Tunisia - Industry Support Institutions Upgrading Project

Document of The World Bank Reoort No: 16230 TUN STAFF APPRAISAL REPORT REPUBLIC OF TUNISIA INDUSTRY SUPPORT INSTITUTIONS UPGRADING PROJECT May 23, 1996 Private Sector Development Finance and Infrastructure Division Maghreb and Iran Department Middle East and North Africa Regional Office  CURRENCY EOUIVALENTS US$1 = TDO.96 TD1 = US$1.04 US$1 = FRF5.17 FRFI = US$0.19 FISCAL YEAR January 1 - December 31 ACRONYMS BMN Bureau de Mise d Niveau CAS Country Assistance Strategy CETIME Centre Technique des Industries Mecaniques et Electriques CETTEX Centre Technique du Textile CNCC Centre National du Cuir et de la Chaussure CTE Centre Technique de l'Emballage CTMCCV Centre Technique des Materiaux de Construction, de la Ceramique et du Verre CUP Competitiveness Upgrading Plan DGI Direction Generale de l'Industrie EC European Commission ECAL Economic Competitiveness Adjustment Loan ETE Euro-Tunisie Entreprises EU European Union FODEC Fonds de Developpement de la Compstitivitd FODEP Fonds de Depollution FRF French franc FTA Free Trade Agreement GoT Government of Tunisia 1CB International Competitive Bidding Ml Ministry of Industry NCB National Competitive Bidding NMS National Metrology System NS National Shopping PEC Programme for Enhancing Competitiveness PCU Project Coordination Unit PMN Programme de Mise d Niveau PSD Private Sector Development SC Steering Committee SME/SMI Small and Medium Enterprise/Small and Medium Industry STC Sectoral technical center TD Tunisian Dinar  REPUBLIC OF TUNISIA INDUSTRY SUPPORT INSTITUTIONS UPGRADING PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. Loan and Project Summary I. INTRODUCTION ........................ . I II. THE STRATEGY FOR INDUSTRIAL COMPETITIVENESS 1 A. Background I B. The Industrial Upgrading Program . . . . . . . . . . . . . . 2 C. Industrial Technology Development 2 D. Sectoral Technical Centers 3 E. The Government's Reform Agenda 3 III. BANK AND EC ROLES AND LENDING STRATEGY . . . . . . . . . 6 A. Bank Role and Lending Strategy . . . . . . . . . . . . . . . 6 B. EC Role ...................... . 7 IV. THE PROJECT.8. . . .............. . 8 A. Project Rationale . . . .. . . ... . . . . . . . . . . . . 8 B. Project Objectives and Scope . . . . . . . . . . . . . . . . . 9 C. Project Description .................. . 9 D. Project Costs . . . . . . . . . . . . . . . . . . . . . . . 12 E. Project Financing. .................. 13 F. Environmental Aspects ................... . 14 G. Financial and Economic Analysis .... . . ......... 14 V. PROJECT MANAGEMENT AND IMPLEMENTATION . .............. 15 A. Management ........................ .. 15 B. Implementation ....................... . 16 C. Procurement .. ...................... . 16 D. Disbursement . . . . . . . . . . . . . . . . . . . . . . . 18 E. Accounts and Audits .................... . 20 F. Monitoring, Evaluation, and Reporting ......................... 20 G. Bank Supervision ...................................... . 21 VI. BENEFITS AND RISKS ....................................... 22 VII. AGREEMENTS REACHED .................... . 23  Paoe No. In-Text Tables Table 4.1 Project Cost .. . . . . . . . . . . . . . . . . . . . . 12 Table 4.2 Financing Plan . . . . . . . . . . . . . . . . . . . . 13 Table 5.1 Procurement Arrangements . . . . . . . . . . . . . . . 17 Table 5.2 Disbursement Arrangements 19 Table 5.3 Estimated Disbursements ............................ 20 ANNEXES Annex 2.1 Letter of Development Policy Annex 3.1 International Experience with Technical Support Institutions Annex 4.1 Existing STCs CETIME CETTEX CNCC CTMCCV Annex 4.2 Proposed New STCs Annex 4.3 National Metrology System Annex 4.4 Project Costs and Financing by Institution and Component Annex 4.5 Methodology for Financial and Economic Analysis Annex 4.6 Examples of Financial and Economic Analysis Annex 5.1 Performance Monitoring Indicators Annex 5.2 Selected Documents and Data Available in the Project File This report is based on the findings of an Appraisal Mission that visited Tunisia in April 1996. The Appraisal team comprised Judith Press (Task Manager), Dominique Pannier (Senior Public Sector Management Specialist), Hamid Alavi (Industrial Specialist), Ezedine Hadj-Mabrouk (Senior Environmental Specialist) and Giulio deTommaso (Consultant). Preparatory studies were financed under a Japanese grant (TF023032). Ira Lieberman and Alain Soulard are the peer reviewers. Claudia Pardifias is the lawyer. The Division Chief is Amir Al-Khafaji, the Country Director is Daniel Ritchie, and the Regional Vice President is Kemal Dervis.  REPUBLIC OF TUNISIA INDUSTRI SUPPORT INSTITUTIONS UPGRADING PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Tunisia. Executini! Agencv: Ministry of Industry / Direction GWndrale de l 'Industrie (MI/DGI). Beneficiaries: Existing and new sectoral technical centers (STCs), and institutions participating in the national metrology system (NMS). Poverty Category: Not applicable. Loan Amount: FRF200 million (US$38.7 million equivalent). Terms: Repayment in 17 years, including 5 years of grace, at the standard interest rate for PIBOR-based French franc single currency loans. Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days after signing, less any waiver. Onlending Terms: For the four existing STCs, funds under the project will be onlent in French francs, at the same PIBOR-based interest rate that the Bank charges, and with a maturity not exceeding that of the Loan. For new STCs established under the project, funds will be made available by the Borrower in French francs on a grant basis. Financing Plan: See para. 4.20. Rate or Return: All investment projects will be required to demonstrate an economic rate ot return of at least 12%. Staff Appraisal Report: 15579 TUN. Project Identification Number: 40208.   REPUBLIC OF TUNISIA INDUSTRY SUPPORT INSTITUTIONS UPGRADING PROJECT STAFF APPRAISAL REPORT I. INTRODUCTION 1.1 Tunisia is at a critical point in its economic development, and both Government (GoT) and the private sector are keenly aware of it. Economic performance has improved following an extensive reform program over the last eight years, which has gone far to liberalize the economy and orient it outward by removing restrictions and administrative controls over external trade, prices, and credit. 1.2 Of critical importance to Tunisia's efforts to improve the international competitiveness of its industry is the strengthening and upgrading of its support infrastructure, to make it more efficient and responsive to the needs of private enterprises. International markets increasingly require products to be certified (to ISO 9000 standards, etc.), requiring firms to have access to an accreditation system and a national metrology system, both of which are now being established in Tunisia. Mechanisms to diffuse information regarding international requirements are needed to support assimilation of new technology, and laboratories are needed to analyze and test products to verify that they meet established standards. Under past industrialization policies, GoT set up sectoral technical centers (STCs) to support private enterprises, which are overwhelmingly small and medium enterprises (SMEs). The private sector wishes to benefit from the services provided by STCs, and lobbies actively for the creation of additional STCs. HI. THE STRATEGY FOR INDUSTRIAL COMPETITIVENESS A. Background 2.1 Tunisian industry developed after independence in 1956 behind high protective barriers. For the last few decades, industrial development has been central to Tunisia's development strategy. The country now has an important industrial base, which accounted for 31 percent of GDP in 1993, compared to 24 percent in 1970. Manufacturing is the largest component of the industrial sector (consisting primarily of agroindustry, construction materials, machinery, textiles, and chemicals), and in 1994 accounted for 17.5 percent of GDP, 20 percent of total employment, and about 65 percent of exports. Tunisia has performed well in terms of export growth, with manufactured exports increasing by 9 percent a year during 1980-92. although growth has slowed in recent years. This rate of growth was achieved through a combination of policies that fostered macroeconomic stability and increased the outward orientation of the economy. 