Tunisia - SOGITEX Textile Rehabilitation Project

Document of The World '!nk FOR OFFICIAL USE ONLY Report No. 7358 FROJECT PERFORMANCE AUDIT REPORT TUNISIA SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) June 30, 1988 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their nfflciAl duties. Its contents may not otherwise be disclosed without World Bank authorization. COUNTRY EXCHANGE RATES Currency Unit - Tunisian Dinar (TD) Appraisal Year Average (1979) : US$1.0 - TD 0.407 1980 (Average) ; US$1.0 = TD 0.405 1981 (Average) : US$1.0 = TD 0.494 1982 (Average) s US$1.0 = TD 0.591 1983 (Average) : US$1.0 = TD 0.679 1984 (Average) : US$1.0 = TD 0.777 1985 (Average) : US$1.0 = TD 0.835 1986 (Average) : US$1.0 = TD 0.794 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS USED CNEI - Centre National d'Etudes Industrielles FRG - Federal Republic of Germany Holding - SOGITEX Holding Company ICB - International Competitive Bidding lm - Linear Meter m2 - Square Meter p.a. - Per Annum SITER - Societe des Industries Textiles Reunies SITEX - Societe Industrielle des Textiles SOGITEX - Societe Generale des Industries Textiles SOMOTEX - Societe Monastirienne des Textiles STS - SOMOTEX, TISSMOK AND SITER STUSID - Societe Tuniso-Seoudienne d'Investissement et de Developpements Swift - Swift Textiles S.A. Zug, Switzerland as represented by Swift S.A. of Paris, France TA - Technical Assistance TISSMOK - Societe de Tissage de Moknine tpy - Tons Per Year UK - United Kingdom UNIDO - United Nations Industrial Development Organizattoi FISCAL YEAR January 1 - December 31 THE WO21D BANK IVR OFTICIAL USE ONLY Washington. DC 20433 USA OSrue as Dvector-eneal Operatue alMstIun June 30, 1988 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT% Project Performance Audit Report on Tunisia SOGITEX Textile Rehabilitation Proiect (Loan 2012-TUN) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Tunisia SOGITEX Textile Rehabilitation Project (Loan 2012-TUN)" prepared by the Operations Evaluation Department. Yves Rovani by Graham Donaldson Attachment 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. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT TUNISIA SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) TABLE OF CONTENTS Page No. Preface ........... .......... ..... .............. Basic Data Sheet .......................*...... ....... ... ... 1 Evaluation Summary ............. ............. .............. 0*0. iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND .............. ............ i A. General Economic Conditions .............. 1 B. Sectoral Characteristics .............................. 3 II. PROJECT IMPLEMENTATION EXPERIENCE ........................ 4 A. Project Preparation .................. ......... 4 B. Project Scope and Objectives .............. . .... 5 C. Implementation ................................... 5 D. Initial Operating Results .................. 6 E. Financial and Economic Rates of Return ........ 7 III. INSTITUTIONAL DEVELOPMENT ............... . .............. 8 IV. OVERALL ASSESSMENT AND SUBSTAINABILITY ................... 10 V. LESSONS LEARNED .............................. . * . .......... 10 ATTACHMENT 1: SITEX - Production and,Exports 1980-86 .......... 13 ATTACHMENT 2: Comments Received from TISSMOK .................. 14 ATTACHMENT 3: Comments Received from SITEX .... ............ 15 PROJECT COMPLETION REPORT I. INTRODUCTION ......................... . ...*........... 19 II. PROJECT BACKGROUND ....... .............. *** ........... 19 III. PROJECT IMPLEMENTATION AND MANAGEMENT ................... 21 IV. INSTITUTIONAL PERFORMANCE AND MANAGEMENT ......... 28 V. OPERATING PERFORMANCE .............. . ................. 34 VI. FINANCIAL PERFORMANCE ............... ....... * ........... 37 VII. ECONOMIC PERFORMANCE ................... * .............. 40 VIII. BANK'S ROLE AND CONCLUSIONS .........os................. 41 This document has a restricted distribution and may be used by recipients only in the performance of their ofcial duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Centents (Cont'd) ANNEXES Paae No. 2-1 SITEX - Project Scope and Changes ...................... 43 3-1 SITEX - Actual and Estimated Project Implementation Schedule ............... ........ ...4.... ..... .... *. 44 3-2 Sources of Procurement ................................... 45 3-3 Project Capital Costs and Financing Required ............ 46 3-4 Utilization of Bank Funds ... ............................ 48 3-5 Bank Loan Disbursement Schedule ......................... 49 5-1 SITEX - Actual and Estimated Production Build-up and Efficiency Development o .......... ... ......... ..... 50 5-2 STS Companies - Production Data ........0*............ 51 6-1 SITEX - Financial Statements ............................ 52 6-2 STS Companies - Summary of Financial Statements ........ 55 6-3 SITEX - Cost and Benefit Streams for Financial Rate of Return ..........o*...............*..............*......... 58 7-1 SITEX - Cost and Benefit Streams for Economic Rate of Return Calculation ..............0................ 61 -i.- PROJECT PERFORMANCE AUDIT REPORT TUNISIA SOGIIEX TEXTILE REHABILITArION PROJECT (LOAN 2012-TUN) PREFACE This is a performance audit report of the Bank's loan (Loan 2012-TUN) to the Government of Tunisia to finance part of the first stage of a rehabilitation program undertaken by the textile plants which were controlled by a holding company, the Societe Generale des Industries Textiles (SOGITEX). The loan, for US$18.6 million, was approved by the Board on June 2, 1981, was signed on October 27, 1981 and became effective on February 25, 1982. The closing date --as December 31, 1984, and the loan was fully disbursed. The proceeds of the loan, which carried an interest rate of 9.6% per annum and and was extended for a term of 15 years with a grace period of 3.5 years, were on-lent to the Societe Generale de Textiles (SITEX), the largest company in the group, and to SOGITEX to be passed on to three other textile producing plants. This Project Performance Audit Report (PPAR) consists of the Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and the Project Completion Report (PCR) pre- pared by the former Industry Department taking into account completion reports submitted by the executing companies. The PPAM is based on a revi -< of the PCR, the President's and Staff Appraisal Reports, the summary of the Board discussion, the project files, economic and sector reports and inter- views with Bank staff- An OED mission visited Tunisia in June 1987 to interview government officials and senior personnel of the p%rticipating companies, and visited the plant sites. The kind assistance, cooperation and courtesies extended by the authorities is gratefully acknowledged. The PCR provides a satisfactory review of the preparation and implementation of the project and of the main elements of tile restructuring achieved. The PPAM focusses on subsectoral developments which influenced the design of the project and on the characteristics of a successful export-oriented strategy at the product level. It also provides more recent information on plant performance and on progress of subsequent stages of rehabilitation of the group. Borrower's comments are shown in Attachments 2 and 3. PROJECT PERFORMANCE AUDIT BASIC DATA SHEET TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUt) BAS,C DATA SHEET A. KEY PROJECT DATA LOAN STATUS (Amounts in US$ million) As of Jan. 31, 1988 Borrower's Oriainal Disbursed Cancelled Repaid Oblitation Loan 2012-TUN 18.60 18.6c - 4.86 21.55 Ia Cumulative Loan Disbursement FY82 FY83 FY84 FY85 (i) Appraisal 10.7 18.1 18.6 18.6 (ii) Actual 0.5 10.7 14.6 18.6 * (iii) (ii) as Z of (i) 5 59 78 100 B. OTHER PROJECT DATA Original Item Plan Actual First mention in files 03/00/74 Government Application - 02/00/78 Negotiations 04/24181 04/24/81 Board Approval 06102/81 06/02/81 Loan Agreement Date 10/27181 10/27/81 Effectiveness Date 02/25/82 05/07/82 Closing Date 12/31/84 12/31/84 Financial Rate of Return (%) 19.5 17.4 Economic Rate of Return 29.9 20.4 Borrower: Republic of Tunisia Executing Agencies: Sogitex Holding; Sitex; Somotex; Tissmok; and Siter Fiscal Year: January 1 - December 31 /a Including 7.81 exchange adjustment. C. MISSION DATA Month/ No. of No. of Report Item Year Das Persons Date Identification 02/79 4 1 127/79 Preparation 04/80 7 3 04111/80 Preappraisal 05/80 20 3 04/23180 Appraisal 11/80 22 2 05/07/81 Supervision 1 05/81 4 1 06/09/81 Supervision 2 03182 2 1 03/26/82 Supervision 3 04/82 7 2 05/19/82 Supervision 4 09/82 5 2 11/04/82 Supervision 5 05183 7 1 07/05/83 Supervision 6 10/83 7 2 11/07/83 Supervision 7 12/84 17 a/ 2 01/28/85 Supervision 8 03/86 2 1 04/04/86 Completion 06/86 10 a/ 1 08/14/86 a/ Combined with other missions. STAFF-INPUT (staff-weeks) FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 Total Preappraisal 30.5 22.0 52.5 Appraisal 39.9 39.9 Negotiation 11.9 11.9 Supervision .7 14.7 11.8 4.0 2.4 1.6 7.7 42.9 Other .2 .2 Total 30.5 74.5 14.7 11.8 4.2 2.4 1.6 7.7 147.4 - iv - PROJECT PERFORMANCE AUDIT REPORT TUNISIA SOGITEX TEXIILE REHABILITATION PROJECT (LOAN 2012-TUN) EVALUATION SUMMARY General Economic Background i. Tunisia's industrial sector played a major role in the growth of the economy in the 1960s but the policy and institutional frameworks re- sulted in a concentration of growth in capital-intensive, import substitu- tion industrias, largely in the public sector. In the early 1970s, the authorities modified their priorities and undertook to encourage private sector investment in labor-intensive activities with export potential. Intensified economic and sector work by the Bank attempted to identify specific subsectors with export potential and a Bank mission in 1974 recommended, inter alia, investment in textiles, including rehabilitation * of and technical assistance to the government owned enterprise, SOGITEX, which accounted for about half of the subsector's output at the time. The Government deferred consideration of the recommendation pending a ieview of * proposals to restructure SOGITEX and the possibility of privatization (PPAM, paras. 1 - 3). ii. In 1973, the management of SOGITEX discussed a production - marketing arrangement with officials of a large French firm supplying cloth to the EEC. Under this proposal, the largest spinning and weaving mills within the SOGITEX group would be upgraded with financial and technical assistance from the foreign firm and would be converted to produce denim cloth; most of the output would be bought by that firm, at prices linked to US factory prices, for sale in the EEC. The arrangement was implemented in 1974 and by 1976 and 1977 substantial exports of denim cloth were achieved; recession in the European market in 1978 led to a setback. However, offic-tals of SOGITEX and the foreign firm were encouraged by the results achieved and undertook an assessment of additional measures needed to improve the quality and competitive position of their denim output to take better advantage of the expected future revival of external demand. The Governmeat then requested Bank participation in a further rehabilitation project (PPAM, paras. 4 - 6). Sectoral Characteristics iii. The design of the project reflected important technological devel- opments in yarn and cloth production which has had particular impact on the production of denim, the demand for which has experienced masssive growth. -v - On the Lechnology side, the introduction of open-end rotors to replace con- ventional npinning and of wide shuttleless looms has led to higher machine efficiency, reductions in yarn and cloth defects and larger, as well as wider, roJIs of cloth. The magnitude of demand for denim (currently esti- mated at 1.5 billion square yards of cloth per annum in the US arJ western Europe) pori ts substantial economies of scale in production and the market has beon, leghl Conietitive. CluLh produced with the new technologies has special advanrtages for garment manufacturers, even more so for denim users, due in large part to the reduction in defects; in general, cloth produced by traditional equipment Ls discounted in the market (PPAM, paras. 7 - 9). Prpect Scope and Objectives iv. A feasibility study for the rehabilitation of the SOGITEX complex was completed in 1980. At the time, the group had been restructured into a holding company and five operating companies, four of which were engaged in textile production. The denim yarn and cloth mills were organized under SITEX; SITER was organized to operate a finishing plant while SOMOTEX and TISSMOK were establishea to operate partially integrated smaller yarn and cloth mills in two separate locations. A review of the study indicated that solutions to existing problems at the latter three plants would require further consideration of basic issues, with the possibility of delaying clearly defined steps requiring immediate action at SITEX. It was therefore decided to approach the modernization in stages. The first stage would focus principally on the modernization of SITEX, building on the program already in executici with the foreign partner; moreover, suppliers' credits to finance purchase of certain equipment had also been arranged. For the other three plants, some provision would be made for debottleneck- ing and technical assistance would be provided to upgrade marketing and for the preparation of investment proposals for the second phase of the reha- bilitation program; the holding company, SOGITEX, would also receive tech- nical assistance to improve its management information and accounting systems. v. The main objective of the project, representing the first stage of SOGITEX rehabilitation, was the expansion of denim production at SITEX, at the same time improving the quality of output, complementing the measures which had been initiated earlier by the company and the cooperating foreign firm. Bank funds were to De used to purchase additional open-end spinning and ancillary equipment while wide shuttleless looms were to be financed through the suppliets' credit. A critical element was the use of Bank funds to finance the import of raw cotton which had been limited due to the prevail'ng foreign exchange shortage in the country. Because of the large proportion of the funds devoted to SITEX, both the PPAM and the PCR deal ptimarily with developments in that enterprise (PPAM, paras. 10 - 14; PCR, paras. 2.01 - 2.04). Implementation vi. Effectiveness of the loan required some 11 months due to the need to complete legal documents and to obtain parliamentary approval. In the - vi - course of implementation, SITEX management and the cooperating foreign firm became convinced that the emerging trend in market demand for denim re- quired that a higher proportion of planned output would have to be produced by wide shuttleless looms. Consequently, it was proposed to modify the scope of the project, increasing the number of such looms and adding suffi- cient open-end rotors to raise the proportion of yarn output from the new technology to 90% of total; part of this change permitted an innovation in weaving technolgy which was to make SITEX one of the leading denim pro- ducers in the world. The proposal was accepted by the Bank; additional financing was provided from suppliers' credits and a loan and equity con- tribution from a joint Tunisian-Saudi bank (STUSID). The preliminary estimate of the cost of the additional equipment, about US$10 million, as compared to the estimated costs of the original investment requirements in SITEX of US$13 million, indicates that the scope of the modifications were considerable (PPAM, paras. 15 and 16; PCR, para. 3.02 and Annex 2-1). vii. All of the new equipment was operating by 1985, some six month. behind the original appraisal estimate. Given the extent of the modifica- tions introduced, implementation proceeded rather well. Actual project costs (including working capital and technicel assistance) exceeded the appraisal estimate by 29%, US$37.5 million as compared to US$29.1 million. However, if one adds to this the (ex ante) estimated cost of the modifica- tions (for SITEX alone, some US$10.6 million), there was in fact a cost underrun in dollar terms. This largely reflected the appreciation of the dollar and the general buyers' market for capital goods at the time (PPAM, paras. 17 and 18; PCR, paras. 3.05, 3.06, and 3.12, Table 3.2 and Annex 3-3). Initial Operating Results viii. In 1986, the first full year of operation of the new equipment, SITEX's output of yarn had increased by 50% as compared to 1980 while cloth output had risen almost 60%. Cloth exports, 90% of which were wide denim, had also grown sharply, up 70 % as compared with 1981; SITEX is now a major supplier of denim to the EEC market. Machine efficiency on the wide looms reached 80%, close to the 85% level normally achieved in developed coun- tries (PPAM, paras. 19 and 20). Financial and Economic Rates of Return ix. Estimates of financial and economic rates of return for rehab projects require an assessment of the probable outcome without the improve- ments, to be compared with the results expected from the project. In this case, the estimates of benefit flows assumed that SITEX would have been closed down if the investments were not made. The re-estimated FRR is 17.4% while the re-estimated ERR is 20.4%, both results highly satisfac- tory; one immediate reflection of the high level of expected benefit flows is the recording of a substantial profit in 1986. While the re-estimated ERR and FRR are lower than the estimates at appraisal, the*change in scope limits the usefulnes of direct comparisons (PPAM, paras. 