 15.2 ECONOMIC DENmmpir RATIO .1.8 2.1 1.7 1.8 1.4 PZRCENT OF PRIVATE 15CUSE UECIVED BY IlUEST 52 OF ROIlEROIlS .. .. 17.0 I HIIHIC5 207 OF HOUSED .. .. 42.0 lIadST 20 OF RS _. .. 6.0 . INST 402 OF0 OLD .. .. 15.0 . VOla!! TAPUT GR2 ISTZIASED A5OOLUTZ POVERTY IRCOS LT= (us$ 5PU CAPIT 33 .. .. 204.0 Af 276.8 26L2 RAL .. .. 97.0 t 177.2 164.0 EST1TD RELATIVE POVERTY DC LZVEL (tW PER CAPITA) ORRAN _ .. .. 193.0 Af 402.6 522.8 RUR ., .. 193.0 f 254.9 372.4 UTEXA2S D POP. ELSI ANSOLT POVERTY DICOIE JL (I) RUI .. .. 20.0 If .. 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Группа Всемирного банка · Memorandum & Recommendation of the President
Tunisia - Irrigation Management Improvement Project
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Memorandum & Recommendation of the President
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