2.2 GoT and the private sector agree that it is necessary to pursue integration with the world economy and in particular the European Union (EU). To this end, it has recently signed a free trade agreement (FTA) with the EU involving full trade liberalization over a 12 year period starting in 1997. The scope and pace of tariff reduction are now clearly defined by the free trade agreement between Tunisia and the EU, as well as by Tunisia's recent accession to the GATT/WTO.  - 2 - 2.3 GoT is fully aware of the necessity of meeting the challenge of such a free trade zone and subsequent cooperation agreement. and thus of completing the overhaul of Tunisia's legal. regulatory, and financial frameworks. Since it is seeking to manage and keep to a minimum the disruption and costs the FTA is expected to cause in the short term, in particular in the industrial fabric, GoT has established a progfram (Programme de Mise a Niveau - PMN) to help upgrade the competitiveness of industrial enterprises to international standards. The European Commission (EC) is playing a leading role in supporting the upgrading process, with a program for enhancing competitiveness (under preparation), as well as the establishment of a Euro-Tunisian business center. B. The Industrial Upgrading Program 2.4 GoT's industrial upgrading program, the Programme de Mise a Niveau (PMN), has been established to assist self-selecting (volunteering) viable private sector industrial enterprises to upgrade to international standards. A diagnostic study, covering inter alia market potential, management capability, technical performance and know-how, financial strength, and competitiveness are prepared by specialist consultants for each firm. Where actual or achievable competitiveness is shown, preparation of a competitiveness upgrading plan (CUP) follows, covering areas such as quality, productivity, environmental issues, recapitalization, organization and management, and physical investments. The firm implements this plan with appropriate technical assistance from various primarily private sector sources, either domestic or foreign. Access to financing under the PMN is conditioned on the firm implementing the agreed CUP. The sectoral technical centers (STCs) are viewed as essential players in the program, both directly as providers of services to firms and as channels for foreign assistance. 2.5 GoT has established a quadripartite Steering Committee (SC) to oversee the PMN, which includes representatives of relevant ministries and of the financial and enterprise sectors, and a representative of the labor union. The SC is chaired by the Minister of Industry,. A coordinating entity, the Bureau de Mise a Niveau (BMN) has also been set up, reporting to the Cabinet of the Minister of Industry and serving as technical secretariat to the SC, to guide firms seeking competitiveness upgrading through the PMN. C. Industrial Technolos!v Development 2.6 Main Impediments to Technology Transfers. Given investors' preference for technologically simple manufacturing activities, entrepreneurs consider the issue of technology transfer a significant challenge. Foreign exchange control is no longer an impediment to technology transfer since the introduction of current account convertibility. Both domestic and foreign direct investment enjoy a high degree of freedom. Training to improve the Tunisian work force's capacity to absorb technology needs to be developed and a favorable business environment put in place to ensure the success of technology transfer. 2.7 The Diffusion of Technology. Diffusion of technology will occur more quickly and widely if economic policies help raise the demand for technology - for example, by further import liberalization and domestic competition among producers, and by incentives to acquire new manufacturing machines and processes. Technology diffusion also depends on measures to increase the flow of information about new technologies and to reduce the direct costs of acquiring new technology; the roles of both the public and private sectors are important in broadening access to new technology. While economic reforms and liberalization, including the recently signed FTA with the EU, have raised demand for technology in Tunisian industry, the mechanisms for technology diffusion remain weak.  - 3 - 2.8 Low Domestic Technological Capacity. Technology transfer is defined as the transfer of the know-how necessary to produce a given good or service. Technology refers to the manufacturing process, but is ultimately reflected in the range and quality of products manufactured. In manufacturing, technology is thus a function of the sophistication and range of the manufacturing equipment used. It is also a function of the manufacturing process and product design, which can be upgraded by acquiring the right to use more advanced propriety processes and product designs, usually through licensing arrangements. In addition to the "hard" components of technology, such as machines, materials, and design, the "soft" components of technology may be equally important because they determine how efficiently the hard components are used in manufacturing. Critical elements of soft technology include the organization and management of manufacturing firms and the training of staff. Taking into account the growing pressure stemming from foreign competition, acquiring technological know-how and machinery from foreign companies is viewed as critical to upgrade the quality of many domestic products and to foster exports. D. Sectoral Technical Centers 2.9 Tunisian sectoral technical centers (STCs) are parastatal institutions (personnes morales d'intgret 4conomique public - "juridical persons of public economic interest") managed by the private sector. At present, they provide a wide array of services to enterprises and the industrial sectors they serve; a common feature of these services is that they support or promote the acquisition and diffusion of technology. 2. 10 Four STCs have been promoting the acquisition of technology in well-established activities with large numbers of enterprises. On the whole, entrepreneurs find their services useful, although they criticize their efficiency and the level of expertise of the staffs. The newest is CETTEX (the technical center for the textiles sector), set up in 1992. The others are CNCC (for leather and shoes); CETIME (for mechanical and electrical industries); and CTMCCV (for construction materials, ceramics, and glass). E. The Government's Reform Agenda 2.11 GoT is undertaking a broad program to reform and upgrade the institutions supporting the development of the private industrial sector, which are intended to play an important role in the PMN. The retorm program is based on the recommendations of studies financed under a Japanese grant, for which the Bank is implementing agency, and is more than a mere institutional reform of existing public instruments. Rather, its aim is to redefine the priority functions of institutions; ensure optimum utilization of limited public finances; clarify the relationships among the state, sectors, and institutions; and encourage the institutions to behave like private-sector operators. 2.12 The general framework of the reform is designed to ease the transition to a situation in which the STCs are incorporated as independent entities that provide services paid for out of allocated public and sectoral resources and by fees from private client firms. This framework should allow each institution to develop along its own lines. The pace of progress toward autonomy -- particularly with respect to salary structures -- will he determined by the level of income generated by services sold to enterprises. 2.13 Reform of the STCs' Charters. The Government initiated the reform process with the enactment of Law No. 94-123 in November 1994, which introduced significant changes in the governance  - 4 - of the STCs. The By-Laws of the STCs must also, henceforth, comply with the provisions of Decree No. 95-439 of March 1995. which implements some provisions of Law No. 94-123. This reform aimed to strengthen the STCs' autonomy under the guidance of private sector representatives, and to reinforce their commercial orientation. Such an approach was advocated by the Bank in the Private Sector Assessment,' which emphasized that the STCs need to work in cooperation with their sectors. 