21 and 22; PCR, paras. 6.04 and 7.03). - vii - x. Evaluaticn of the economic impact of the project must also take into account the net foreign exchange which is generated by SITEX, particu- larly in view of the fact that its principal input is 1002 imported and some 75% of final output is exported. Based on price relationships pre- vailing in 1986, some 25 to 30% of the sales value of total output repre- sents net foreign exchange earnings, of the order of US$15 to 20 millioa, a favorable result. One must also take into account the indiredt exports arising from foreign sales of domestic garment manufacturers who buy cloth-, from SITEX and the fact that the calculation is net of the exchange ex- penditure for imports required to meet Tunisian domestic consumption which presumably would have been incurred with or without SITEX (PPAM, paras. 23 and 24). Institutional Development xi. A substantial portion of project funds were allocated for techni- cal assistance to the four operating companies and the holding. Actual expenditure exceeded the estimate by 55%, much of the additional funds going to the firms other than SITEX to improve their operations and manage- ment controls. The companies benefited considerably from this assistance (PCR. paras. 4.05 and 4.06). xii. The principal achievement of the project has been the strengthen- ing of SITEX, the Bank's inputs complementing the assistpnce proviued by the cooperating foreign firm. This has involved not only the major reha- bilitation of productive facilities but also the further development of technical capacities which has led to an important innovations in the weaving process and the formation of a strong management team. In line with the Government's policy to disengage from non-strategic economic activities, steps are being taken, with the assistance and participation of IFC to privatize SITEX (PPAM, para. 26; PCR, para. 4.08). xiii. At the end of 1985, IFC and the parent company of the cooperating European firm participated in an increase in the share capital of SITEX, reducing the percentage held by SOGITEX and STUSID. This restructuring took place in the context of a further expansion and modernization program and involved additional financing from IFC, STUSID and suppliers' credit. At the end of 1987, IFC sold part of its shares to the foreigu partner. Consideration is now being given to a further reduction in the share hold- ing of SOGITEX, through sale of additional shares to the foreign partner and a distri-.-tion of some stock to SITEX employees (PPAM, para. 27; PCR, para. 4.08). xiv. Rehabilitation programs prepared with technical assistance funds provided under the project are now being implemented in the cases of SITER and SOMOTEX. In July 1987, approval was given to IFC equity participation in and a long-term loan to SITER linked to equity contribution from a for- eign firm. These funds, along with long-term loans provided by local banks, are to be used to modernize the finishing facilities of the plant which would raise its quality and permit substantial exports. In the case of SOMOTEX, a modernization proposal, which would also raise the quality of -viii - its cloth production to export standards, is under study by IFC and local banks whils foreign participation is being sought. Rehabilitation pro- posals for TISSMOK are under review; because of the age of the equipment, some of which Is obsolete, a r.latively large investment would be required (PPAM, paras. 28 - 30). Overall Assessment and Sustainability xv. The project has fully achieved its major objectives relating to selected rehabilitation of plant and to strengthening the technical and managerial capacities of the participating companies. In the context of the government's policy for disinvestment, the stage has been set for increasing privatization of the enterprises concerned. Given the record of achievement and the further progres in the various follow-up activities, the flows of benefits are likely to be not only sustained but progressively increased (PPAM, para. 31). Lessons Learned xvi. The Bank was able to play a critical role throughout the develop- ment of the project by committing appropriate technical resources and allocating adequate staff time; this confirms that, for operations in the productive sectors where technology and demand conditions are subject to rapid change, the Bank must be forthcoming in providing support (PPAM, para. 32; PCR, para. 8.01). Rapid changes in demand and supply conditions require flexibility in design of projects and close monitoring during implementation. The Bank can play a role in helping financially weak public sector enterprises to undergo technical and managerial improvements and financial restructuring which are required before privatization is attempted (PPAM, para. 33; PCR, para. 8.04). xvii. The emergence of SITEX as an outstanding textile exporter provides important insights into strategies at the product level to achieve that result. Two principal elements are highlighted. The first was the close involvement of the foreign firm marketing the output which would have been extremqly difficult for a Tunisian enterprise to accomplish. The advan- tages to that firm from the arrangement are clear; Tunisia offered consid- erably lower labor costs than other sources with which it was dealing and had preferred access, as well as proximizy, to the EEC market. The SOGITEX officials recognized that this was not a "zero-sum" game and that the ad- vantages to them would also be substantial; thoughout the development of the enterprise tney have demonstrated an open attitude, essentially self- confidence in their ability to absorb the technology and reach the neces- sary levels of productive efficiency, further reflected in the innovation in weaving process for which they are responsible (PPAM, paras. 34 - 39). xviii. The second element is the choice of technology. There was some concern within the Bank regarding the proposal to adopt the newest tech- nologies, it being widely felt that less capital intensive technologies were more appropriate to the resource endowment of the country. However, the project sponsors were convinced that the export market would not accept - ix - denim cloth produced by the traditional processes, or would do so at a substantial price discount sharply reducing the foreign exchange earnings from the project; after a thorough review, the Bank accepted the design. The success demonstrates that, while factor proportions should be con- sidered in the choice of technology, export-oriented activities must be designed to meet the needs of the markets and this may require more the most advanced technologies (PPAM, para. 36). PROJECT PERFORMANCE AUDIT MEMORANDUM TUNISIA SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) I. BACKGROUND A. General Economic Conditions 1. Tunisia's industrial sector was one of the principal sources of growth of the economy during the 1960s, increasing at an annual rate of some 6% as compared to about 4% for GDP. However, the sector's expansion was concentrated in a number of capital intensive, import-substitution industries, mainly public enterprises, with high import content and low employment generation. At the beginning of the 1970s, the authorities modified their priorities and undertook to encourage private sector invest- ment in light industries, with lower capital requirements and with greater opportunities for absorbing labor and for earning foreign exchange. Among the measures adopted were incentives for "off-shore" manufacturing, involv- ing further processing of imported raw materials and intermediates for re- export to EEC mackets providing preferential access for Tunisian products. * 2. Intensified economic and sector work by the Bank focussed at the time on practical measures which would support the emerging new strategy and on the identification of subsectors with further export potential. An * Industrial Sector and Project Identification Mission visited Tunisia in March 1974 and, among other matters, recommended expanded investment in textile manufacturing; given its size and importance, the public sector enterprise SOGITEX, which controlled almost half of both spinning and fabric capacity in the country and accounted for virtually all the existing fabric export, would be a major recipient of both financial and technical assistance within the proposed program. 3. Consideration of the recommendation was deferred by the Government which at the time was undertaking a revision of its policies with respect to public sector enterprises, putting emphasis on expansion of private sector activity and, in particular, on romoting joint ventures between foreign investors and local entrepreneurs. Moreover, a major reorganiza- tion of SOGITEX was being undertaken, a restructuring involving the 1/ In principle, private sector projects had access to financing through the Banque de Developpement Economique de Tunisie (BDET) which was the recipient of a number of Bank loans for relending to medium and small- scale enterprises; in fact, BDET had supported several moderately sized investments in the textile industries by that time but of limited overall impact on the structure of the subsector. - 2 - establishment of separate ccmpanies to reflect the actual distribution of productive facilities with SOGITEX to operate as a holding company.2 Since the enterprise had experienced serious financial losses duting most of its years of operations, consideration was also being given to various possible measures to restructure its finances. I.. In 1978, the Government began to discuss with the Bank the possi- bility of assistence to the restructured SOGITEX and a formal request for financing was submitted in 1979. The decision to seek Bank support at that time appears to have resulted from a number of developments following the completion of the 1974 subsector report. Prior to the restructuring, the management of SOGITEX bad begun to explore means to improve its performance and to eliminate its operating losses. In 1973, it was approached by officials of a large European textile firm (Swift), supplying denim cloth to garment makers in the EEC, who expressed interest in entering, into an operating agreement with SOGITEX. Under this arrangement, SOGITEX would produce denim in its existing facilities, the required yarn at the largest spinning mill within the group and the weaving at the largest weaving plant. Some equipment upgrading and additions would be undertaken, super- vised by Swift which would also provide technical assistance. In turn, output would be sold to Swift, at a price varying in accordance with the US factory price, for export to its customers in the EEC. 5. Implementation of the arrangement was initiated in 1974; from low levels of largely grey cloth exports in the early 1970s, trade in denim with EEC countries reached 8.3 and 9.2 million square meters in 1976 and 1977, respectively, almost half of fabric production of SOGITEX. Moreover, the company provided denim cloth to local garment manufacturers who were exporting ready made items to the same markets. In 1978, however, recession in Europe resulted in a sharp fall in sales. 6. In spite of the setback, SOGITEX management and the foreign participant in the arrangement were encouraged by many aspects of the experience. An assessment was therefore undertaken of measures which would be required to improve production performance, for the purposes of both cutting costs and upgrading quality, so that the enterprise could be in a position to take better advantage of future recovery in external demand. As a first step, it was proposed to modernize the spinning plant, with financing provided by the external partner, Swift; this would involve introduction of the latest technology for yarn production, open-end rotors. At the same time, in addition to further modernization which would be required, the continued deterioration in the company's financial situation made it essential that a fundamental restructuring be undertaken to permit its continued functioning. In these circumstances, with good prospects for 2/ The Bank's 1974 subsector study had recommended a restructuring of SOGITEX but did not go into the matter in detail. -3- expanding foreign exchange earnings and the possibility of developing closer ties with external partners setting a model for other industries, the Tunisian authorities requested the Bank to participate a in broad based rehabilitation project with an export orientation. B. Sectoral Characteristics 7. In reviewing the design of the project which emerged, it is important to take into account a number of characteristics of the world market for denim cloth, as well as technological developments in the 1970s affecting the textile industry. The massive growth in demand for denim, primarily for use in the manufacture of trousers "jeans" worn by both men and women, originated in the United States but has now spread throughout the world. The magnitude of the quantities required3 and the simple con- struction of the cloth have permitted unprecedented economies of scale in production in an industry which in the developed countries had previously been characterized by substantial efforts at product differentiation by manufacturers in an effort to capture and/or maintain market shares; large plants could now be built specifically for the purpose of producing denim, ignoring the need for diversification. As a consequence, the market for denim cloth is intensely competitive, with extremely low profit margins and sales success highly dependent on meeting strict delivery schedules and quality standards imposed by garment manufacturers. While world demand for this item has experienced considerable cyclical variation since the mid- . 1970s, it nevertheless remains at high levels and recently experienced a resurgence following an innovation in cloth treatment ("stone-washing'). The main concern within the industry is the rapid increase in supply and * the threat of over-expansion of production facilities. 8. As regards textile technology, the development of open-end rotors for yarn production has substituted an essentially continuous process for the batch-process approach of traditional spindles, where coarse cotton is gradually. reduced to the desired width through several stages of "spinning". This has led not only to higher machine efficciency (per unit of capital) but also to a sharp reduction in yarn defects, eliminating their main source, and to the possibility of long uninterrupted spools of yarn. The introduction of shuttleless looms, capable of operating at extremely high speeds, has similarly increased machine efficiency and has permitted longer rolls of cloth (particularly when based on yarns from open-end rotors), while at the same time sharply reducing the number of fabric faults in a given area of cloth.4 In addition, the technology has encouraged the development of wider looms. 3/ To provide some indication of the orders of magnitude of demand, it is estimated that annual consumption of denim in the United States is in erness of 900 million square meters and in the European Community close to 600 million square meters; A/ According to industry sources, fabric from shuttleless looms contain as little as one-third the number of faults found in cloth produced by traditional shuttle looms. -4- 9. Aside from the opportunity to get inputs at lower prices, the advantages to a garment manufacturer in using cloth produced by the new technologies are manyfold. In the first place, there is the reduction in cloth defects which substantially reduces waste; even if the cloth manufac- turer has provided some system for reimbursement for defective materials, there are indirect costs arising from the interruptions in production caused by such problems.5 Moreover, the wider cloth on longer rolls also lends itself to reduction in waste as pattern cuttings can be better planned (particularly with the new computerized techniques now available for those operations) to ensure optimum 'e of fabric. Finally, in the particular case of the blue denim, the longer and wider rolls of cloth permit substantially larger batches for dying; this ensures that the supply of simultaneously dyed cloth will be of a magnitude large enough to avoid problems in color matching after cutting the cloth into garment pieces. II. PROJECT IMPLEMENTATION EXPERIENCE A. Project Preparation 10. The main elements of the project implementation experience are well pregiented in the PCR. Some of the principal aspects are briefly sum- marized in this PPAM because of their relevance to the important lessons learned. After receiving indications from the Government of its interest in Bank support for the project, the Bank recommended, and the Government agreed to, the preparation of a detailed feasability study for the reha- bilitation and modernization of the SOGITEX facilities which by that time had been reorganized into a group of operating companies and the holding. The group included the large spinning and weaving plants which comprised the basic production units for the denim operation (organized as SITEX); a finishing plant (SITER); and smaller spinning and weaving facilities in two separate locations (SOMOTEX and TISSMOK). The reorganization had also in- cluded a financial restructuring plan involving the injection of additional equity capital from the Government. 