2.14 The main changes under the Law are to: (a) subject STC operations to commercial law and to audit of accounts, while giving them financial autonomy as quasi-corporations - without share capital-that pursue public economic goals (personne morale d 'intdr& &conomique public); (b) delegate to the Board of each STC all major decisions regarding the STC's activities; (c) give a large majority of the Board seats to private sector representatives (9 out of 12 members) nominated by the sector's professional association and appointed by the Minister of Industry, and allow the Board to appoint the Chairman and the Managing Director, the latter after consulting the Minister of Industry; and (d) provide a broad definition of the powers of the Chairman and the Managing Director. 2.15 Public funding entails certain controls: (i) the Finance and Industry Ministers approve current and capital expenditure budgets, financing plans, and the salary scale; and (ii) the Minister of Industry approves the internal organization of the center, as well as borrowings. The new legal regime provides for a system of checks and balances, which is generally appropriate, although state control over salaries is an impediment to a fully commercial orientation. With an increasing proportion of commercial revenues, and with a proper incentive scheme as provided for in the program and performance contracts (para. 2.16), STCs are expected to become more autonomous and accountable to their clients' representatives. 2.16 Program and Performance Contracts. To support the transition to autonomy, the Government intends to implement a program and performance contract (PPC), which will constitute the basic principle governing the relationship between the Ministry of Industry and the institution. To clarify the role of each party, and ensure that the actions of each institution are consistent and directed toward meeting the needs of private enterprises, the activities of each body will be classified in three categories, each of which will be associated, eventually, with a specific payment mechanism: (a) Services provided for, and at the reguest of. enterprises in the sector, in the form of technical assistance, product development, analyses or tests, training, information services. and documentation. Such services must be billed in principle at full cost and payment received (with the exception of activities for which there is an agreement for sectoral support - see (b) below), or else be paid by subscription fees. (b) Support efforts benefitting all enterprises in a particular sector or subsector of activity, e.g., the monitoring of technological developments, participation in standardization, etc. Such support is currently funded through payments from FODEC (the Fonds de DeSveloppement de la Competitivite, put in place by GoT to fund the industrial upgrading process), but in future will be subject to a subscription levied on the sector in question. In the future, these services may also be provided through competitive bidding, following a pattern similar to that of franchising. / Report No. 12945-TUN, dated November 1994.  - 5 - (c) Operations in response to 2overnment needs, or specific needs for public services, should initially be paid for by the Government through a multi-year contract. Subsequently. once the institutions are completely private, these needs can be met by means of competitive bidding. At such time, these functions can be assimilated into the first category defined above. At present, payments are made through FODEC, but eventually they will be entered in the central government budget. 2.17 Finally, during a transitional period (defined in the PPC), the Government can undertake to contribute exceptional and decreasing support (i.e., a subsidy) while the STCs build up their self- financing capacity (categories a+b+c below). This subsidy would therefore cover both the delivery of services that are not currently remunerated at their true value, and the cost of inefficiencies. Introduction of a cost accounting system will make it possible to determine clearly the costs of the various services. 2.18 The PPC is therefore an appropriate instrument while the institutions maintain their current status. It defines: (a) The STC's revenue from enterprises for services supplied to them by the STC (cateworv _2/); this should increase over a period of three to seven years, to reach at least 50 percent of operating expenses; (b) The share and/or amount of financing covering services provided in the general interest (cate2orx b), for reasons of competitiveness; (c) The share and/or amount of financing covering the provision of public services (categorv c); and (d) The gradual reduction and final elimination of the subsidy currently granted while the institutions build up their self-financing capacity. 2.19 In addition, the PPC specifies to what degree an institution will be responsible for its own capital budget and to what degree it will be funded by FODEC (or, in the future, by the government's budget or a levy on the sector), based on the various categories of activities above. 2.20 The PPC also provides for positive and negative incentives. In particular, positive incentives will include ways to reward employees for increases in the institutions' incomes, while negative incentives could be incurred if an institution requires a higher subsidy than provided for in the PPC. The contract also indicates the measures to be adopted in case of noncompliance with contractual duties. Finally, provision is made for a supervisory board (commission de suivi) to act as arbitrator in case of disputes between the parties regarding possible nonperformance of contractual duties. Program and pertormance contracts for the four existing sectoral technical centers have been prepared under terms of reference agreed with the Bank. This category largely corresponds to services described in para. 2.16 (a) above, but may also include some payments from firms for services primarily covered by the sector, as described in para. 2.16 (b).  2.21 The Government has sent the Bank a policy letter regarding its reform program for the support institutions, which is attached (in translation) as Annex 2.1. In addition to the commitment to implement the PPCs described above, this letter addresses the authorities' intentions to: (a) implement the reform of the support institutions as a coherent set of service providers; (b) identify the priority missions for each institution; (c) put in place an appropriate cost accounting and billing system in each institution; and (d) initiate more flexible recruitment procedures as well as some form of incentive system for personnel in each institution. 111. BANK AND EC ROLES AND LENDING STRATEGY A. Bank Role and Lending Strategv 3.1 As noted in the proposed Country Assistance Strategy (CAS), the pace of structural reform needs to move forward decisively in Tunisia, particularly in the areas of trade and opening more investment activities to the private sector. The rest of the world is changing rapidly, so that countries such as Tunisia need to liberalize to enhance their international competitive position. The state needs to decrease its size and role in the economy further, strengthen its actions in the provision of public goods and the management of scarce resources, and encourage a higher level of private investment. both domestic and foreign. 3.2 In this context, the Bank's private sector development (PSD) strategy in the short term is to work in parallel on two fronts: (a) support further reform of the legal and regulatory frameworks to foster further private sector development, through the proposed Economic Competitiveness Adjustment Loan; and (b) support GoT's efforts to upgrade private firms' competitiveness, through this proposed project. the proposed Second Training and Employment Project, and possible subsequent operations. In the long term, the Bank's PSD work in Tunisia is expected to encompass the private provision of public services as well as the promotion of private agriculture, and in particular linkages with agroindustry. The Bank is also working closely, and in complementarity, with the European Commission (EC). 3.3 Rationale for Bank Involvement. The recent Private Sector Assessment and other economic sector work identify the main issues to be addressed to make the economy more competitive. This work responds to the priorities of GoT, which regards the Bank as a valuable source of policy advice and technical analysis, and to the strategy outlined in the CAS of supporting private sector development and continued policy reform. Moreover, at GoT's request and in preparation for Bank support for PSD, the Bank was executing agent for a set of studies, financed by a Japanese grant (TF023032), that reviewed the needs in order to upgrade enterprises and strengthen support agencies. The project is complementary to the proposed Economic Competitiveness Adjustment Loan (ECAL) and Second Training and Employment Project, as well as to the EC programs aimed at supporting Tunisian efforts  - 7 - to improve the international competitiveness of viable private sector enterprises. The Project has been developed in close cooperation with the EC, which is expected to provide parallel cofinancing for the technical assistance and training components. 3.4 The recently revised legal status and By-Laws of the industrial support agencies offers a satisfactory framework for their transition to a corporate model, which the project seeks to support. The proposed project addresses some of the institutional needs of the industrial support infrastructure, and responds to the Govermnent's industrial competitiveness upgrading strategy and policy for the reform of the technical support infrastructure. 3.5 Lessons Learned from Previous Bank Operations. As documented by an ASTTP study of the use of external sources of technology by private enterprises in six countries,3 government support must play a major role in many areas where the market itself does not provide it. As the study points out. this is especially important for small scale industry (SSI), which suffers most from lack of support. Empirical data. as documented by the study, suggest that government's role is first and foremost to create an appropriate environment for technology acquisition and development and to ensure that the right incentives are present, including product competition and an education system that produces quality technical manpower. The survey further suggests that where technological institutions are needed, government must support their creation or stimulate industry to cooperate and create them. Where such institutions already exist, as in Tunisia, their success depends on several factors. Design of the present project draws heavily on the study's findings (see Annex 3.1 for a summary of international experience with technical support institutions). 3.6 The proposed project draws on successful examples of technological institution reform. which point to the following key elements: (a) reward structures for staff based on quantity and quality ot service provided to industrial clients. (b) flexibility in personnel management in order to select and retain valuable technical staff, (c) leadership capable of driving the changes, and (d) a clear understanding of who the clients are and their priority needs, translated into the right mix of STC activities. The project performance indicators have been chosen to highlight progress along these lines (para. 5.20 ff). B. EC Role 3.7 The European Commission (EC) is playing a leading role in supporting the upgrading process, with a Programme for Enhancing Competitiveness (PEC), under preparation, to support the development of venture capital, provide technical assistance to the entity coordinating the PMN upgrading process. and provide training to the banking system. The EC is also putting in place a Euro-Tunisian business center. Euro-Tunisie Entreprises (ETE). which will undertake diagnoses of firms and provide them with appropriate technical assistance, as well as promote joint ventures between Tunisian and European firms. 3.8 The objective of the PEC is to provide support for the Tunisian private sector to enable it to take advantage of opportunities that will arise through the liberalization of the trade regime, and to enable it to contribute more generally to economic growth. The main focus of the program is on development of the financial sector; it is designed to be complementary to the EC program providing business services through the ETE, as well as providing support to GoT's PMN. The PEC is also 3/ Institutions and Policies for Industrial Technology Development (Yellow Cover), November 3, 1995, Private/Public Sector and Technology Development Division, Asia Technical Department (ASTTP).  - 8 - designed to he complementary to the ECAL under preparation by the Bank with parallel cofinancing from the EC. 3.9 The PEC is expected to comprise the following components: (a) fostering development of the Tunisian capital market through the establishment of a venture capital facility, with funds channeled through the European Investment Bank: (b) support to the BMN, through providing medium-term expatriate staff and, in particular, organizing targeted study tours for Tunisian decision makers and policy-related workshops in Tunisia with external advisory inputs, on themes relating to the mise a.niveau process. The EC has requested Bank support for and participation in this component; (c) assistance to the banking system to deliver appropriate training for commercial bank staff so that the banking sector can better address the needs of the business community, through a broad training program addressing each bank's individual needs as well as areas of general concern; and (d) resources to strengthen the EC's capacity to manage this series of activities in Tunisia, as well as oversee ETE, and a privatization program yet to be launched. IV. THE PROJECT A. Project Rationale 4.1 Tunisia's international competitiveness is limited by the capacity of private entrepreneurs, mainly SMEs, to adapt their products to foreign market requirements and to meet increasing domestic demand for quality and diversity. Acquiring and assimilating technology is central to overcoming both difficulties. As in other developing countries, the overwhelming demand of industrial firms is for services related to technology transfer. Technological know-how is so diverse and specialized that individual firms (unless they have a large technology support group of their own) cannot possibly have up-to-date knowledge in all relevant fields. Some needs may be satisfied through normal market channels, or through means such as the use of private research firms, consultants, cooperation between supplier and customer. etc. However. government support must play a major role in many areas where the market itself does not provide it (para. 3.5). 4.2 The project involves an adjustment in the role played by the state, in line with the Tunisian 1994 law reforming the statute of the STCs (para. 2.13), as well as with the lessons drawn from successful examples of technology infrastructure (para. 3.5). 4.3 The Tunisian government will focus on its role as catalyst, offering financial assistance to support the creation of new STCs and funding the cost of STC activities that benefit the entire sector or subsector, in particular small and medium industries (SMIs). GoT will also (a) establish a supervisory board for monitoring PPC execution, (b) promote common projects, such as the introduction of a common cost accounting scheme. (c) set up an incentive scheme for STC personnel that will foster client orientation, and (d) reform poorly performing STCs, by identifying their priority missions, providing positive and negative incentives, and negotiating exceptional and decreasing financial support while institutions build up their self-financing capacity. This role is commensurate with the state's capacity to negotiate and enforce the rules of the game, with the supervisory board as arbitrator. These issues are reflected in the letter of development policy received from GoT (see para. 2.21).  