11. Funds for the feasability study were made available by UNIDO. The Bank actively monitored the development of the work, during the course of which it identified various gaps where additional information was required in order to complete the analysis and to improve the project. In elaborat- ing the recommendations emerging from the study, it appeared that the solution of existing problems at SITER, SOMOTEX and TISSMOK would require further consideration of basic issues, with the possibility of delaying clearly defined steps requiring immediate action at SITEX. It was there- fore decided to approach the modernization program in stages; the first 5/ Industry sources also note that large importers of cloth, not only denim but particularly grey cloth, are limiting their purchases of these fabrics to materials produced on shuttleless looms; fabrics from conventional shuttle looms are sold only at large price discounts; see below, para. 15. -5- stage would focus principally on SITEX, building on the program already in execution with the participation of Swift, with emphasis in the other plants on the preparation of future investment plans (PCR, paras. 2.01 - 2.03). The PCR and this PPAM focus on the experience with SITEX which accounted for some two-thirds of planned expenditure under the project, about 80% of the portion allocated for equipment purchases; where appro- priate, reference is made to project activities in support of the other companies n the group as well as of the holding. 12. The project, incorporating the first phase of SOGITEX's rehabili- tation, was approved by the Board on June 2, 1981, for t%e amount of US$18.6 million. It was signed on October 27, 1981 and became effective on May 7, 1982. The delays largely reflected the need to complete various legal arrangements within Tunisia and the need to obtain parliamentary approval. B. Project Scope and Objectives 13. The objectives of the investments to be made at SITEX were to expand and to improve the quality of its production of denim cloth, comple- menting th improvements which had been initiated in 1980 (see para. 6, above). This involved installation of additional open-end rotors and auxiliary and preparatory equipment at the yarn mill; at the weaving mill, the main sletent was the installation of new wide shuttleless looms with the necessary preparation facilities. The looms would be financed under a bilateral Swiss suppliers' credit while Bank funds were to be used to pur- chase the other elements. Because of the availability of the former, a substantial portion of the Bank funds could be used for working capital, permitting the importation of raw cotton which had been adversely affected by the prevailing import regime reflecting the difficult foreign exchange position of Tunisia. Finally, technical assistance funds were made avail- able, to assist in implementation of the project, generally in support of the assistance being given by Swift under the operating agreement (PCR, para. 2.04). 14. For the other three plants, provision was made for essential de- bottlenecking and rehabilitation, leaving for future consideration more thorough modernization programs. Technical assistanci funds for strength- ening marketing capability and assessing market potentials and for the preparation of investment proposals for the second stage of the project were also provided. In addition, technical assistance funds were allocated to strengthen SOGITEX through upgrading its accounting and managing systems to permit it to function properly as a holding company; under the reorgani- zation, it would be responsible for overall planning, coordination and development (SAR, para. 3.05). C. Implementation 15. In the course of implementing the project, the scope of the improvements to be undertaken in SITEX was considerably expanded. Re- viewing the rapid changes which were occurring in tne world market for -6- denim, SITEX management and Swift officials became convinced that the users of denim cloth, i.e. garment manufacturers, were becoming highly selective in their purchases of that cloth due to the technological advances which were being introduced in spinning and weaving; because of the advantages in using inputs from wide looms, it could be expected that there would be a sharp increase in demand for those materials and cloth from conventional narrow looms could only compete through substantial price discounts. It was therefore decided, in consultation with the Bank, to increase the number of new wide shuttleless looms to be installed which would in turn require additional open-end rotors as well as preparatory and auxiliary equipment. The increase in use of open-end rotors, to raise the proportion of yarn output from the newer technolgy to over 90% of total as compared to one-third expected under the original plan, was also designed to permit an innovation in weaving which has made SITEX one of the leading denim pro- ducers in the world (PCR, para. 3.02). 16. The value of the additional investment required for SITEX was estimated at almost US$10 million, as compared to the estimated US$13 million for the capital costs included in the original project (see PCR, Annex 2-1). While it is not possible to quantify the increase in scope due to the differences in the equipment mixes and the qualitative improvements introduced, it is clear that it was significant. Additional financial resources were provided through an increase in the Swiss suppliers' credit and through a line of credit and an equity contribution from a joint Tunisian-Saudi Bank (STUSID). 17. Given the nature of a rehabilitation project, it is difficult to define either start-up or completion date. The bulk of the new equipment for SITEX was installed and operating about seven months after the date expected in the appraisal report, reflecting mainly the delay in loan effectiveness. In general, the new machinery was commissioned as soon as installed (see PCR, paras. 3.05 and 3.06). Given the change in scope, it is apparent that implementation proceeded extremely well. 18. Actual project costs (including working capital and technical assistance but excluding interest during construction) were 29% greater than estimated in appraisal, US$37.5 million as compared to US$29.1 million (PCR, para. 3.12, Table 3.2, and Annex 3-3). However, if one adds the estimated (ex ante) cost of the expansion in scope, for SITEX alone amount- ing to US$10.6 million, there was in fact a cost underrun in dollar terms. This largely reflected prices for equipment lower than expected, due to the appreciation of the dollar and the general buyers' marke' for capital goods which prevailed at the time. D. Initial Operating Results 19. The first wide looms financed by the Swiss credit and the first open-end spinning equipment mainly financed by the Bank were installed in 1982; by 1985 all the new units under the project were operating. Table 1 provides data on the structure of output of both yarn and cloth from 1980 - 7 - through 1986, indicating the growth in production from the different elements of SITEX's equipment park. Loom operating efficiency reached 80% in 1986 and that rate was maintained in the early months of 1987. Further improvements in preparation and auxiliary equipment are being introduced so that the efficiency level can be improved, comparable to that achieved in developed countries with more experience in the new technology.6 20. Table 2 presents data on export performance. In volume terms, denim exports have risen sharply and in 1986 were some 50% higher than in 1980. As expected, exports of narrow loom denim have been sharply cur- tailed with the shift to the production of wide loom cloth. Over 90% of output of the latter is now exported. SITEX has now become a major supplier of quality denim cloth to the EEC market. E. Financial and Economic Rates of Return 21. Estimates of the financial and economic rates of return (FRR and ERR) for rehab projects involve assessments of the probable outcome without the project to be compared with the results of the project. Both at appraisal and at completion, estimates of these benefit flows7 were based on the assumption that it would have been necessary to close SITEX down if no project were forthcoming. That judgement took into account the prior history of operating losses, the poor operating condition of the equipment and the inability to compete in the rapidly changing international market unless changes were introduced (SAR, para. 7.12; PCR, para. 6.04). 22. The reestimated FRR at completion is 17.4% as compared to 19.5% at appraisal; the re-estimated ERR is 20.4% as compared tc 29.4% (PCR, paras. 6.04 and 7.03). However, comparisons of appraisal estimates with those prepared at completion are of limited meaning due to the substantial change in scope of the project which uas introduced during implementation (see above, para. 15). Nevertheless, the reestimated values remain at relative- ly high levels and it is clear that, as regards the level of expected future benefit flows, the project has been an outstanding success. 23. In evaluating the economic impact of the SITEX project, one must also consider the generation of foreign exchange, given that 100% of the cotton input requirements is imported while some 75% of output is exported. Based on the results for 1986, the first year of full utilization of the new facilities provided under the project, the estimate of SITEX's net foreign exchange earnings is relatively favorable. In that year, its exports reached US$40 million, 85% of which was wide denim cloth; total 6/ Some of these improvements are being financed with funds provided through an IFC project approved at the end of 1985 which involved the initiation of a privatization program for SITEX; this is discussed below. 7/ As noted earlier, since the bulk of the physical improvements were undertaken for SITEX, these estimates have been undertaken only for that company. -8- output was valued at US$57 million. Total raw cotton imports (i.e., includ- ing inputs for goods produced for the domestic market) were valued at US$16 million, representing some 302 of total sales value.8 24. Thus, taking into account foreign exchange outflows for debt servicing, spare parts and dividends paid to the external partners, net earnings are estimated in the range of US$15 to 20 million; moreover, that calculation is net of the foreign exchange expenditure for inputs required for products sold in the domestic market which would have been incurred with or without the presence of SITEX.9 While input costs relative to output values have risen recently, net earnings have been reduced but remain at significant levels. III. INSTITUTIONAL DEVELOPMENT 25. Shortly before project approval, the major reorganization of SOGITEX was completed with the est&blishment of separate operating companies, four controlling cloth manufacturing and one for garment manufacturing, and the holding. Technical assistance funds within the project were allocated to each of the four companies producing textiles to improve various aspects of accounting, marketing and production perfor- mance, with emphasis on information flow. Moreover, consultants were employed to prepare the second phase investment program in order to carry out the complete rehabilitation of the group. As examined in the PCR (Table 3.2 and paras. 4.03 - 4.05), actual expenditure on assistance was some 55% over the appraisal estimate, with the bulk of the additional funds devoted to the three operating textile companies other than SITEX and to the holding. In general, the companies have greatly benefitted from the external assistance provided them (PCR, paras. 4.04 and 4.05). 26. The principal achievement of the project has been the strengthen- ing of SITEX, complementing the technical assistance provided by the external partner. In danger of being closed down due to serious losses, the company has been turned into a leading manufacturer and exporter of denim cloth, responsible for important innovations in the weaving process 8/ However, it must be noted that 1986 was a year of exceptionally low raw cotton prices, some 25% below the levels in 1985 and 55% below those prevailing in 1987; on the other hand, the unit values for wide denim cloth exports, in both dinars and dollars, increased slightly in 1986 as compared to 1985. 9/ In this connection it should be noted that some of the denim supplied to the local market is used to produce garments which are exported to the EEC; such indirect exports increase the overall contribution of SITEX to net foreign exchange earnings. Moreover, in the future, local garment manufacturers are expected to expand their export sales with further long term beneficial effects on Tunisia's employment and payments balance. - 9 - (see para. 15), and with a strong management team. In line with the Government's policy for increasing privatization of the large public sector enterprises, to disengage from all non-strategic economic activities, steps are now being taken, with the assistance and participation of IFC, to sell shares in the company to private investors. 27. In the first phase, in connection with a further expansion and modernization program initiated at the end of 1985, the share capital of the company was increased by slightly more than 50%, with equity contribu- tions from IFC and from the parent company of Swift, a large Canadian textile firm. As a consequence, the share holdings of SOGITEX and STUSID were reduced. Further financing required for the program, involving the purchase of additional wide looms and associated equipment, was provided through long term loans from IFC and STUSID and Swiss export euppliers' credits. In 1987 IFC sold part of its holdings to the Canadian firm (PCR, para 4.08). Consideration is now being given to further changes in the structure of shareholding, with the Canadian partner buying additional shares from SOGITEX which would also distribute a small portion of its remaining shares to employees. 28. The project also led to a major restructuring proposal for SITER which undextakes textile finishing operations for the group. In June 1985, IFC's board approved an equity contribution and loan to finance a moderni- zation project which would similarly have involved equity participation by a foreign private textile firm; the firm later withdrew from the arrange- ment and, after consultation with the Government, IFC cancelled its commit- ment. Subsequently, a new foreign partner, a major French textile company, became interested in investing in the venture. In July 1987, IFC's par- ticipation in a revised project was approved, involving an equity contribu- tion, a long term loan and a GRIP arrangement with the foreign partner.10 Also participating in the new project are two local private commercial banks and two government owned development banks (PCR, para. 4.09). 29. Restructuring and modernizing a third company in tiie group, SOMOTEX, is now under consideration. Under the existing project, the com- pany had upgraded its yarn production through the acquisition of some open- end spinning equipment. At the same time, shuttleless looms were provided under a Belgian suppliers' credit. As currently formulated, the proposal calls for a modern integrated spinning-weaving mill producing a wide range of basic textiles (e.g. sheeting and cloth for work clothing) for both the local and export markets. Local banks have agreed to participate and the company is now discussing possible IFC participation, as well as partici- pation by a foreign firm which would assist in external marketing. 10/ The GRIP arrangement (guaranteed recovery of investment principal) was recently initiated by IFC as a means of encouraging foreign private investment. - 10 - 30. A restructuring proposal has also been prepared for TISSMOK which currently has both spinning and weaving facilities and produces mainly for the local market. Under the Bank project, some improvement was made in auxiliary equipment for spinning while new looms were provided under a Belgian suppliers' credit. However, much of the machinery in the plant is old and obsolete so that a full modernization program would involve a relatively large investment. The proposal is being examined by various financial institutions. IV. OVERALL ASSESSMENT AND SUSTAINABILITY 31. The project has fully achieved its major objectives relating to selected physical rehabilitation of plant and to strengthening the techni- cal and managerial capacities of the participating companies. Enterprises which were in danger of being closed down have been revitalized and impor- tant contributions are being made to maintaining employment and to expand- ing foreign exchange earnings. Further advances in rehabilitating plant, which would constitute a second phase investmerc program, are now being undertaken in conformity with government policy in the context of privati- zation programs. Given the record of achievement under the project and the further progress being made in the various follow-up activities, the flows of benefits are likely to be not only sustained but progressively increased. V. LESSONS LEARNED 32. There are a number of significant lessons to be learned from this project experience relating both to the design and implementation of Bank operations and to the development of export-oriented industries in newly industrializing countries. These may be broadly classified under three headings: rehabilitation of productive enterprises; privatization of public sector enterprises; and the design of export-oriented strategies. The Bank was able co play a critical role throughout the d.velopment of the project through the project cycle; as noted in the PCR (paras. 