4.4 During project preparation. Government and the STCs examined their respective roles and the STCs' mission. and prepared the divestiture of activities that directly compete with the private sector. The project will strengthen and improve management and encourage the STCs to further clarify their mandate and focus on marketable services. Therefore, the thrust of the reform supported by the project is to foster the STCs' responsiveness: STCs, to be effective, should be proactive in reaching out and providing services to industrial clients, foreseeing their future needs, and adjusting their services accordingly. As recommended by the study, the emphasis is on close association, rather than competition, with the private sector. B. Proiect Objectives and Scope 4.5 The objective of the proposed project is to put in place an efficient and market-responsive system of support agencies, providing assistance to the industrial sector, consisting mainly of small and medium enterprises, and in particular to firms seeking to become more internationally competitive. The project aims to enhance the effectiveness of GoT support for viable private sector enterprises' efforts to upgrade their international competitiveness, which various donors, including the EC, are supporting. It will improve management of the STCs through the introduction of program and performance contracts, and encourage them to further clarify their mandate, and focus on marketable services. C. Project Description 4.6 The project will support: (a) the institutional reform and strengthening of the four existing sectoral technical centers, (b) the creation of additional sectoral technical centers, and (c) the establishment of a national metrology system (NMS). To this end, the Project will assist in financing such productive facilities and resources of the technical institutions supporting the industrial sector as will contribute to the economic and social development of the Borrower. Thus, the Bank loan will finance civil works, goods and equipment, technical assistance and training for investment projects in support of the above activities for the STCs, and civil works, goods and equipment for the NMS. Existing Technical Centers 4.7 The four existing sectoral technical centers (STCs) are CETIME (mechanical and electrical industries), CETTEX (textile sector), CNCC (leather and shoes), and CTMCCV (construction materials, ceramics, and glass). A detailed description of each institution is given in Annex 4.1, and a breakdown of planned investments by STC and covering about the next two years in Annex 4.4. The Bank has reviewed the financial and economic justifications for these investments, which are satisfactory; these planned investments account for 50 percent of the financing requested for the existing STCs under the Bank loan. The project aims to address the particular needs of each of these institutions. within the framework of the reform program described above. 4.8 The economy's new outward orientation requires both a broader range of services than the STCs now provide and a strengthening of the private sector's capacity to provide technical expertise to productive enterprises. Since one of the STCs' main functions is to provide the kind of technical services that private firms can be expected to provide in the future, the STCs need to balance three different objectives: providing technical expertise to enterprises in their sectors; developing private sector capabilities for providing technical expertise, especially where private firms can be expected to replace the STCs; and performing an array of functions that private firms cannot be expected to perform, at least in the medium term.  - 10 - 4.9 There are a number of functions that the STCs can perform as repositories of sectoral technical expertise. that are not likely to be performed by private firms. One is to collect and disseminate information on technology for enterprises and, if requested, for the state. Most enterprises in Tunisia are too small to (a) stay abreast of new techniques and product designs being adopted around the world; (b) have laboratories to test inputs, outputs, and prototypes; and (c) employ production engineers able to master issues of quality, conformity, production process optimization, etc. As an illustration of the limited in-house technical capacity of Tunisian manufacturing industry, it should be noted that the average ratio of engineers and technical staff to total staff in Tunisian companies is two to three times less than in other countries in a similar stage of development and six times less than in industrialized countries. While the ultimate objective should be to increase this ratio, adequate numbers of qualified personnel are not currently available. The proposed Second Training and Employment Project will help develop enterprise-based and in-service training to address these issues. In the meantime, the STCs can help overcome at least some of the firms' limitations. 4.10 Draft program and performance contracts (PPCs), allowing for progressively greater autonomy as an STC improves its performance, have been prepared with assistance from consultants financed under the Japanese grant (para. 2.16 ff). The draft PPCs have been reviewed by the Bank and found to be satisfactory. The contracts will transfer responsibility to the STCs and ensure that their actions are consistent and directed toward meeting the needs of private firms; the contracts include measures in case of noncompliance by either party. GoT has also sent the Bank a policy letter covering this and other aspects of its reform program for support institutions (para. 2.21). Assurances have been received that PPCs acceptable to the Bank will be signed with each existing STC. Signature of a PPC satisfactory to the Bank will be a precondition for an STC to enter into a financing agreement with the Borrower under the Loan (para. 4.23). New Technical Centers 4.11 Until now, private investors have not taken the initiative to build up private advisory or testing capacity on a purely market basis. For example, there is no domestic independent consulting or engineering capacity in the sector of wood transformation and furniture manufacturing. This is due to a combination of the following factors: (a) the Tunisian manufacturing sector is largely composed of SMIs; (b) the lack of a tradition of cooperatives or exporting firms that encourage collective action; (c) lack of confidence that privately run laboratories would protect commercial or industrial secrets; (d) a weak industrial base in manufacturing, which translates into scarce local technical knowledge; (e) a limited domestic market for engineering and consulting; (f) the reluctance of SMI entrepreneurs to utilize foreign advisors or experts; and (g) their reluctance to pay market rates for professional consulting or advisory services. These facts should not discourage the new STCs from following the example of CETTEX in fostering the creation of private consulting practices or testing laboratories. Rather, they underline the need for a transition period before envisaging full privatization of an STC. 4.12 Despite private sector reluctance to set up such centers, several employers' associations have long advocated the creation of technical centers in their sectors. The November 1994 law reforming the statute of technical centers introduced the concept of private management for those centers (para. 2.13 ff) and clarified the conditions attached to their creation. In addition, the Tunisian authorities and the Bank have agreed that any new centers should adhere to the following principles: (a) A commercial orientation, which should translate into internal organization, management, and working procedures equivalent to those in place in Tunisia's private sector;  - 11 - (b) A deliberate policy of restraint by (i) developing activities that are not performed or insufficiently performed by private entrepreneurs, and (ii) carrying out these activities using private sector providers to the greatest possible extent, following the model of the sector-wide agreement on the use of laboratories developed by CETTEX; (c) Small, highly qualified technical staff, following CETTEX's example. In consequence, personnel should be recruited on the basis of contracts comparable to those in the corresponding private sector; and (d) An increasing share of revenue from services provided and billed to private firms, rapidly attaining the threshold of 50 percent. 