8.01 - 8.04), it committed appropriate technical resources and allocated adequate .taff time, essential to permit it to perform its catalytic function. For operations in the productive sectors where both technology of production and market conditions can be expected to be subject to rapid changes, the Bank must be forthcoming in allocating staff resources to provide proper support at all stages. 33. As regards rehabilitation of productive enterprises and the priva- tization of public sector enterprises, the lessons are well stated in the PCR, particularly para. 8.04. In summary, rapid changes in productive sectors as regards both supply and demand conditions require flexibility in project design and, in particular, close monitoring during implementation; the Bank can play a role in helping financially weak public enterprises to undergo the substantial technical and managerial improvements and financial restructuring which are necessary before privatization is attempted. - 11 - 34. The successful emergence of SITEX as an export-oriented firm, its development as an outstanding denim cloth producer, illustrates a number of critical elements in elaborating an export development strategy which may be of interest to other developing countries. Of particular importance is the open attitude which SITEX management demonstrated in the early 1970s when it became clear that the financial difficulties and the constraints of the local market required a radical modification in production objectives. As noted in the PCR, senior personnel of the entire SOGITEX group have excellent technical backgrounds, most of them having studied in the leading textile technical universities in France or Belgium; at the same time, however, their opportunities to develop managerial and marketing skills had been limited. In these circumstances, when the European firm approached them with the proposal to shift their production facilities to a new line, with its technical, marketing and financial assistance, the group's manage- ment readily accepted the offer. 35. The advantages to the European firm were obvious. Tunisian products had access to the EEC which was its main market and wage costs in Tunisia were substantially lower than in the countries which were at the time the principal suppliers of its goods. On their part, SOGITEX offi- cials recognized that this was not a "zero-sum" game and that the benefits they could obtain from the arrangement also were substantial. This open- ness, essentially self-confidence in their ability to learn while doing, charac4erized the entire relationship with the foreign partner, as well as with tne Bank, during this period and is reflected in the innovative weav- ing technique developed during implementation, under the guidance of both the foreign partner and one of its largest customers. 36. This experience suggests other important lessons in considering the rehabilitation of financially troubled public s6ctor enterprises. It is essential to examine the conditions which have led to -hose situations, identifying the elements which in proper economic environments would permit the enterprises to achieve success. Foremost would be the caliber of existing management, in particular the potential for growth as demonstrated in the ability to analyze their problems. Without the appropriate human resources, restructuring proposals are likely to fail. In addition, the current plan for SOGITEX to distribute some of its SITEX shares to employ- ees appears to offer a number of advantages in accomplishing privatization, particularly in those case where local capital markets may have limited absorptive capacity, and merits consideration in other cases. 37. The original proposal to utilize the newest technologies for both spinning and weaving was subject to considerable discussion within the Bank where it was widely felt that less capital intensive technologies were more appropriate to the resource endowment of developing countries such as Tunisia. On the other hand, the Tunisian sponsor and the foreign partner were convinced that export markets were rapidly changing and that only cloth of the quality provided by the new technologies would be acceptable; with the Swiss suppliers' crediL, they were prepared to move quickly to - 12 - obtain appropriate shuttleless looms. After thorough review of the pro- ceases, the Bank agreed to the proposed project design. The outstanding success of this project demonstrates that, while facto- proportions should be considered in the choice of technology, export-oriented activities must be designed to meet the needs of those markets in order to capture full benefits from these sales add they may therefore require the most advanced technology. Denim cloth from more traditional processes (less capital intensive) are having increasing difficulties in attracting buyers and, at the least, would require substantial price discounts, considerably reducing net foreign exchange earnings. 38. There were, in addition, some doubts about the net advantages to Tunisia of an export-oriented textile industry based on 100% imported inputs. An internal Bank review of the future of the textile industry in developIng countries had suggested that large scale exports from those countries would most likely require a substantial domestic market to provide the basis for scale economies and the development of necessary skills. In this instance, the prior experience of SOGITEX as a domestic- market oriented enterprise was the basis for the accumulation of production skills while the involvement of a foreign marketing partner assured quick access to external markets. ATTACHMENT 1 - 13 - Table l SITEX - Yarn and Cloth Production, 1980-1986 ITEM 1980 1981 1982 1983 1984 195 1986 Yarn (th. tons) Conventional n.a. 5.67 5.37 3.98 2.72 2.17 0.69 Open-end n.a. 3.19 3.97 6.08 6.77 9.99 11.6 Total 8.16 8.85 9.34 10.06 9.49 12.16 12.29 Fabric (mil. sq. m.) Denim, narrow 16.73 15.04 9.06 6.1 1.46 3.52 2.38 Denim, wide 0 1.19 7.52 11.97 13.06 16.89 22.09 Other cloths 0.93 1.24 4.06 4.6 8.47 5.07 3.3 Total 17.66 17.47 20.64 22.67 22.99 25.48 27.78 Source: SITEX Table 2& SITEX - Export Sales. 1981-1986 (million sq. meters) ITEM 1981 1982 1983 1984 198 12 Denim, nar.ow 12.71 6.86 3.21 0.15 1.46 1.42 Denim, wide 0.73 6.81 9.98 10.63 16.06 20.14 Other fabrics 0.81 2.01 1.99 2.03 2.09 2.42 Total 14.35 15t68 15.18 12.81 19.61 23.98 Note: Data from SITEX in linear meters converted to square meters based on conversion factors from production data. ATTACHMENT 2 - 14 - COMMENTS RECEIVED FROM TISSMOK WORLD BANK MSS ZCZC OERPO205 WUI901 OEDD2 REF: TCP TF * ***** * ** * OEDD2 * TRANSLATION FROM FRENCH WUI901 30753 SOGIM TN LE 14.6.88 ATN. MR. A. NOWICKI THANK YOU FOR YOUR LETTER OF MAY 17, 1988, CONCERNING THE SOGITEX TEXTILES REHABILITATION PROJECT. ALTHOUGH I HAVE NO COMMENTS, HAY I SUGGEST YOU ATTACH TO THE DOCUMENT IN QUESTION THE FINAL RECOMMENDATIONS OF THE SGT TECHNICAL ASSISTANCE BUREAU. BEST REGARDS, M. NOUREDDINE DIHASSI PRESIDENT-DIRECTEUR GENERAL TISSMOK NOTE: THE RECOMMENDATIONS OF THE BUREAU OF TECHNICAL ASSISTANCE SGT REFERRED TO IN THE TELEX DEAL WITH THE QUESTION OF THE REHABILITATION OF TISSMOK AND WERE NOT AN ISSUE FOR THE AUDIT. 30753 SOGIM TN 194757 1000 140688 01710171 901 -06140723 NNNN ATTACHMENT 3 -15 - COMMENTS RECEIVED FROM SITEX WORLDBANK MSS ZCZC OERPO209 JWS0354 OEDD2 REF: TCP TF * OEDD2 * TRANSLATION FROM FRENCH JWS0354 JGK889 IN 15/10:41 OUT 15/10:45 30763 SITE TN TELEX NR 517 DU 15.6.88 ATT: MR. ALEXANDER NOWICKI WE HAVE RECEIVED YOUR DRAFT PROJECT PERFORMANCE AUDIT REPORT FOR THE TEXTILE REHABILITATION PROJECT (SOGITEX LOAN 2012-TUN) AND WE THANK YOU. WE HAVE NO COMMENTS ON THE REPORT. GREETINGS A. GHODBANE FINANCIAL DIRECTOR SITEX SOUSSE V?99 5, 30763 SITEX TN -06151200 - 17 - PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) June 17, 1987 Industry Department - 19 - PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) I. INTRODUCTION 1.01 Since the 1970s, the Tunisian textile industry has been the second largest industrial subsector in its contribution to GDP and the first in employment and exports. In recent years, the industry accounted for 3.5% of GDP, 11% of manufacturing output and 13.3% of manufacturing employment. Textile exports have grown rapidly in the last decade and now account for about 20% of the country's export earnings. The SOGITEX Group comprises a holding company (the Holding), four operating textile companies, and a small garment plant (SOPIC). The operating textile companies are SITEX and the STS companies (SOMOTEX, TISSMOK and SITER). The SOGITEX Group operates the country's largest textile plants with about two thirds of the spinning and more than half of the weaving capacity in Tunisia. The Government of Tunisia (the Government) has 100% ownership in the Holding, which, in turn, controlled the operating companies. During and following the project, the share of the Holding in the companies was . reduced (para 4.08). In addition to the export-oriented "offshore" enterprises which operate largely outside the Tunisian tax and customs regime under law 72-38, the private textile sector comprised in 1985 about * 90 modern enterprises, of which 12 accounted for some 20% of fabric production and the rest were small weaving and knitwear establishments. The informal sector consumes about 10% of the yarn supply (mainly for knitwear) but is estimated to employ about 60% of total employment in the industry. 1.02 The Government requested Bank assistance for the rehabilitation and modernization of the textile mill of SITEX, for debottlenecking and purchase of spare parts for the STS companies, and for technical assistance for the above companies as well as for the Holding. The project was part of an effort to improve the country's exports and it was the first direct Bank involvement in the textile industry in Tunisia. 1.03 The Project was prepared with assistance from the Bank and UNDP and implemented by the textile companies of the SOGITEX Group with the assistance of international consultants. II. PROJECT BACKGROUND A. Project Preparation, Appraisal and Loan Approval 2.01 The Tunisian textile industry was studied by Bank missions in 1976-78 and the possibility of improving the performance of the SOGITEX Group (the country's largest textile producer) was discussed with the Government and SOGITEX on those occasions. A UNDP-financed feasibility - 20 - study for the modernization and rehabilitation of the SOGITEX Group was prepared in 1979/80 by a UK consulting firm [P-E International Operations Ltd.]. In February 1980 the Industry Department I/ determined that the study did not provide a sufficient basis for the proposed project and a preappraisal mission that visited Tunisia in May/June 1980 recommended, in coordination with the Government and the SOGITEX Group, a modified project scope which included the rehabilitation and modernization involving all operating textile companies of the SOGITEX Group. 2.02 Subsequently, data submitted by SITER 2/ and SOMOTEX in preparation of the revised project scope raised serious questions, the resolution of which would have considerably delayed project consideration by the Bank. Furthermore, the carrying out of the full project in all three companies as proposed could have overtaxed the implementation organization of the Group and could have impaired the success of the rehabilitation of the largest company in the Group - SITEX. Consequently, the appraisal mission which visited Tunisia in November 1980 recommended to phase the SOGITEX Group's full rehabilitation and modernization program. The Government and the SOGITEX companies were in agreement with this proposal. 2.03 The appraisal mission therefore evaluated the first phase of the full program (the project) and the corresponding Staff Appraisal Report was issued on May 7, 1981. On June 2, 1981, the Bank approved a Loan to the Government of US$18.6 million with a fixed interest rate of 9.6% p.a. to be repaid in 15 years, including 3-1/2 years of grace. The Loan Agreement was signed on October 27, 1981, and became effective on May 7, 1982, more than 11 months after Board approval. The delay in loan effectiveness was mainly due to the legal steps needed in Tunisia for the ratification of the loan (including Parliamentary approval through the passing of a law). The proceeds of the Loan were onlent by the Government to SITEX (US$14.4 million) and to the Holding'(US$4.2 million) at an interest rate of 10.6% p.a. and over a period similar to that of the Bank loan. The Holding in turn passed on most of the loan proceeds to the STS companies and retained a small part for technical assistance. B. Project Objectives and Descriptiod 2.04 The project's main objectives were to upgrade SITEX's production facilities with a view to enhancing the company's competitiveness in the export markets, and to prepare the ground for the full rehabilitation of the STS companies. The project scope as originally planned at the time of appraisal is summarized as follows: (a) Investments in SITEX. Reconditioning and modernizing the SITEX facilities to improve the production of denim,3/ mainly for 1/ At the time of appraisal, the Industry Department was called the Industrial Projects Department, 2/ Prior to 1981, SITER owned and operated the TISSMOK plant also. T/ Sturdy cotton fabric largely used for making jeans. - 21 - export, including: (i) reconditioning of the spinning mill located in Sousse (to complement a US$4.8 million investment already completed at the time of appraisal and comprising the expansion of yarn preparation equipment, replacement of drawing machines and installation of new open-end spinning machines); and (ii) upgrading the existing weaving equipment at the plant in Ksar Hellal by installing 60 extra-wide shuttlelers looms to produce wide denim, and renovating and expanding weaving preparation, finishinag and auxiliary services to bring production of finished fabrics from 17.5 million square meters (2) in 1980 to 26 million i2 upon project completion. I (b) Investments in the STS companies. Balancing existing production facilities and overhauling some of the equipment, including: (i) modernization and rehabilitation of SITER by renovating the scouring/bleaching, washing and dyeing equipment, upgrading the capacity and quality performance of the mercerizing and stentering machines, adding a new rotary printing machine, and acquiring spare parts; (ii) renovation of spinning equipment, reconditioning of existing looms and provision of auxiliary weaving equipment in SOMOTEX and (iii) acquisition of auxiliary equipment and reconditioning of existing weaving equipment in TISSMOK. (c) Technical Assistance. This component of the Project comprised consulting services required to: (i) upgrade the management and accounting systems of the companies of the SOGITEX group; (ii) assist SITE in the implementation of the project; (iii) assess the markt potential for the STS companies and strengthen their marketing capabilities; and (iv) assist in the preparation of future investment plans for the STS companies. III. PROJECT IMPLEMENTATION AND MANAGEMENT A. Achievement of Project Objectives 3.01 The project's objectives have, on the whole, been achieved. The physical investments in the operating companies have been substantially realized. SITEX has become a competitive denim producer and exporter; in 1985, its production of denim reached 20.4 million m2 and that of other fabrics, 5.1 million a2, for a total of 25.5 million a2 compared to an appraisal estimate of 26.3 million i2.4f In the case of SITEX, desired improvements in the organization and management of operations and finances have been made as a result of the technical assistance program, while results of the program in the STS companies have been mixed. 4/ Actual production, however, was realized with a revised project scope as discussed in para 3.02. - 22 - B. Project Scope Changes 3.02 During project implementation. SITEX and the consultants, aware of the rapidly dropping demand for narrow width denim, studied the necessity of making some modifications in the project scope. As a result, SITEX proposed the acquisition of additional wide shuttleless looms to increase its share of wide fabrics and of open-end spinning frames which allowed the innovative use of open-end spun yarn both for warp and weft in the weaving of denim fabrics. These modifications were extensively discussed with, and approved by, the Bank. The main changes in the physical scope of the project are as follows: (a) For SITEX. A supplemental program, undertaken in consultation with the Bank and estimated to cost US$10.6 million, included the acquisition of 2 open-end spinning frames, 55 wide shuttleless looms, indigo dyeing equipment, civil works and computing equipment. To a large extent this program was financed by a Swiss credits and the joint Tuniso-Saudi development bank STUSID (para 3.14). The open-end spinning rotors and wide looms were required to meet the demand for exports (para 5.04). The new indigo dying range financed by the Bank loan, surplemented the existing range leased from Swift to improve denim quality and give more flexibility in production planning. The civil works comprised a warehouse for finished products, two depots for cotton bales, a building for the dyeing department at Ksar-Hellal, laboratories, and air conditioning and administrative buildings at Sousse. On the other hand, a sanforizing machine included in the original program was not purchased because it was found that the existing equipment could be reconditioned. Details of project scope changes for SITEX are given in Annex 2-1. (b) For SOMOTEX. Three open-end spinning frames and computing equipment were added to the original list and several smaller changes were made; the open-end spinning frames were purchased instead of revamping of the existing spinning equipment.5/ (c) For TISSMOK and SITER. Only minor adjustments were made in the project scope.6/ C. Project Management 3.03 The overall management of the SITEX component of the project was the responsibility of a team headed by SITEX's President and General 5/ Forty-nine [Picdnol] looms were purchased outside the scope of the project to replace 74 old [Dieterich] looms. This acquisition was financed by a Belgian credit. 6/ In the case of TISSMOK, outside the project, forty-three new looms were financed by a Belgian credit to replace 78 obsolete [Dieterich] looms of 1950 vintage. - 23 - Manager, and including the Director of Engineering and the Director of Finances, Accounting and Data Processing. Given the relatively significant size of the investment to be carried out by the company, consultants were appointed in consultation with the Bank, to assist in: (i) the preparation of detailed project design, including equipment specifications, the preparation of tender documents and evaluation of bids; (ii) the inspection of equipment and start-up operations; (iii) and the development of project monitoring and control systems. During project implementation, SITEX successfully undertook most of the functions descriled above and consequently the need for consulting services for this purpose was considerably reduced. 3.04 Because of the prior experience of the STS companies and the technical and development department of the Holding in managing the Gr1up's investments, the Bank agreed that no expatriate consulting services were needed for t-ndering and bid evaluation of the relatively small investment programs of SOMOTEX, TISSMOK and SITER. On the other hand, it was found that these companies needed substantial improvements in their organization and in operational and financial management functions. For this purpose, a large part of the technical assistance program described bel.w (para 4.02) was dedicated to this task. D. Implementation Schedule 3.05 The originally estimated and actual Project implementation schedules for the SITEX component are shown in Annex 3-1 and summarized below. iz.le 3.1 SITEX - E 4-iated and Actual Implementation Schedule Appraisal Estimate Actual a/ Delays -- (month/year) - (months) Orders for Equipment 05/82 04/83 11 Delivery of Equipment 01/83 10/83 9 Completion of Equipment Erection 02/83 02/84 12 Start-up of Equipment 08/83 03/84 7 a/ Based on main spinning and weaving equiprtent. 3.06 The first group of Swiss-financed equipme-it (para 3.14) was ordered before the approval of the Bank loan and had been installed by February 1982. The orders for Bank-financed equipment were, in the case of the major spinning and weaving equipment, placed with a delay of about 11 months and completion of erection of this equipment was about 12 months behiid schs;dule. Because of the availability of an indigo range leased from Swift, SITEX delayed the ordqr for the new range, which was not part of the original project scope (para 3.02), until January 1984, and its - 24 - erection was completed in May 1984. The main reason for the delay in Project implementation was the long time (11 months) between Board approval and effectiveness of the Bank loan (para 2.03). Some of the lag was recovered in the following steps and it is estimated that overall project completion was delayed by about half a year. Given the rehabilita,ion nature of the project, most equipment was commissioned as soon as it %as installed and start-up of operations extended over several years (para 5.01). E. Procurement and Performance of Suppliers 3.07 The Swiss credit was tied and the equipment financed by it was procured from Swiss suppliers. Bank guidelines on procurement were followed for Bank-financed goods and services: equipment items costing more than US$100,000 each were acquired through ICB and items costing less than US$100,000 as well as cotton (incremental working capital) were procured through international shopping. Proprietary equipment and spares, as well as items for which standardization with existing equipment was required, were purchased directly from suppliers approved by the Bank. Consultant selection and contracting also followed Bank guidelines (para 4.06). 3.08 The equipment suppliers generally performed satisfactorily. One exception was the bale press which hydraulic system did not work and forced SITEX to reorder from another supplier. In another case, new bids were called for an electric generator because the validity of the bid price had expired and, as a result, the supplier's prices had been modified substantially. Other minor difficulties were encountered but they were overcome without problems and have not affected project Implementation. The performance of the consultants is discussed in para 4.07. 3.09 The countries of origin of Bank-financed goods and services are shown in Annex 3-2. The main suppliers of equipment financed by the Bank loan were, in the case of SITEX, the YRG, the USA, and France, while cotton was purchased from Syria, Mali, Turkey and Burkina Faso (formerly Upper Volta). Equipment and spares for the STS companies were procured mainly from the FRG, France and the Netherlands. The main source of technical assistance for the project was Canada. F. Environmental Aspects 3.10 Overall plant and equipment specifications were designed to ensure that the discharge of solid, liquid and gaseous wastes would not exceed internationally acceptable limits. The improvements made by the project on the air conditioning systems of the weaving halls have provided for an effective control of dust and fiber emissions to the atmosphere and the dust level in working locations is maintained at less than 0.5 mg/3. Noise levels have also been considerably reduced. Automatic fuel combustion controls installed in the new boilers financed by the project ensure more complete combustion and diminish the discharge of toxic gases. The only important liquid discharge of the SITEX plant (from the indigo - 25 - dyeing range) is disposed in accordance with Tunisian environmental standards and has not created any problems. G. Employment and Training 3.11 No significant change in employment has taken place as a result of Project implementation. The overstaffing at SITEX, however, has been relatively reduced as the increased production (para 5.04) has been attained through introduction of modern equipment and d-bottlenecking, renovation and more efficient utilization of existing facilities, while total employment has been maintained at about 1,800. This was accomplished through training programs established by the SOGITEX Group with the assistance of the consultants. The firms responsible for the supply and erection of equipment also provided tritaing for the operators and, in addition to the aistance given to workers in the plant, foremen were given training abro.d by Schlafhors-, Sulzer, Morrison and Zinzer. This assistance was iL addition to the training already extended by Swift, the main buyer of SITEX's fabrics (para 5.04). H. Capital Costs. Financing and Loan Disbursement 3.12 Capital costs and financing required is shown in Annex 3-3 and summarized in the table below. Total actual cost of the project is US$37.5 million, 29% higher than the appraisal estimate. For the SITEX . part of the project, the increase is US$7.2 million (29%), due mainly to the additional investments which were part of the supplemental program carried out by the company (para 3.02), including purchase of additional . equipment, and carrying out of civil works which had not been foreseen. There was also an increase in working capital (33%), and a substantial overrun in duties and taxes paid which were more than four times higher than estimated at appraisal. In.the case of the STS companies and the Holding, the cost overrun for equipment was about 9%, while the actual cost of technical assistance was more than double the appraisal estimate and the overall project cost increase for these companies was 28%. The foreign exchange cost increased by 20% for SITEX and 11% for the STS-companies and the Holding. The local cost overrun was 64% and 235% for SITEX and the STS companies/Holding, respectively. The foreign and local currency cost overruns for the overall project were 18% and 75%, respectively. - 26 - Table 3.2 Capital Costs and Financing Required (US$ million) Appraisal Estimate Actual For- For- Local eign Total Local eign Total Equipment & Spares a/ 1.29 14.87 16.16 3.17 15.81 18.98 Civil Works - - - 1.13 - 1.13 Preoperating Expenses & Training 0.18 0.13 0.31 0.15 0.11 0.26 Technical Assistance 0.23 1.47 1.69 0.35 1.30 2.65 Incremental Working Capital 3.76 7.14 10.90 4.76 S.74 14.50 Project Cost 5.46 23.60 29.07 9.95 27.96 37.52 Of Which: SITEX 5.12 19.36 24.48 8.42 23.25 31.67 SOMOTEX, SITER, TISSMOK & Holding 0.34 4.24 4.58 1.14 4.71 5.85 Interest During Implementation 0.31 3.54 3.85 0.22 3.18 3.40 Total Financing Required 5.77 27.14 32.92 9.78 31.14 40.92 Of Which: - - - - - SITEX 5.34 21.99 27.33 8.64 25.86 34.50 SOMOTEX, SITER, TISSMOK & Holding 0.43 5.16 5.59 1.14 5.28 6.42 a/ Including freight, insurance, duties and erection. 3.13 Total financing required for the project was US$40.9 million, 24Z higher than the appraisal estimate. In spite of the project completion delay there was not an overrun in interest during construction and the larger financing required stems fully from the project cost overrun. 3.14 The actual financing plan compared with the plan presented in the appraisal report is shown in table below. - 27 - Table 3.3 Financing Plan (US$ million) Appraisal Estimate Actual For- For- Local eign Total Local eign Total SITEX IBRD Loan - 14.36 14.36 - 14.40 14.40 Swiss Credit 4.50 4.50 - 6.27 6.27 STUSID Loan - - - 1.65 - 1.65 Paid-in Capital 5.34 3.12 8.46 6.00 - 6.00 Cash Flow - - - 0.99 5.19 6.18 Subtotal 5.34 21.98 27.32 8.64 25.86 34.50 Other Companies IBRD Loan - 4.24 4.24 - 4.20 4.20 Paid-in Capital 0.43 0.92 1.35 0.91 - 0.91 Cash Flow - - - 0.23 1.08 1.31 Subtotal 0.43 5.16 5.59 114 3.28 6.42 Total Project IBRD Loan - 18.60 18.60 - 18.60 18.60 Swiss Credit - 4.50 4.50 - 6.27 6.27 STUSID Loan - - - 1.65 - 1.65 Paid-in Capital 5.77 4.04 9.81 6.91 - 6.91 Cash Flow - - 1.22 6.27 7.49 Total 5.77 27.14 32.91 9.78 31.14 40.92 3.15 In addition to the IBRD loan, SITEX obtained long-term loan financing from Switzerland and a Tunisio-Saudi development bank, STUSID. The Swiss credit was increased from appraisal estimates and the STUSID loan added to finance a part of SITEX's supplemental investment program (para 3.02). The Swiss credit was made to the Government and of the US$6.27 million onlent to SITEX, one third was interest-free and repayable in five years beginning in 1992, while two thirds was at an interest rate of between 5.5% p.a. and 7.925% p.a. and repayable in ten years, including three years of grace. The STUSID loan was extended for ten years, of which two years grace period, at 12% interest. Paid-in capital consisted of Government equity which was passed on and held by SOGITEX holding, as well as a capital subscription by STUSID to finance part of SITEX supplemental program. Although in US$ terms the cap4 tal contribution was below appraisal estimates, the contributicn in Dinar terms was about 17% higher than anticipated at appraisal; the difference being the result of the movement in the US$ exchange rate. Cash flow by the enterprises covered the remaining financing needs. The paid-in capital allowed the companies to maintain satisfactory financial structures except for SOMOTEX and SITER (para 6.03). - 28 - 3.16 The actual use of the proceeds of the Bank loan compared to khe appraisal estimate is shown in Annex 3-4. The proportion of Bank funds used by SITEX and the STS companies remained unchanged but there were increases of 19.6% and 14.0% in the sums allocated to working capital and technical assistance respectively; these increments were balanced by a decrease of 16.3% in the Bank funds used for equipment and spares. 3.17 The estimated and actual disbursement schedules of the Bank loan are shown in Annex 3-5. The lag in actual disbursements was particularly high in the first seven quarters between July 1981 and March 1983, at the end of which cumulative disbursements had totalled only 35.3% of the values projected at appraisal. As mentioned before, this lag was to a large extent due to the delay in Bank loan effectiveness (para 2.03). Thereafter disbursements accelerated and the loan c1csing date (December 1984) did not need to be extended. All the Bank funds had been committed in contracts finalized before that date, and committed but ur. Labursed payments on that date were disbursed through June 1985. IV. INSTITUTIONAL PERFORMANCE AND DEVELOPMENT A. SOGITEX Group's Organization and Technical Assistance Program 4.01 The SOGITEX Group has in general highly qualified technical staff and the type of technology used in the project, although sophisticated, was not aaw to the companies. With some additional training for plant operating staff therefore, few difficulties were expected or encountered. On the other hand, the organization and procedures of the companies suffered from some inadequacies, particularly in the financial management of its operations: obsolete inventory control systems, long delays in financial reporting, lack of a suitable cost accounting system, and unrealistic budgeting and inadequate budget monitoring. Except for denim sales by SITEX, marketing was also a weak point in the operations of the SOGITEX Group, particularly for the STS companies, which depended largely on orders placed by wholesalers visiting the depot and/or submitting samples of fabrics brought from Europe. 4.02 the scope of the technical assistance (TA) program agreed upon by the project sponsors and the Bank during appraisal was therefore largely aimed at improvements in the financial and marketing systems, while specific technical advice on equipment specifications and selection, and operational assistance was also sought. The scope of activities covered by the TA component was as follows: (a) For all the companies. Upgrading the management and accounting systems to the level required in modern textile mills ensuring that accurate information is timely made available to company executives so that they can make appropriate decisions. (b For SITEK. Assistance in detailed project preparation and implementation including detailed design and equipment specifications, prepaiation of tender documents, production planning and dev*1opment of a training program. - 29 - (c) For the STS companies. Assistance in market research, in improvements in the marketing strategies and systems, and in the preparation of investment proposals to be implemented during a second phase of the Group's rehabilitation and modernization program. B. Results of Technical Assistance Program and Institutional Development 4.03 The number of man-months of consulting required for SITEX was estimated at the time of appraisal at 34 man-months (about 150 man-weeks) and for the other companies at 86 man-months (about 378 man-weeks), for a total of 120 man-months (about 528 man-weeks). The services were expected to be required for a period of 2.5-3 years to be comp'eted toward the end of 1983. In fact, the actual services were carried out between the fall of 1981 and 1985, and totalled 989 man-weeks, of which 225 man-weeks were for SITEX and 764 man-weeks for the STS companies. Of the consulting time for SITEX 54 man-weeks were used by SOMOTEX and TISSMOK. The actual consulting time used by SITEX was therefore 141 more than the appraisal estimate and that for the other companies, more than double (116%). The cost of these services is given in para 3.12 (average monthly cost of about US$12,000), and the results of the TA program are discussed in the following sections. 4.04 SITEX. SITEX's operations have gained considerably from TA provided outside the project through its relationship with Swift which started already in the early 1976s (para 5.04). The project has supported improvements in its organization and management systems. As a result, SITEX has improved its operations to the point of becoming one of the leading companies in its field. The main accomplishments are: (a) Organization and Management Systems. The quality of SITEX's management is outstanding and it has been particularly successful in establishing an adequate organization structure and modern operational and managerial systems, for which support was provided under the project. The project was particularly instrumental in realizing improvements in (i) organization structure particularly in defining clear job descriptions and reporting relationships in financial and technical management areas; (ii) financial management through introduction of a revised accounting plan and improvements in treasury management and costing systems (further improvements in standard costing and budgetting were still under way); (iii) introduction of electronic data processing for accounting, costing and inventory control. The project contributed to the fact that the company now has in place modern financial recording and reporting procedures, electronic data processing, proper preventive maintenance, more efficient inventory control and ordering systems, and control of machinery efficiencies and product quality. (b) Technical Aspects. SITEX has received and successfully absorbed assistance from Swift and the consultants in its operations as - 30 - well as in the selection of equipment and processes. Due to'the satisfactory organization of the project by SITEX (para 3.03), technical assistance which had been foreseen in this area was only used to a limited extent and waa mainly used for improving technical management and methods of the company. 