4.13 The 1994 law has given new impetus to the projects; four industrial sectors, namely chemical industries, wood and furniture, agroindustry, and packaging, have officially requested the creation of technical centers. Joint committees, made up of representatives from the sector and from the Ministry of Industry, were established in the spring of 1995 to make recommendations on the main activities of these centers and the methodology for their creation. Feasibility studies are currently underway for these proposed new STCs, under terms of reference acceptable to the Bank and reflecting the above principles, the results of which are expected by July 1996. These studies will include detailed market studies that estimate actual and potential demand by industrial enterprises for services to be provided by new STCs, and the financial and economic viability of their investment programs, including rate of return requirements (at least 12 percent). Annex 4.2 provides summary information regarding the proposed new STCs, and a tentative breakdown of planned investments is given in Annex 4.4. 4.14 New STCs will, therefore, be established along similar lines to the reformed existing STCs, as market-responsive institutions expected rapidly to earn at least half their revenue from services rendered to firms. The economic viability of one of the proposed new STCs, namely the technical center for wrapping and packaging (Centre Technique de l'Emballage - C), has been established. The initial results of the economic analysis of CTE show an internal economic rate of return (IERR) of 65 percent, which is satisfactory to the Bank. This economic analysis is based on the agreed methodology (see Annex 4.6) to ensure that CTE will choose the most cost effective investment among various alternatives, while maximizing the positive sectoral impact. The full report, including economic analysis, is available in the project files. Assurances have been obtained that receipt by the Bank of a feasibility study establishing the viability of each proposed new STC. and a signed PPC satisfactory to the Bank. will be preconditions for signina a financing agreement between the STC and the Borrower (para. 4.23). Metrology 4.15 Tunisian exports will be facilitated if products and/or production processes can be tested and certified in Tunisia before incurring shipping costs. A necessary condition for product testing is that Tunisian firms satisfy the health, safety and environmental standards applied in foreign markets, primarily the European Union, which receives 85 percent of Tunisia's exports. Certification of production processes may also be a necessary condition for obtaining subcontracts from foreign firms. This requires Tunisian laboratories that are (a) able to certify, and (b) recognized by their trading partners. International recognition requires that: (a) for metrology, primary level certification laboratories must be up to international standards and recognized as such by international counterparts, and (b) for product testing. relevant testing bodies must be accredited by recognized primary level certification organizations.  - 12 - 4.16 The project will support the creation of an NMS by financing civil works and equipment inter alia for a primary level laboratory, which does not yet exist in Tunisia, and for industrial metrology. This equipment and associated technical assistance is needed to fulfill the first objective. GoT has developed a comprehensive plan for the accreditation of testing bodies. It has identified metrology as the weak link in the chain of elements to build the country's accreditation and certification system. Before investment in equipment is planned. a detailed study of the shape of the Tunisian metrology system is required. In particular. a choice must be made between a centralized and a decentralized system. An explanation of the issues involved is given in Annex 4.3, along with a brief description of the EC-funded study that will provide the basis for an informed decision. 4.17 Estimates of costs are difficult to make, especially because of the significant difference between the two scenarios. The costs of establishing a new, centralized national laboratory may be high: roughly TD30 million could be needed for a qualified centralized laboratory. If a decentralized system is chosen, this figure could probably be reduced to TD8-10 million (for civil works and equipment), the actual cost to be determined by the quantitative analysis to be undertaken as part of the EC-funded study of the requirements of testing bodies (laboratories) and industry. 4.18 The Bank project will ensure that the results of the EC-funded study translate quickly into purchase of needed equipment. Under the project, US$10.4 million is allocated to finance the metrology component. Subject to Bank approval of the consultant's recommendations, purchase of equipment and execution of needed civil works will be financed out of the proceeds of the loan, up to US$7.4 million. Donors (most likely the EC) or GoT will fund the associated costs of technical assistance and initial training. Assurances have been received that the EC-funded study will be completed by March 31, 1997. This study will ascertain the most appropriate principles and system to set up the metrology component. On the basis thereof, GoT will determine, in agreement with the Bank, the most adequate institution to implement this component. D. Project Costs 4.19 The estimated project cost is TD59.6 million (US$62.1 million equivalent). No physical or price contingencies have been included, at GoT's request, since overall costs for significant components of the project are only estimates. Direct and indirect foreign exchange costs account for about US$54.1 million equivalent, or about 87 percent of total costs. Recurrent costs, including personnel, have not been included in project costs. Estimated project costs by component are presented in Table 4.1. Table 4.1 Proiect Costs (US$ million) (FRF million) Component L_cal Foreign Total Local ForeiLn Total STCs 6.5 45.1 51.7 33.7 233.4 267.1 Metrology 1.4 9.0 10.4 7.3 46.5 53.9 Total Proiect Cost 79 54.1 62.1 41. 279.8 32  - 13 - E. Project Financing 4.20 The proposed Bank loan will finance equipment, including vehicles, civil works. technical assistance and training, and will finance about 62 percent of total project costs. The overall financing plan for the project is presented in Table 4.2. Table 4.2 Financing Plan (US$ million) (FRF million) Financier Local Foreign Total Local Foreign Total GoT/STCs 7.9 0.0 7.9 41.0 0.0 41.0 GoT/STCs/EC 0.0 15.4 15.4 0.0 79.8 79.8 IBRD 0.0 38.7 38.7 0.0 200.0 200.0 Total Financing 7.9 54.1 62.1 41.0 279.8 320.9 4.21 All project funds for STCs, including the environment sub-component, will be pooled, while those for the metrology component will remain separate. Unless the Bank shall otherwise agree, no single STC will utilize more than US$6 million equivalent of Loan funds, to ensure fair access for STCs to project funds. 4.22 For the four existing STCs, funds under the project will be onlent in French francs, at the same PIBOR-based interest rate that the Bank charges, and with a maturity not exceeding that of the Loan. This is appropriate in view of the increasing autonomy of the STCs over the project's life, and the principle of cost recovery. No commitment charge on the unwithdrawn amount of the onlent funds shall be paid, however. For new STCs established under the project, funds will be made available by the Borrower in French francs on a grant basis; this is acceptable since the STCs have no equity capital. Assurances have been received that the Borrower will enter into a financing agreement acceptable to the Bank regarding the conditions under which funds will be passed on to each institution by the Borrower. Signature of a PPC satisfactory to the Bank (paras. 