4.05 STS Companies. In total, the three companies engaged foreign assistance for a total cost of about US$2.1 million (para 3.12), of which SOMOTEX accounted for about 43%, TISSMOK for some 33%, while SITER's share was 24%.7/ The main results of TA program were as follows: (a) Organizational Issues. The consultants reported that the activities of the STS companies were not effectively coordinated in spite of being largely complementary and recommended two alternative solutions: (i) to merge SOMOTEX, SITER and TISSMOK in a new "STS company" under unified management, or (ii) to retain the existence.of three separate companies but under the control of one strong executive with expertise in the textile industry and knowledge of the Group's companies. This executive could be the President of the Boards of the three companies but with ultimate executive authority. Following considerable deliberations, an attempt was made to set up a joint marketing organization among the three companies, including a quality control department in Tunisia. Although a joint committee was set up for this purpose, the initiative was not pursued after it become clear that the companies preferred to operate independently, although the companies continued to make use of the quality control department. It was the Bank's assessment that the proposed centralization was not necessary because informal coordination exists between the companies' executives and some degree of competition among the companies should improve their efficiency. At the company level, the consultants also made recommendations for improvement of organization structure, particularly for technical and financial management. These recommendations were largely implemented by the three companies. (b) Technical Improvements. The main accomplishments in the areas of production and quality control have been the following: (i) at SOMOTEX: (a) the readjustment and tuneup of the existing cards and the establishment of a fourth shift, instead of the purchasing of new cards; (b) improvements in the control of humidity and temperature; and (c) better recovery and control of the rejects in each producing unit; and (d) improved quality control. The previously mentioned procedures have contributed to increasing the proportion of first-quality products made; (ii) at TISSMDK: improvement of controls to ensure that the most appropriate temperature and humidity are used for each type of 7/ In addition, the Holding company engaged assistance for about US$78,000, mostly for project coordination and carrying out of some studies for the SOGITEX Group. - 31 - yarn; reduction of rejects; and quality control systems; (iii) at SITER: introduction of systematic follow-up of machine efficiencies. Furthermore, in the area of technical services and training, the consultants have helped to establish a system of production norms and standards which helps to measure work performance and productivity. Also, preventive maintenance systems were developed for the enterprises. In general, TA in this area appears to have been well received by SOMOTEX and TISSMOK, while results at SITER have been more limited. One reason may be that the consultant was not sufficiently specialized in the finishing operations of SITER, while being more conversant with spinning and weaving activities of SOMOTEX and TISSMOK. The continued presence of a technical consultant to follow-up progress may have contributed to good results in this area for the latter two companies. (c) Financial Systems. It was foreseen that the consultants would elaborate and help to introduce the necessary management control systems, including (i) financial accounting; (ii) management accounting; and (iii) related electronic data processing systems. Generally, it appears that for TISSMOK and SITER the results of the TA program have been very modest in this area. In the case of TISSMOK and SITER the consultants prepared reports and documents in a number of areas including treasury management, general accounting plan, cost accounting, budget control, internal audit function. However, the follow-up to these reports has been very limited, and in most cases the two companies reversed back to their old procedures. As reasons for lack of follow-up, the companies indicated that the objectives of the TA were not sufficiently defined, that proposed methods were in their view not appropriate, that sufficient follow-up and explanation was provided not for, and that too many different experts were involved with in some cases, insufficient experience. Part of the problem also may have been the lack of sufficient data processing facilities to allow introduction of new systems. The companies are now implementing such facilities with local assistance. For SOMOTEX, the results appear to be more favorable with improvements in the organization of its financial department, including establishment of a treasury function, introduction of an accounting plan for the company, initiation of a cost accounting function, and establishment of a data processing department with necessary hardware facilities. New budgetting procedures were also being introduced. Besides TA provided under the project, SOMOTEX benefitted considerably from assistance passed on by the financial management of SITEX in this area. (d) Marketing. The consultants recommended a strategy of increased standardization in gray fabric production by the weaving plants of SOMOTEX and TISSMOK, together with greater flexibility in conversion to finished goods by the finishing plant SITER. It - 32 - was also foreseen that exports would be expanded. This strategy was based on the proposed new organizational setup of the STS companies (see (a) above), and although the coordination of this strategy among the STS companies has not fully materialized, at company level the recommendations are being applied. (e) Preparation of Second Phase Investment Program. Based on the marketing strategy, the consultants developed the outline of an investment program for further rehabilitation and modernization of the STS companies. These programs were discussed extensively with the Bank, and the Bank was instrumental in their further elaboration jointly with the companies, and, at a later stage, with various local development banks. Following the initial preparation of the program, IFC approved an equity participation and loan to finance part of SITER's program which will be realized with a French technical partner (para 4.08). For SOMOTEX, an initial investment was approved by a local development bank, while for TISSMOK the local lead bank was seeking foreign private financiers to complement its financing (para 4.08). C. Use and Performance of Consultants 4.06 During appraisal, the terms of reference for the consultants' services and a short list of consultants were discussed and agreed upon by the SOGITEX Group and the Bank. The invitations for proposals were issued on March 7, 1981, and the selection of the consultants took place on June 29, 1981, prior to effectiveness of the Bank loan. It was originally thought that about US0.5 million in retroactive financing would be needed and was thus specified in the appraisal report. The contract between the consultants and the SOGITEX Group was not, however, signed until September 18, 1981, and retroactive financing was not necessary. The contract was extended in February 1983, December 1984 and May 1985. For the establishment of an integrated data processing system a separate contract between SITEX and another consulting firm was signed on June 12, 1984. 4.07 On the whole, the absorption of the TA by the STS companies has been uneven with SOMOTEX and TISSMOK having benefitted from the consultant's intervention in the operational areas leading to improved methods and procedures. The limited success with SITER in this area may partly be the result of the more limited expertise of the consultant in textile finishing operations such as SITER, and the frequent changeover of consultant personnel with lack.of sufficient implementation follow-up. Results in the implementation of improved financial systems has been mixed with favorable results in the case of SOMOTEX, while the outcome for TISSMOK and SITER has been disappointing. The recommendations on the overall organization of the STS companies were found impractical and therefore, not implemented. Overall, however, it is felt that the exposure - 33 - of the companies to the foreign TA has been beneficial in Improving their operations and product quality and has laid the ground work for their further rehabilitation. D. Further Restructuring of the SOGITEX Group 4.08 The project has been instrumental in-laying the groundwork for further restructuring and privatization of the SOGITEX companies. In line with the Government's intention to privatize the SOGITEX Group, IFC approved on January 7, 1986 an equity investment of US$3.2 million equivalent for the acquisition of 15% of the company's share capital and a loan of US$5.0 million to finance a follow-up investment to the IBRD-supported project including further modernization and expansion of SITEX's spinning and weaving plants. Together with the IFC investment, Dominion Textile from Canada also took a 19% participation in the company's share capital and together with the 23% participation by the STUSID bank, the share of the SOGITEX holding in the share capital was reduced to 43%. In 1987, IFC sold one third of its equity holdings to Dominion Textile. Further privatization of SITEX is expected to take place in 1987 with a public offering proposed to be underwritten by IFC of 17% of shares held by SOGITEX holding being offered publicly on the Tunisian stock exchange. This would lead to the the formation of a joint venture with a 51% majority participation of private investors - the Dominion Group (24%), IFC (10%), and individual private investors (17%) - and a minority share holding position of the SOGITEX Group (26%) and STUSID (23%). 4.09 To enable further restructuring of the STS companies, the Bank, based on investment proposals for the 3 companies prepared by the consultants, assisted in 1985 in further elaboration of these proposals. In the case of SITER this led to a project approved by IFC in 1985 which did not materialize as the private share holders withdrew. IFC is currently finalizing a new investment proposal in SITER, in which DMC, one of the leading French textile firms, would be the foreign marketing and technical partner of SITER. DMC and IFC together would hold 35% of share capital, while two private Tunisian commercial banks also decided to invest in SITER (16%). The SOGITEX holding participation would be reduced from 78% and 29%, while two local development banks would hold the remaining 20% of shares. 4.10 In the case of SOMOTEX, a limited investment was approved in 1985 by a local development bank intended to improve the unbalanced financial structure of the company (para 6.03) and continue its physical restructuring initiated under the project. Full restructuring of the company, which has shown a good operational response to the technical assistance provided under the project (para 5.03), woulo require a further equity infusion and additional physical restructuring. For TISSMOK, based on the investment proposals elaborated by the Bank, another local development bank prepared a project for which it was seeking other private investors. - 34 - V. OPERATING PERFORMANCE A. Start-up, Commissioning and Production Build-up 5.01 Because of its nature as a rehabilitation project rather than a new greenfield plant, the project had no clear-cut start-up and co,mmissioning dates. The testing and start-up of new and rehabilitated equipment at SITEX extended over a period of about two years (para 3.05) and, although the new facilities were not formally commissioned, they have operated at near capacity since they were installed. The main spinning and weaving equipment at SITEX had 1een installed by February 1984 and, it has been assumed that, although a small number of auxiliary items was not in place until after 1984, the overall project was completed by the Closing Date of the Bank loan, December 31, 1984. In the case of the STS companies, most of the equipment included in the project as well as some additional equipment (para 2.04) had been received by December 1983, and was operational in 1984. 5.02 Actual buildup of SITEX production compared to the appraisal estimate is shown in Annex 5-1 and summarized in the table below. As can be seen, production objectives in 1985 were reached within 10% for spinning and within 5% for weaving. It should be kept in mind, however, that actual production was realized with additional open-end spinning frames and wide looms due to project scope adjustments (para 3.02). Operating efficiency remained below appraisal expectations. The lower actual than estimated efficiency attained for wide looms is due to continued equipment replacement and renovation work. IFC estimates 85% efficiency will be attained within two years of complation of improvements now underway. - 35 - Table 5.1 SITEX - Production Buildup 1980al 981 1982 1983 1984 1985 Actual Yarn ('000 tons) b/ 8.16 8.85 9.34 10.05 9.49 12.16 Fabrics (million m2) - Denim 16.73 15.38 16.58 18.07 14.34 20.43 - Other Fabrics 0.93 2.17 4.06 4.60 8.65 5.05 Total Tabrics 17.66 17.55 20.64 22.67 22.99 25.48 Operating Efficiency c/ - - 74.5 66.6 73.2 78.0 Appraisal Estimate Yarn ('000 tons) 7.80 10.00 13.15 13.25 13.25 13.25 Fabrics (million m2) - Denim 16.20 20.48 23.90 24.20 24.20 24.20 - Other Fabrics 0.97 2.27 2.10 2.10 2.10 2.10 . Total Fabrics 17.17 22.75 26.00 26.30 26.30 26.30 Operating Efficiency (%) c/ - - 85.0 85.0 85.0 85.0 Actual/Appiisal Ratio (%) for: - Yarn (by weight) 104.6 88.5 71.0 75.8 71.6 91.8 - Fabrics 102.9 76.8 79.4 86.2 87.4 96.9 a/ The results shown in the appraisal report for 1980, were preliminary departing slightly from the final ones shown. bi. Open-end spun yarn increased from 36% of the total in 1980 to 82% in ' 1985. c/ For wide looms. 5.03 No production forecast had been made for the STS companies during appraisal because of the relatively small investment (mostly used for technical assistance) allocated to them. Actual 1980-85 production figures for the other companies are contained in Annex 5-2. Generally, the companies improved or stabilized their production performance despite adverse conditions in the local market. B. Market Development 5.04 The project's success depended largely on exports of denim to Western Europe and its scope has been largely geared to improving the export competitiveness of SITEX. Production of denim for export started in 1976 as the result of a 1973 agreement with Swift S.A. (Switzerland), which provided technical assistance and purchased the best grades of denim at prices equivalent to the US prices in large lots. The contract between -36- SITEX and Swift has recently been extended through September 1989. Swift sells denim to a large number of customers in Europe and some "offshore" pfants in Tunisia which largely operate outside the Tunisia tax and import regime (para 1.01). Due to.serious marketing effort and flexibility of the S TEX plant, largely as a result of the project, the company has been able to maintain and even increase its market share, despite an overall depressed denim market, which in 1985 recovered to the 1980 consumption level although a 4% p.a. growth was anticipated at the time of appraisal. SITEX enjoys a good position on the European market (about 9% market share) because of its cost competitiveness, good quality of its product, its locational advantage and its duty-free access to these markets (other competitors .from the Far East and South America have a 1?-5% duty on their fabrics). STEX future marketing strategy, which has be , elaborated jointly wit' Dominion Textile/Swift calls for (i) a greater reliance on exports in the future with the addition of a major new market, i.e., Canada; (ii) a more diversified product-mix of heavy and light denim fabrics; and (iii) a flexible approach with quick adjustments to the product-mix in accordance with market requirements. 5.05 During appraisal it was forecast that international demand for narrow denim would drop rapidly and one of the objectives of the project was to provide SITEX with the capacity to make wider fabrics. In fact, during iplementation of the project, its scope was adjustad to meet the challenge of a worsening outlook for narrow denim exports (para 3.02). This-trend has been confirmed by the actual data of the last five years which shog that SITX's narrow denim exports were cut from 11.5 million linear meters (alm) in 1981 to 1.3 m1m in 1985. Exports of wide denim on the other hand increased dramatically to about 10.4 million in 1985, as shown in the table below. The same trend, although less pronounced, was felt on the local market. - 37 - Table 5.2 SITE - Dents Sales to Swift (00O I=) Exports 1981 1982 1983 1984 1985 Wide Denim 472 4,396 6,438 6,861 10,360 Narrow Denim 11.544 6 240 2 921 140 1,325 Total Denim 12,016 10,636 9,359 7,001 11,685 Other a/ 822 1,818 1,807 2 057 2,008 Total 12,838 12,454 11,166 9,058 13,693 Local Sales Wide Denim 148 390 287 1,442 904 Narrow Denim 2,324 2,497 1,054 1,851 .Total Denim 2,472 2,283 2,784 2,496 2,755 Other a/ 1,003 1,758 1332 2,108 2,860 Total 3,475 4,041 4,616 4,604 5,615 Total Sales Wide Denim 620 4,786 6,725 8,303 11,264 Narrow Denim 13,868 89133 5,418 1 194 3,176 Total Denim 14,488 12,919 12,143 14,440 Other. 1,825 3,576 3639 4,165 4,868 Total 16,313 16,495 15,782 13,662 19,308 a/ Mostly gray fabrics. 5.06 As a result of the economic recession in Tunisia in 1985-86, domestic demand for textiles declined substantially in 1986 and Tunisian consumption is not expected to recover to its pre-1986 levels of about 48,000 tons p.a. in the near future, although, in 1985, the CNEI had projected an average growth rate of 3.5% annually through the early 1990s. VI. FINANCIAL PERFORMANCE A. Financial Results 6.01 A basic consideration in the preparation of the project was that the SOGITEX Group was making losces in spite of the fact that the largest company - SITEX - had secured a good market share for denim in the European market for denim as well as in the local market. It was foreseen that this situation could be rapidly improved by relatively small investments coupled to effective technical and management assistance. It was also felt that failure to improve operations could only lead to the loss of the denim market and the subsequent failure of SITEX. Historical financial statements for SITEX are shown in Annex 6-1 and summarized in the following table. - 38 - Table 6.1 SITEX - Summary of Financial Statements (TD million) 1980 1981 1982 1983 1984 1985 Results: Exports 13.5 14.1 15.5 17.0 16.4 24.9 Local Sales 2.5 5.3 6.7 8.3 11.0 13.2 Other Revenues 0.7 1.5 1.8 2.7 3.3 4.4 Total Sales 16.7 20.9 24.0 28.0 30.7 42.5 Operating Profit (0.2) 0.9 1.3 1.2 2.0 3.6 Net Incomera/ (0.2) 0.7 0.7 0.4 0.5 1.7 Cash Flow 0.6 1.9 1.7 2.0 2.0 3.7 Ratios: - Operating Profit/Sales (%) (1.0) 4.2 5.3 4.2 6.5 8.4 - Net Income/Sales (%) (1.0) 3.4 3.0 1.4 1.6 4.1 Balance Sheets: Current Assets 10.5 13.4 16.1 20.6 29.6 27.9 Net Fixed Assets 9.0 11.5 13.4 16.1 19.0 18.0 Total Adsets b/ 19.9 25.4 30.1 37.6 48.9 46.2 Current Liabilities 11.4 10.5 11.8 8.6 16.4 16.4 L and M Term Debt 0.6 6.9 7.1 16.1 19.1 16.3 Equity 7.9 8.0 11.2 12.9 13.4 13.5 Ratios: - Debt/Equity 8:92 46:54 39:61 56:44 59:41 54:46 - Current Ratio 0.93 1.28 1.37 2.39 1.81 1.70 - Debt Service Coverage - 4.6 1.6 1.5 1.5 1.5 a/ Net income after income taxes. b/ Including investments and deposits. 6.02 As shown above, SITEX financial results have improved considerably over the 1980-85 period with consistent and increasing profits after 1981. Also its financial structure has remained very satisfactory both from point of view of liquidity and debt/equity structure. The good financial results in 1985, allowed distribution of dividends in 1986. As such, the company has not had any problems in meeting the financial ratio covenants (minimum current ratio of 1.2; maximum debt/equity ratio of 60:40; and minimum debt service coverage of 1.3). 6.03 Financial results for the STS companies have been mixed. A summary of the financial statements for the three companies is given in Annex 6-2. The resuits show that while TISSMOK has generally been able to maintain a satisfactory financial performance, SITER and particularly - 39 - SOMOTEX have not done so well. In fact, SOMOTEX has consistently 'generated substantial losses and had a negative cash flow throughout the period. Also its financial structure was very unbalanced with a debt/equity ratio as high Rs 95:05 in 1984 and cutrent ratios between 0.8 and 1.00. These poor financial results have obsetred the improving operational performance of the company and can be attributed to its undercapitalized financial structure which led to unproportionally high financial charges on the company's high debt burden. The Bank has regularly stressed the need for an equity infusion. In this respect a first step was taken in 1986 with the approval by a combination of local banks of an initial TD 7.0 million package of financial and physical rehabilitation measures, which are expected to be a first step in the full financial restructuring of the company. In the case of SITER, its profitability remained rather marginal over the period leading to a tight liquidity position and low debt service coverage in some years. Due to the above constraints both SOMOTEX and SITER have not complied with all financial covenants during the project implementation period although their financial performance is expected to improve with the additional restructuring measures being put in place for these companies (para 4.09). Furthermore, the Holding company has not submitted audited financial statements as had been agreed with the Bank, despite regular requests by the Bank to provide such audit reports. B. Financial Rate of Return . 6.04 The calculation of the updated financial rate of return (FRR) for SITEX has been made based on aztual data through 1985 and projections of operating performance thereafter. With projected production build-up to a little more than the appraisal estimate of 25 million 1m of fabrics for the project but with a shift towards a higher proportion of wide denim as a result of the higher proportion of wide looms due to the changes in the project scope (para 3.02), total revenues of SITEX have been estimated at TD 46.0 million annually in constant terms for the period 1988-94 (Annex 6-3). Except for an increase in real terms of 10% in the cost of labor and utilities, other unit cost of operating inputs are assumed to be priced at the same level (in constant prices) as in 1985. Although the price of cotton is a highly fluctuating one, it is expected that, as in the past, the price of denim will continue to be closely linked to that of cotton, so therefore, the price of cotton has been kept at its 1985 level. Capital costs in US dollar terms have been adjusted to constant 1985 terms by using the unit value index of manufacturing exports. The calculation of the financial rate of return (FRR) is based on the assumption that, without the project, SITEX would have had to plose down its operations and sell its assets. This conclusion was confirmed by the overwhelming trend towards wider fabrics during the course of project implementation and the need for quality improvement (para 5.05). For the FRR calculation, such closure was treated as an additional cost to the Project (foregone sale of assets). The benefit and cost streams are shown in Annex 6-4. 6.05 Based on the above assumptions, the updated FRR for the SITEX part of the project is estimated at 17.4% compared to the appraisal estimate of 19.5%. The FRR is quite sensitive to price changes for SITEX - 40 - products. In case of a 5% decrease of all product prices, and assuming other parameters remain the same, the FRR would reduce to about 11%. VII. ECONOMIC PERFORMANCE A. Economic Rate of Return 7.02 The economic rate of return (ERR) calculations for SITEX are based on the assumption that had the project not been implemented the only reasonable alternative would have been to close down its manufacturing operations to avoid mounting losses and to sell the assets and pay the outstanding debts (para 6.04). Further, capital costs have been adjusted to exclude import duties and other taxes, or about 8% of installed cost. Also working capital was adjusted in similar fashion by 10%. 7.02 Operating costs of SITEX have been adjusted to eliminate the duties on the part of raw materials destined for the local market, as such materials for export fabrics are exempted from duties. The adjustment is therefore only some 2.5-3.5% bf financial costs for cotton and other raw materials. Utilities were assumed to cost in economic terms 1.1 times their financial cost to take into account the somewhat lower local costs for electricity and fuel oil than their long-run economic cost. For labor, a conversion factor of 0.80 has been used. Other expenses have also been adjusted by a factor of 0.80. A summary of the adjustment made to financial costs for the ERR calculation is given in Annex 7-1. 7.03 Concerning revenues of sales, all export sales have been valued at their financial prices. For local sales, it was assumed in the financial analysis that selling prices would move closer to the prices of export sales. They will remain somewhat higher as it concerns substitution of imports for which CIF import prices should be higher than the FOB prices of SITEX's exported fabrics. Based on the above assumptions, the updated economic rate of return of the SITEX part of the project is estimated at 20.4% compared to 29.4% at appraisal (Annex 7-1). No calculations have been made for the STS companies because, as mentioned in para 5.03 at appraisal, no financial and economic analysis had been carried out for the modest investments allocated to them. B. Other Benefits 7.04 Deducting the value of imported cotton and some materials and fuel oil, net foreign exchange gains by SITEX are estimated at about US$25 milli n annually in 1986 prices after 1988. Over the project's lifetime, gross total foreign exchange earnings would total about US$265 million which, even if discounted at 20% per year, would pay many times the foreign exchange cost of the project. 7.05 There has been a considerable spillover from the benefits accrued by SITEX to other companies in the SOGITEX Group (para 4.05(c)) and, to a smaller degree, to some of the private companies through the movement of competent staff, meeting of the dompanies' executives and technical - 41 - personnel, and by the demonstration effect of successful marketing and project preparation and implementation experiences. VIII. BANK's ROLE AND CONCLUSIONS A. Bank's Role 8.01 The Bank participated in the preparation of the project and actively supported the SOGITER Group and its consultants in defining the proper scope of the project, technology to be used and the formulation of satisfactory procurement protedures and bid packages. Throughout project preparation and implementation, there were excellent relations between the Bank and the project sponsors. Relatively frequent supervision missions resulted in the design of a well-conceived program implemented under good conditions and at reasonable cost. 8.02 Awareness on the part of the supervising Bank staff of the rapidly evolving technological and marketing conditions in the industry allowed for a flexible approach to the project and, in response to those changing conditions, modifications were introduced in the project scope which, had they not been accepted by the Bank, could have seriously impaired the success of SITEX and might even have led to its failure as a company. The staff of SITEX and the STS companies also benefitted from the advice of the Bank and of the consultants engaged with as6istance from the Bank. The volume and efficiency of operations have been substantially improved (para 5.02) and production and financial management for SITEX, and to a somewhat smaller degree for the Group as a whole, have been improved considerably. 8.03 The Bank's involvement in the project put SITEX in a strong position to face a tightening marketing outlook under limited financial resources. The project helped in the improvement of the company's financial management and financed the acquisition of much needed equipment. Following the Government's decision to privatize SITEX, the Project was followed up by further assistance from the Bank Group through an IFC investment. The Bank has also had a role in the upgrading of the operations of the STS companies. The preparatory work for a second phase rehabilitation project for these companies has helped in the preparation of the further restructuring measures of the STS companies. B. Conclusions 8.04 The project was successfully completed with little delay in spite of the long period between approval and effectiveness of the Bank loan. Production targets have been substantially reached and the main product is competing efficiently in the international market. SITEX has become one of the leading denim making companies in the world with modern organization and management systems, and has attracted international marketing firms as partners in a joint venture sponsored by IFC. SITEX management believes that without the project such successful restructuring would not have taken place. For the STS companies, the exposure to foreign technical assistance - 42 - has been beneficial in improving their operations and product quality and has laid the ground work for their further restructuring. C. Lessons Learned 8.05 A few lessons can be underscored as a result of this project's preparation and implementation: (a) Technical and managerial improvements of financially weak public sector companies are generally a required first step in the restructuring of those companies and their successful privatization or conversion into joint ventures. (b) Flexibility in dealing with revisions in project scope and technology is needed for the success of projects in industries where market and/or technological conditions are rapidly changing. (c) In the preparation of project implementation schedules, potential delays should be taken into consideration to avoid unnecessary departures between actual and projected project implementation and Bank loan disbursement schcdules. (d) Close relationship between Bank staff and project sponsors and relatively frequent supervision missions have contributed to shis project's success pointing out the need of allowing enough time for the establishment of mutually satisfactory working relationships between Bank staff, consultants and the project sponsors' executives and technical personnel. Industry Department June 1987 ANNEX 2-1 Page 1 - 43 - PROJECT COMPLETION REPORT TUNISIA - SOGITEX TERTILE REHABILITATION PROJECT (LOAN 2012-TUN) SITEX - Project Scope and Changes (US$ '000) Actual Estimated Cost Cost Supple- Original mental Item Program Program Total Total - Civil Works - 1,100 1,100 1,128 5 - Spinning Frames 1,150 - 1,150 879 2 - Spinning Frames - 408 408 386 - Air Conditioning for Spinning 760 - 760 509 1 - Lint Press 40 - 40 30 2 - Drawing Frames - 71 71 69 2 - Bale Breaker - 64 64 59 2 - Air Compressor 150 - 150 79 - Computing Equipment - 184 184 230 - Knotting Machines 40 - 40 21 3 - Cleaning Equipment 60 - 60 48 2 - Cleaning Equipment - 77 77 - - Conveyors 15 - 15 9 1 - Baling Equipment 85 - 85 144 2 - Boilers 1250 - 250 63 - Air Conditioning for Weaving 130 - 130 75 - Spares 50 - 50 514 - Electronic Equipment 40 - 40 29 1 - Warp Making Machines - 74 74 69 1 - Glue Applier 200 - 200 241 1 - Glue Applier - 330 330 2?8 3 - Inspection Table. - 120 120 t2 - Repair Tables 168 168 133 1 - Indigo Dyeing Equipment 50 1,000 1,050 1,278 - Spare Parts 900 - 900 312 1 - Water Treatment 115 - 115 62 - Fire Fighting Equipment '20 - 20 42 - Rennovation of Denim Range 20 - 20 28 - Waste Recovery System - 150 150 - " Battage" - 250 250 - - Indigo Recovery - 378 378 - 1 - Sanforizer 250 - 250 - 65 - Sulzer Looms 4,821 - 4,821 3,562 55 - Sulser Looms - 3,500 3,500 3,410 1 - Spinning Frame - 240 240 212 - Dyeing Mechine 105 105 184 - Contingencies 2,345 - 2,345 - - Pre-Operating Expenses 1,704 1,000 2,704 2,577 Installed Cost 13,195 9,219 22,414 16,693 - Working Capital 10,895 1,400 12,295 14,500 - Technical Assistance 395 - 395 473 - Interest During Construction 2,840 - 2,840 2,829 Total Financing 27,325 10,619 37,944 34,495 Industry Department June 1987 PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) SITEX - Actual and Estimated Project Implementation Schedule 1981 1982 1983 1984 1985 1 24 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 Engineering and Studies xxxxx Preparation of Bid Documents xxxxx Invitation to Bid xxxx Bid Reception x Evaluation of Bids Contracts xx xxxxxxxxxx Equipment Delivery xxx XKKxxxx xx Installation xxxx xx xxxxxxxx Testing Ixxxxxx I Start-up xxxxxxxxxx Technical Assistance C x I I ' I1 4 . Kxiix.Kxx 1 11 L -- 1 11I xxxx : Appraisal estimate - : Actual for Main Equipment (Spinning and Weaving) -- - : Actual for Other Equipment Industry Department June 1987 - 45 - ANNEX 3-2 PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) Sources of Procurement % of US$ '000 Total A. SITEX Syria (Cotton) 4,163 22.4 F.R. of Germany 2,814 15.1 Mali (Cotton) 2,670 14.4 USA 1,608 8.7 Turkey (Cotton) 1,189 6.4 France 880 4.7 Burkina Fasso (Cotton) 474 2.5 Canada 341 1,8 Switzerland 157 0.8 Belgium 75 0.4 United Kingdom 29 0.2 Subtotal 14,400 77.4 B. STS Companies & Holding F.R. of Germany 1,664 9.0 Canada 1,372 7.4 France 591 3.2 Netherlands 187 1.0 Belgium 142 0.8 USA 120 0.6 Switzerland 81 0.4 Other 43 0.2 Subtotal 4,200 22.6 18,600 100.0 Industry Department June 1987 -46- ANNE 3-3 Page 1 PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-411N) Project Capital Costs and Financing Required (UsS '000) Appraisal Estimate ./ Actual Local Foreign Total Local Fore Total A. SITEX - Equipment, Spares 334 10,731 11,065 - Freight, Insurance 343 545 888 Subtotal PT 11,276 - -- r 12,989 - Duties and Taxes 343 - 343 1,407 - 1,407 - Civil Works - - - 1,128 - 1,128 - Erection and Relocation 100 407 507 914 - 914 - Trainig 117 58 175 -al -a/ -a/ - Pre-Oper. Expenses 62 73 135 150 106 256 - Engineering and Consulting Services 65 411 476 56 417 473 Installed Cost 1,364 12,225 13,589 3,655 13,512 17,167 - Incremental Working Capital b/ 3. 1071386 4,764 9736 14'0 Project Cost 5,1 19,363 24,485 8,419 23,248 31,667 - Interest during Construction 218 2,622 2,840 215 2,614 2,829 Total Financing 5,340 21,985 27,325 8,634 25,862 34,496 B. SITER. SOwE,. TISSIOR & Holding - Debottlenecking Equipment 179 3,186 3,365 852 2,828 3,680f/ - Consulting Services 161 1,054 1,215 292 18s1c/ 2.173 Installed Cost 340 4,240 4,580 1,74/ 4,709 5,853 - Interest during Construction 95 915 1010 - 570 570*/ Total Financing 435 5,155 5,590 1,144 5,279 6,423 ANNEX 3-3 47- Page 2 Appraisal Estimate Actual Local Foreign Total Local Foreign Total C.0 TOTAL PROJECT * Installed Cost 1,704 16,465 18,169 4,799 18,221 23,020 Working Capital 3,758 .7.138 1 4 9736 14,500 Project Cost 5,462 l3,603 29,065 9,563 27,957 37,520 Interest during Construction 313 3,537 3,850 215 3,184 3,399 Total Fimnag 5,775 27,140 32,915 9,778 31,141 40,919 a/ Included In preoperating expenses. b/ Represents increases in net working capital during 1981-83. c/ Of which US$1.372 million financed by Bank loan. d/ Calculated at average exchAnge rate of D 0.69/US$. e/ Estimate. . / Including transportation and erection. ./ Including distribution of contingencies over various cost categories. Industry Department June 1987 -48 - AM=K 3-4 PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXILE REHABILITATION PROJECT (LOAN 2012-TM) Utilization of Bank Funds . Technical Working 2 of Et#pEgEt Assistance Capital Total Total A. Apraisal Estimate (US$ '000) SITER '6,836 464 7,100 14,400 77.4 Other Companies a/ 3095 1105 - 4,200 22.6 Total 9,931 1,569 7,100 18,600 fij.O % of Total 534 8.4 38.2 100.0 B. Actual (US$ '000) SITEX 5,489 416 8,495 14,400 77.4 Other Companies - SOGITER Holding - 67 - 67 - SOMDTEK 1,395 556 - 1,952 - TISSMDK 224 323 - 547 - SITER 1.209 425 - 1.634 Subtotal 1.372 - 4 200 22.6 Total 8,317 1,788 8,495 18,600 100.0 % of Total 44.7 9.6 45.7 100.0 C. Actual as % Appraisal Estimate SITEX 80.A 89.7 119.6 100.0 Other Companies a/ 91.4 124.2 100.0 Total 83.7 114.0 119.6 100.0 a/ SOGITE Holding, S014MX, TISSt)K and SITER. No breakdown by these companies had been prepared at appraisal. Industry Department June 1987 - 49.- AII!K 3-5 'IINISuI - SOGEZ!K 'IE!KrBE In!A1EL1TTrIG< PIJECT «AN 20124UN) Bak Loam Dishursent Sd~chle ntua~ive cal Yarlear Apprs % of Actual Z of Actuel as % and Quarter t*lCumdattv Ta b uat Qilat Total Appra l (US$ ailion) -- --- (US$ "dlcnn - 1981 I 0.5 0.5 2.7 - - - - iV 3.3 3.8 20.4 - - - - 1982 I 3.5 7.3 39,3 - - - - n 3.4 10.7 57.5 0.5 0.5 2.9 5.0 Im 2.8 13.5 72.6 1.0 1.5 8.1 11.1 iV 2.7 16.2 87.1 0.1 1.6 8.8 10.1 - 1983 I 1.3 17.5 94.1 4.6 6.2 33.2 35.3 ' 1 , 0.6 18.1 97.3 4.5 10.7 57.7 59.3 II 0.3 18.4 98.9 1.1 11.8 63.4 64.1 * iv 0.2 18.6 100.0 1.3 13.1 70.3 70.3 1984 I - 18.6 100.0 1.0 14.1 75.9 75.9 fl - 18.6 100.0 0.5 14.6 78.3 78.3 Im - 18.6 100.0 0.2 14.8 79.6 79.6 iv - 18.6 100.0 3.1 17.9 %.0 %.0 1985 I - 18.6 - 100.0 0.4 18.3 98.6 98.6 il - 18.6 100.0 0.3 18.6 100.0 100.0 Jue D17 rb June 1987 PRI!LT 02 !:%'I R IUNISIA - 90G 'EXTIIM.E 1RELITAT Pzcr (IUAN 2012-TW) Sr= - Actual and Esti~t Proictic Build-up and Effiey Developent, 1980-85 1980 1981 1982 1983 1984 1985 AlaialAppra~a App~an Appra~a lgia Ap~naia Actual Est~ue Actal Estiimte Acual Esatme. Aba1 Estimte Atsl Esti~ute Ach.1 Estinte Yam (tæs) 8,162 7,800 8,854 10,000 9,338 13,150 10,053 13,250 9,487 13,250 12,163 13,250 Aver e Not 0.8/1 10.8/1 13.08/1 10.8/1 13.14/1 10.8 13.34/1 10.80/1 14.44/1 10.80/1 12.89/1 10.80/1 Yam (kmn) 88,130 84,200 115,82 108,000 122,715 142,020 134,172 143,100 136,992 143,100 156,782 143,100 Finild Fabries ('000 M) Denia: - Narræ Denim 15,210 .15,000 13,670 14,880 8,239 12,700 5,544 -12,700 1,323 12,700 -3,200 12,700 0 -Wide Deni - - 769 3,000 j851 6,800 7,721 7,000 8,313 7,000 10,908 7,000 Total ('000 m) 15,210 15,000 14,439 17,800 13,090 19,0 13,5 19.700 9,636 19.700 14 108 19.700 Total ('000 n2) 16,731 16,20 16,229 20,48 16,582 23,900 18,066 24,200 14,341 24,200 20,428 24,2M Other Fabric: -Narro 3,692 1,900 4,184 1,900 6,%5 1,900 4,540 1,900 -Wide - - - - 543 - 40 - Total ('000 m) 849 900 1,128 2,100 3,2 1, 9 0184 1,90( -, ,iW 149,0 Z, iS Total ('000 2) 933 972 1,241 2,268 4,061 2,100 4,602 2,100 8,650 2,100 5,056 2,100 Total All - -- -- -- - - Fabrics ('000 M) 17,580 15,900 17,357 19,900 16,782 21,400 17,449 21,600 17,144 21,600 18,688 21,600 ('000 M2) 17,664 17,172 17,470 22,748 20,643 26,000 22,668 26,30 22,991 26,300 25,486 26,300 Effirencies a) Nari Fabrcs 80.9 77.5 83.2 77.5 70.1 77.5 72.0 77.5 66.2 77.5 71.4 72.5 Vide Fabrics - 85.0 - 85.0 74.5 85.0 66.6 85.0 73.2 85.0 78.0 85.0 u ptry -artent June 1987 - 51 - ANNEX 5-2 PROJECT OOMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) STS Companies - Historical Production Data 1980 1981 1982 1983 1984 1985 A. SOMNIEX Spinning: - Wool & Waste yarn (tons), 1,277 1,453 1,291 1,027 940 1,021 - Cdtton Yarn (tons) 1,279 1,515 1,624 1,858 1,938 2,142 Weaving: - Grey Fabkics ('000 lm) 7,065 6,942 6,274 6,569 8,007 7,796 - Picks per cm (no.) 19.3 20.3 20.5 21.1 21.4 20.5 B. TISSMK ('000 1m) a/ Weaving: - Grey Fabrics: Cotton 4,190 3,577 2,613 2,446 3,335 Cotton-Polyester 3,072 2,993 3,938 3,890 2,711 Rayon-Fibrane 1,130 455 1,953 2,748 2,818 Others 529 1,031 976 940 1,255 Total 8,921 8,056 9,480 10,024 10,119 - Picks per cn (no.) 22.7 23.4 21.8 21.8 22.7 C. sITa ('000 I) Production by Type of Finishing: Bleaching 3,018 2,577 3,110 3,091 2,920 2,891 Dyeing 6,299 6,589 6,250 6,604 6,595 6,946 Color Woven 913 1,552 1,688 1,933 2,058 2,337 Printing 3,388 6,454 6,325 6,035 6,451 5,524 Total 13,618 17,172 17,373 17,663 18,024 17,698 a/ In 19,79/80 TISS(DK was oined and operated by SITER, and was established in 1981 As a separate entity. Industry Department June 1987 -52 - ANNEK 6-1 Page 1 PROJECT cOmLETION REPORT TUNISIA - SOGITEX TEXT1LE REHABILITATION PROJECT (LAN 2012-TUN) SITER - Historic l Income Statements (TD million) Appr. Actual Est. 1980 -1981 1982 1983 1984 1985 1985 Exports 13.52 14.05 15.51 17.06 16.39 24.91 26.11 Local Sales 2.45 5.34 6.71 8.28 10.98 13.22 2.41 Other Revenues 0.72 1.54 1.75 2.70 3.29 4.35 0.80 Total' Revenues 16.69 .93 23.97 28.04 30.66 42.48 29.32 Operating Costs: Cotton 7.07 8.32 9.57 12.15 13.09 16.76 14.71 Other Materials 1.89 2.18 2.31 2.46 2.57 4.68 4.10 Utilities 0.41 0.56 0.73 0.89 0.97 1.19 1.28 Labor 3.73 4.59 5.25 6.28 6.47 7.06 4.84 Depreciation 0.78 1.17 1.01 1.60 1.51 1.95 1.18 Overhead & Other Expenses 2.97 3.24 3.84 3.48 4.05 7.28a/ 0.73 Total Operating Costs 16.85 20.06 22.71 26.86 28.66 38.92 26.84 Operating Profit (0.16) 0.87 1.26 1.18 2.00 3.56 2.48 Finanhial Charges - . 0.16 0.54 0.78 1.47 1.80 0.68 Income before Taxes (0.16) 0.71 T73 07W0 0.52 T.76 1.79 Income Taxes - - 0.02 0.01 0.02 0.03 0.37 Net Income after Taxes (0.16) 0.71 0.71 0.39 0.50 1.73 1.42 Cash Flow 0.62 1.88 1.72 1.99 2.01 3.68 2.60 Ratios: - Operating Profit/Sales (%) (1.0) 4.2 5.3 4.2 6.5 8.4 8.5 - Net Income/Sales (%) (1.0) 3.4 3.0 1.4 1.6 4.1 4.8 a' Exceptional year because of large purchase of spare parts and stock variations. b/ Etmates, including extraordinary provision for future cotton price i4creases. Af!f 6-1 -53- Pqp 2 SE Hst~1 Baa St (ID d~14m 1983 1981 192 1g3 1984 1985 j~ ffil. Apada Agw~ pp ds~ Adal Adul Aduud Esae Acti Es:e Actu Estin~te Achmi Es~an 2~~ A~ 0.39 0.6 3.17 1.2D 1.26 1.29 2.25 1.32 1.41 1.32 Ac Rædeveb 1.39 5.16 3.78 2.59 5.37 2.83 9.a) 2.ff 9.89 2.85 rinty 6.44 6.02 7.18 9.07 12.30 9.79 15.8B 9.M 15.30 9.81 0tm ent s~ 2.M 1.61 2A06 1.72 1.69 1.86 L 1.86 1.28 187 1btai rxne Asuets 1055 13 16.17 T4.58 W!.V 17.77 9.61 5.8 27.8B 15.85 Inesn & D i 0.29 0.47 0.55 0.29 0.85 0.29 0.27 0.29 0.35 0.29 1F~e A~st G CapL~ltaI Assets 10.26 13.60 16.42 15.% a46 16.ff 24.71 16.83 25.72 16.83 lems: 0 ~ vleiu Dep.riwJ~ 1.22 2.06 3.05 2.84 4.34 3.9B 5.67 5.17 7.75 6.35 Net F1 A~ 9.04 11.54 1 3.10Ó 16.12 128 19.I 11.-66 1f7..97 10. 'tal A 19.ff 25.47 '3.09 27.97 37.59 28.92 48.92 27.78 46.20 26.62 Sh=t-TBarkDEbt 4.93 0. 1.8 1.51 0.75 (0.45) 5.39 0.41 4.12 (0.9) A=~nte P le 4.82 6.66 6.(B 3.10 2.6f 3.30 4.47 0.87 4.87 0.87 rtr Prti Cf IRD~ - 0.& 1.62 0.81 1.64 0.8 1.58 1.28 4.66 L28 othr -~t Td,t 1.62 2.21 2.29 1.90 3.60 2.07 5.01 2.16 2.72 2.18 1btal rwt IatMi.e 1.3 XW 1i.f 7.32 8.W2 -!Cg) T6i IT T6.36 W Ta.and MedlartenDeft 0.65 6.94 - 7.11 9.87 16.11 9.58 19.15 8.30 16.2B 7.02 Owm - Eq~t ~.ptea ard Proø~ 8.54 8.0L 10.49 10.16 11.74 11.08 11.75 11.08 11.3 11.08 Rpae~ n1n ~0.69) 0.2 0.02 (0.62) 0.73 0.62 1.12 2.36 - 3.67 m of Yem - - 0.71 1.24 0.39 1.74 0.50 1.31 1.73 1.42 Net F~uy T.85 WU 1.2 1- 71 2 1XV 1W~36 W 1. 13-Y ~117 'lbtal T Lmlitn & Fødty 19.88 25.47 3.09- 27.97 37.59 28.92 48.92 27.78 46.2 26.62 Debu~qui R8tfo. 892 46:54 39:61 48: 56:44 42.58 59:41 3664 54:46 3070 o-stRatio 0.93 1.28 1.37 1.99 2.39 2.67 1.81 3.35 1.70 4.61 -54 - ANNEX 6-1 Page 3 SITEU - Historical Cash Flow Statements (TD million) 1979 1980 1981 1982 1983 1984 1985 Sources of Funds Profit After Tax (0.53) (0.16) 0.71 0.71 0.39 0.50 1.73 Depreciation 0.57 0.65 0.84 0.99 1.29 1.33 1.94 Interest on L&MDebt - - 0.16 0.54 0.78 1.47 1.80 Cash Generation Before Interest onLT Debt 0.04 (0.49) 1.71 2.24 2.46 3.30 5.47 Short-term Bank Debt 5.98 - - 0.99 - 3.85 - Equity 0.05 - 7.96 2.48 1.25 0.01 6.08 SOGITEX Holding 8.49 - (8.&9) - - - - Long-term Loans - 0.65 7.97 1.79 9.88 4.40 0.60 Decrease in Working Capital - 1.62 - - - - - Total Sources 14.57 2.76 9.14 7.50 13.59 11.56 6.14 Application of Funds Increase in Fixed Assets 8.85 1.70 3.52 2.90 4.34 3.67 1.09 Increase in Working Capital 5.72 - 0.49 3.24 6.56 5.74 0.16 Decrease in Short-tern Debt - 1.05 4.76 - 1.05 - 1.23 Repayment Long-term Debt - - 0.21 0.81 0.85 0.68 1.85 Interest on Long-term Debt - 0.16 0.54 0.78 1.47 1.80 Long-term Debt Service - - .-37 1.35 1.63 2.15 3.65 Total Applications 14.57 2.76 9.14 7.50 13.59 11.56 6.14 Debt Service Coverage - - 4.59 1.65 1.50 1.53 1.50 Industry Department June 1987 ANNEX 6-2 Table I PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) SOMOTEX - Summary of Financial Statements (TD million) 1981 1982 1983 1984 1985 Results: Local Sales 6.41 7.52 9.43 9.84 11.94 Exports 2.81 2.51 2.09 4.42 2.90 Other Revenues 1.52 1.53 2.04 2.42 3.15 Total Sales 10.75 11.56 13.56 16.68 17.99 Operating Profit (0.29) (0.79) 0.22 0.02 0.93 Net Income (1.06) (1.64) (0.88) (1.00) (0.90) Cash Flow (0.75) (1.26) (0.53) (0.33) (0.22) Ratios: - Operating Profit/Sales (%) ,(2.7) (6.8) 1.6 0.1 5.1 - Net Income/Sales (%) (9.9) (14.2) (6.5) (6.0) (5.0) Balance Sheets: Current Assets 7.50 7.02 9.12 13.90 15.28 Net Fixed Assets 3.70 3.71 5.20 5.82 6.48 Total Assets a/ 11.24 10.76 14.36 19.76 22.20 Current Liabilities 7.13 7.81 10.58 15.60 15.23 L & M Term Debt 1.65 1.24 2.56 3.94 4.36 Equity 2.45 1.72 1.22 0.22 2.61 Ratios: - Debt/Equity 40:60 42:58 68:32 95:50 63:37 - Current 1.05 0.90 0.86 0.89 1.00 - Debt Service Coverage Neg. Neg. Neg. Neg. 0.1 a/ Including investments and deposits Industry Department June 1987 ANNEX 6-2 - 56 - Table 2 PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) TISSMDK - Summary of Financial Statements (TD million) 1981 1982 1983 1984 Results Local Sales 7.67 7.99 8.24 8.47 Exports - 0.41 0.50 0.55 Other Revenues 1.31 1.66 1.80 1.98 Total Sales 8.98 10.06 10.54 11.00 Operating Profit 0.46 0.66 0.72 1.12 Net Income (0.03) 0.05 0.13 0.30 Cash Flow 0.09 0.25 0.44 0.64 Ratios: - Operating Profit/Sales (%) 6.0 8.3 8.7 13.2 - Net Income/Sales (%) (0.4) 1.0 2.1 4.7 Balance Sheets: Current Assets 4.88 5.91 7.20 9.62 Net Fixed Assets 1.58 2.34 2.52 2.48 Total Assets a/ 6.62 8.41 9.97 12.60 Current Liabilities 3.85 4.95 5.76 8.C4 L & M Term Debt 1.18 1.48 1.93 1.98 Equity 1.58 1.98 2.28 2.59 Ratios: - Debt/Equity 43:57 43:57 46:54 43:57 - Current 1.27 1.19 1.25 1.20 - Debt Service Coverage 2.6 0.8 2.5 2.3 a/ Including investments and deposits Industry Department June 1987 - 57 - ANNEX 6-2 Table 3 PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) SITER - Summary of Financial Statements (TD million) 1981 1982 1983 1984 1985 Results: Local Sales 6.83 4.47 5.14 5.65 6.71 Exports 0.05 0.02 0.02 0.01 0.01 Other Revenues 2.58 1.06 1.86 1.49 1.63 Total Sales 9.46 5.55 7.02 7.15 8.35 Operating Profit 0.48 0.42 0.53 0.30 0.51 Net Income 0.01 0.01 0.11 0.03 0.12 Cash Flow .0.19 0.24 0.34 0.39 0.58 Ratios: * - Operating Profit/Sales (Z) 5.0 7.5 7.6 4.1 6.1 - Net Income/Sales (%) 0.1 0.1 1.6 0.5 1.5 ' Balance Sheets: Current Assets 4.58 3.75 4.03 3.26 4.30 Net Fixed Assets 2.74 2.79 3.57 5.04 4.84 Total Assets a/ 7.42 6.67 7.75 8.24 9.26 Current Liabilities 4.13 3.11 3.57 3.25 4.72 Long- and Medium-term Debt 1.32 1.45 1.96 2.92 2.08 Equity 1.97 2.11 2.22 2.26 2.46 Ratios: - Debt/Equity 40:60 41:59 47:53 56:44 46:54 - Current 1.11 1.21 1.13 1.00 0.90 - Debt Service Coverage 4.7 0.9 0.9 1.3 2.0 a/ Including investments and ddposits Industry Department June 1987 ANNEX 6-3 Page 1 PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) SITEX - Cost and Benefit Streams for Financial Rate of Return Calculation (Constant 1985 US$ million) Fixed Foregone Capital Working Operating Sale of Net Costs Capital Benefits Assets Benefits 1981 (6.00) (5.43) (11.43) 1982 (3.62) (5.69) 3.99 (3.49) (8.81) 1983 (3.73) (9.77) 4.14 (9.36) 1984 (3.35) (7.34) 4.49 (6.20) 1.985 (0.95) (0.60) 6.60 5.05 1986 (0.60) 10.50 9.90 1987 (0.60) 9.90 9.30 1988 (0.50) 11.40 10.90 1989 11.40 11.40 1990 11.40 11.40 1991 11.40 11.40 1992 11.40 11.40 1993 11.40 11.40 1994 1.76 16.39 11.40 29.55 FRR - 17.4% ANNEX 6-3 59- Page 2 PROJECT COMPLETION REPORT TUNISIA - SOGITEK TEXTILE REBABILITATION PROJECT (LOAN 2012-TUN) SITEX - Financial Rate of Return: Fixed Capital Costs Less Less Interest Plus Total Unrelated During Technical Total Fixed to Construe- Assis- Project Investment Project tion tance Cost Current TD Million 1981 3,342 335 46 - 2,961 1982 2,823 457 209 - 2,157 1983 4,030 369 847 100 2,914 1984 4,255 432 982 270 3,111 1985 1,012 310 - 22 724 Current US$ Milion a/ 1981 6,427 644 88 - 5,695 1982 4,568 739 338 - 3,491 1983 5,101 467 1,072 126 3,688 1984 4,891 497 1,331 310 3,373 1985 1,332 408 - 30 954 Constant US$ Million b/ 1981 6,768 678 93 - 5,997 1982 4,742 767 351 - 3,624 1983 5,157 472 1,084 127 3,728 1984 4,857 494 1,322 308 3,349 1985 1,332 408 - 31 954 a/ Calculated at the exchange rates used by SITEK for capital costs: 1981 1982 1983 1984 1985 TD/US$ 0.520 0.618 0.790 0.870 0.760 b' Adjusted by the unit value index of Manufacturing Exports (NUV Index) expressed in US$: 1981 1982 1983 1984 1985 MUV Index 105.3 103.8 101.1 99.3 100.0 -60- ANNE 6-3 Page 3 PROJECT CompLETION REPORT TUNISIA - SOGITER TEXTILE RERABILITATION PROJECT (LOAN 2012-TUN) BITER - Financial Rate of Return: Projected Sales. Operating Costs and Profits (TD million Il constant 1985 prices) 1985 1986 1987 1988-94 (Zctual) Volume of Sales (million 1) Exports Wide Denim 10.36 14.50 15.0 18.1 Narrow Denim 1.32 1.1 1.0 0.9 Other a/ 2.08 1.0 0.5 - Total Exports T7. TT 97 T Local Market Wide Denim 0.90 1.0 1.3 1.5 Narrow Denim 1.85 2.2 2.3 2.5 Other b/ 2.86 2.5 2.2 2.0 Total Local Market T .7 378 37 Total IT I1 2T:1 23T. Unit Prices (TD/Im) Exports Wide Denim 2.00 1.95 1.95 1.93e/ Narrow Denim 1.42 1.20 1.15 1.10 Local Market Wide Denim 2.69 2.50 2.30 2.00 Narrow Denim 1.86 1.80 1.70 1.50 Value of Sales and Other Revenues Exports Wide Denim 20.74 28.3 29.2 35.0 Narrow tam 1.88 1.3 1.1 1.0 Other c/ 2.29 1.4 1.2 - Tot3l Exports 24r 31.0 3. 3" Local Market Wide Denim 2.43 2.5 3.0 3.0 Narrow Denim 3.44 2.2 3.9 3.7 Other A/ 7.39 5.6 3.6 2.34/ Total Local Market I1!. -1,"= 5 W Other Revenues 4.35 1.8 1.5 1.0 Total Revenues 42.63 43.1 43.5 46.0 Cash Operating Costs Cotton 16.76 17.0 18.5 19.8 Other Raw Materials 2.02 2.1 2.2 2.4 Utilities 1.19 1.3 1.4 1.5 Labor 7.06 7.4 7.5 7.8 Spare Parts 0.92 1.0 1.0 1.0 Other Expenses 9.02f/ 5.5 4.6 4.0 Total Cash Operating Costs 36.97 34.3 35.2 36.5 Cash Operating Profits 5.51 8.8 8.3 9.5 Equivalent US$ million 6.60 10.50 9.90 11.40 s/ Not including Iarments. bI Including grey cloth, yarn, raw cotton, grey fabrics, bed sheets and garments. e/ Including all products. dl Mainly grey cloth. - ./ Equivalent to US$2.30/1a. / Exceptional year because of large purchases of spares and stocks. Industry Department June 1987 - 61 - ANNEX 7-1 Page 1 PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) SITEX - Cost and Benefit Streams for Economic Rate of Return Calculation (Constant 1985 US$ million) Fixed Foregone Capital Working Operating Sale of Net Cost Capital Benefits Assets Benefits 1981 (5.35) (6.00) (11.35) 1982 (3.23) (5.12) 5.79 (9.36) (11.92) 1983 (3.33) (8.79) 5.64 (3.49) (9.97) 1984 (2.99) (6.61) 5.49 (4.11) 1985 (0.85) (0.54) 8.20 6.81 1986 (0.54) 12.20 11.66 1987 (0.54) 11.30 10.76 1988 (0.45) 14.60 14.15 1989 14.60 14.60 1990 14.60 14.60 1991 14.60 14.60 1992 14.60 14.60 1993 14.60 14.60 1994 1.57 22.59 14.60 38.76 ERR - 20.4% - 62- ANNEX 7-1 Page 2 PROJECT COMPLETION REPORT TUNISIA - SOGITEX TEXTILE REHABILITATION PROJECT (LOAN 2012-TUN) SITE - Summary of Adjustments Made to Financial Costs and Benefits for Economic Rate of Return Calculation Conversion Factor Fixed Investments Exclude Duties and Taxes a/ Other Local Costs 0.80 Working Capital 0.90 Operating Costs Raw Materials: - Cotton 0.98a/ - Other 0.966/ Utilities 1.10 Wages 0.80 Other Expenses 0.80 Revenues Exports 1.00 Local Sales 0.85 (until 1988) 1.00 (from 1988) a/ Duties and taxes represent about 8% of installed cost (Annex 3-3). b/ Adjustment of 0.90 on 24% of sales (share of local sales). c/ Adjustment of 0.85 on 24% of sales (share of local sales). Industry Department June 1987