4.11 and 4.15) will be constitute a precondition for an STC to enter into a financing agreement with the Borrower. Receipt of two signed financing asreements satisfactory to the Bank will be a condition of Loan effectiveness: receipt of a signed financing agreement, satisfactory to the Bank. will be reguired before proposed investments are approved for each center. 4.23 Cofinancing. Parallel cofinancing for the project is expected primarily from the EC, in the form of grants, to cover part of the technical assistance and training components. Assurances have been received that GoT will ensure adequate financing for the technical assistance and training components. in the event and to the extent that other donors do not fully cover these needs.  - 14 - F. Environmental Aspects 4.24 Supporting competitiveness upgrading of private industrial enterprises to international standards requires a review not only of the financial soundness of these enterprises and their support institutions but also of their technological, environmental, and management performance. This includes, in particular, an assessment of: the production process; the quality control system; the consumption and use of raw material, water, and energy; the production and management of waste; and the degree of compliance with environmental and quality requirements and standards, both national and international. The support institutions (the STCs) should be prepared to provide the best practice example as well as the best service and advice in these areas. 4.25 Accordingly, under the project, STCs will review their own environmental and quality control practices and develop a solid state-of-the-art knowledge base, as well as necessary institutional capacity through training, technical expertise, studies, and enhancement/mitigation measures (including win/win measures and investment in clean technologies and best environmental practices). An environmental institutional strengthening sub-component will constitute an integral part of the project's technical assistance and investment program. In light of the project's scope, and after Bank review of the operations of the four existing STCs (in particular the in-house demonstration production units) found them to have an insignificant enviromnental impact, the project was classified as category C. 4.26 In addition, the centers (existing and new) are committed, under the proposed reform and upgrading program and as part of their overall new mission and services, to support the competitiveness upgrading process of participating private industrial enterprises, to bring them into line with international standards and market requirements, especially in the areas of technological, environmental, quality, and management performance. Accordingly, the centers are proposing, with the support of the project, to strengthen or develop a new line of advisory and other services in the areas of information and research on clean technologies; upstream waste minimization and reduction; economies in the use of raw material, energy, water, and chemical products and other dangerous substances in the production process; waste recovery and recycling; training in industrial best environmental practices; and environmental audits. 4.27 The centers also expect to (a) assist private enterprises in applying for support from the national depollution fund (Fonds de Depollution - FODEP), and (b) provide paid services, upon request, to support the proposed establishment by the Ministry of the Environment of a national Environmental Label Scheme. in particular by participating in the determination of industrial product groups and the definition of selection criteria, and by providing assistance to enterprises in redesigning their products and in preparing their applications to be awarded the environmental "clean production" label. 4.28 The support activities proposed under the project to strengthen the service capacity of both the existing and new centers consist of pilot enviromnental audits, studies, technical assistance, in-house and external training, information and publications, and some small equipment. The implementation of these activities will be supervised as an integral part of the overall Bank project. G. Financial and Economic Analysis 4.29 A methodology for the financial and economic analysis of each category of proposed subproject has been discussed and agreed with the Tunisian authorities, as well as with the management of each existing and proposed new institution (see Annex 4.5). The same methodology will be applied  - 15 - to the metrology component. Some features of this methodology, which relate specifically to the types of activities undertaken by market-responsive technical support institutions, are summarized below. 4.30 For the financial analysis: (a) a market study to determine what services are needed by private industries that are not being offered by the private sector, as well as the demand for the proposed service at different prices; (b) a technical study to determine what investments are necessary to offer a given service; and (c) financial rate of return analysis, including the full cost of the investment and of operating expenses, with apro rata allocation for overheads, to verify that it is financially viable-for the institution to provide the service at an acceptable price. 4.31 For the economic analysis: (a) financial analysis at border prices for investments demonstrating an adequate financial return, to ensure correct allocation of resources from a country perspective; (b) for other subprojects, economic analysis based on (i) opportunity costs (e.g., of sending products abroad for testing and certification, of lost value due to product spoilage, etc.), and (ii) externalities (e.g., benefits of technical services to the entire sector). 4.32 The Bank has received satisfactory financial and economic analyses, following the agreed methodology, of early year investment projects for the existing STCs, amounting to some 50 percent of proposed Bank financing for the existing STCs (para. 4.7). Assurances have been received that financial and economic analysis for investment projects for both new and existing STCs will be carried out according to the methodology agreed with the Bank, and that all investments above the free limit (para. 5.4) will be reviewed by the Bank for prior approval. The condition for each disbursement for each STC is that the Bank shall have arnroved the investment Dro*ect in respect of which withdrawals are requested. V. PROJECT MANAGEMENT AND IMPLEMENTATION A. Manalerrent 5. 1 The Direction Generale de I 'Jndustrie (DGI) within the Tunisian Ministry of Industry has carried out the leadership role during the preparation phase of the project. It will continue to play this role in the execution phase, but with a different degree of direct involvement depending on whether the beneficiary is an existing or new STC, or the institution (not yet defined) entrusted with responsibility for establishing the national metrology system. 5.2 The MI will ensure overall coordination through a small Project Coordination Unit (PCU), created within the DGI, to administer the project on behalf of the Government. The PCU will be headed by a recently appointed director, who will act as a focal point for the beneficiaries. The PCU director will report to the Director General of Industry; appropriate arrangements will be put in place for the implementation of any component not entirely under the responsibility of the MI. The DGI will form, as needed, specialized working groups of representatives of the STCs to ensure consistency in the implementation of the reform program and execution of the project. This has already been planned for matters of common interest, such as cost accounting. The PCU director will foster exchanges of experience and documents relating to review of capital investments subprojects and the methodology used for economic and financial justifications of such investments.  - 16 - 5.3 For each existing as well as new STC, the managing director will be responsible for investment planning and the preparation of the PPC (para. 2.15), which will be presented to the newly formed STC boards, which now include a majority of private enterprise representatives. In view of this important step, the terms of reference for the consultant who has helped design the performance contracts include the task of presenting draft proposals to these representatives and familiarizing them with the concepts and logic of such contracts. In the case of new STCs, project implementation will be carried out by the MI, until the boards of each STC appoint a chairman and confirm the managing director, in accordance with the procedure set out in the March 1995 decree on mandatory provisions in technical center By-Laws. 5.4 The PCU, with the help of designated Ministry of Industry administrative staff, will be responsible for project accounts, review and guidance of procurement activity carried out by beneficiaries, disbursement administration, monitoring of beneficiaries' activity, collecting project indicators, and reporting. The PCU will also clear and monitor project commitments and disbursements (para. 5.17), monitor the progress of the various components and report to the Government and the Bank semi-annually on management issues and implementation. In addition, the Bank has delegated to the PCU the authority to approve investment projects for the STCs up to a free limit of US$100,000 equivalent of Bank financing, on the basis of the agreed criteria; this value may be increased as the PCU develops and demonstrates its capacity to evaluate proposed investments. Each beneficiary institution will name a counterpart for the PCU. The PCU Director will hold a full-time position for the first years of project implementation. He will regularly liaise with the Bank's project staff and visiting missions, in particular on issues relating to the allocation of funds among the various institutions. 5.5 Without the results of the study (para. 4.19), it is impossible to designate at this stage the agency or agencies to be in charge of the metrology component. The DGI shall act as the interim implementing agent until the study being undertaken to this end has been completed (para. 4.19). The MI will be assisted by two EC-financed residential experts who will ensure consistency within the entire quality promotion program and advise the Government on the preparation or implementation of recommendations. B. Imulementation 5.6 The project will be implemented over a period of six years. Project completion is expected by June 30, 2002, with the loan closing by December 31, 2002. A mid-term review of the project will be carried out no later than December 31, 1999. C. Procurement 5.7 The procurement arrangements for the components to be financed by the Bank are summarized in Table 5.1 below.  - 17 - Table 5.1 Procurement Arrangements (in US$ millions) Proiect Element ICB NCB Other NBF Total 1. Civil Works - 10.6 - - 10.6 (7.4) (7.4) 2. Goods 2.1 Equipment 21.3 7.0 3.9a - 32.2 (18.5) (6.1) (3.4) (28.0) 2.2 Vehicles 3.4 - - 3.4 (2.8) (2.8) 3. TA & Training - - 0.5 15.4 15.9 (0.5) (0.5) TOTALS 21.3 21.0 4.4 15.4 62.1 (18.5) (16.3) (3.9) (38.7) Note: Figures in parentheses are the respective amounts financed by the Bank loan. N.B.F.: not Bank-financed. Due to rounding, numbers may not add up. a/: includes international and national shopping. 5.8 All works, goods, and equipment to be financed by the Bank loan will be procured in accordance with the Bank's Guidelines for Procurement under IBRD Loans and IDA Credits (January 1995, revised January 1996). Tunisian manufacturers competing for contracts for the supply of goods procured under international competitive bidding (ICB) procedures will receive domestic preference, in accordance with Appendix 2 of the procurement guidelines. 5.9 Goods and equipment to be financed under the Bank loan will consist of laboratory equipment, vehicles, office equipment and furniture, and technical documentation. To the extent practicable, contracts for goods shall be grouped into bid packages estimated to cost the equivalent of US$250,000 or more each. Goods and equipment packages, including vehicles, estimated to cost more than US$250.000 equivalent each, will be procured through ICB, using the Bank's Standard Bidding Documents. National Competitive Bidding (NCB) will be used for contracts estimated to cost between US$100,000 and US$250,000, with an aggregate limit per STC, and for the NMS, of US$1 million. International Shopping (IS), with at least three quotations solicited from two eligible countries, will be used for contracts estimated to cost less than US$100,000, with an aggregate limit per STC, and for the NMS, of US$500,000. Off-the-shelf items, with a value not exceeding US$50,000 per contract, will be procured through National Shopping (NS) by obtaining at least three competitive quotations, with an aggregate limit per STC, and for the NMS, of US$250,000. For any two STCs, or for the NMS and any one STC, the aggregate limit for IS and NS may be doubled. Any direct contracting for goods which are of a proprietary nature, if required, will be approved on a case-by-case basis.  - 18 - 5.10 Civil works contracts for the construction of STCs and facilities for the NMS vary in amount, with an average of around US$1.2 million, and none of these contracts will cost more than US$3 million equivalent. All civil works will be carried out in accordance with NCB procedures acceptable to the Bank, as they will not interest foreign contractors. 5.11 Contracts for technical assistance, consultants, and training will be awarded following the Bank's Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency (August 1981), and assurances have been obtained to that effect. 5.12 Assistance will be provided to the implementing agency until its staff becomes conversant with international commercial procurement practices and the Bank's procurement procedures. All contracts for goods awarded through ICB, for works valued above US$350,000, for the employment of consulting firms valued above US$100,000, and for the employment of individual consultants valued above US$50,000 will be subject to prior Bank review. In addition, the first two bid evaluations and contract awards for each STC, and for the NMS, below the prior review threshold will also be subject to prior review. These limits will result in prior review of about 60 percent of procurement financed by the Bank. All contracts subject to prior review will require submission of a completed Form 384 by the PCU. All other contracts will be subject to selective ex-post review by the Bank. Assurances have been received from the Government that procurement will be undertaken in accordance with the Bank's procurement guidelines; standard bidding documents, as well as the format and content of the bid evaluation reports, have also been agreed with the Borrower. 5.13 Procurement information will be collected and recorded as follows: (a) Communication to the Bank, for review in accordance with the above provisions, of bidding documents; (b) Prompt reporting of contract award information by the Borrower; (c) Comprehensive quarterly statements on procurement to the Bank by the Borrower indicating: (i) A complete updated list of all contract awards, including contract award dates and other data, as agreed with the Borrower during negotiations; (ii) Revised cost estimates for individual contracts and the total project, including best estimates of allowances for physical and price contingencies; (iii) Revised timing of procurement actions, including advertising, bidding, contract award, and completion time for individual contracts; and (iv) Compliance with aggregate limits on specified methods of procurement. D. Disbursement 5.14 The proposed project will be implemented over a period of approximately six years and is expected to be completed by June 30, 2002. The loan funds will be disbursed as follows: (a) civil works at 70 percent of expenditures, (b) goods and equipment at 100 percent of foreign expenditures;  - 19 - 100 percent of local expenditures (ex-factory cost), and 85 percent of local expenditures for locally procured items. and (c) consultants' services and training at 100 percent of expenditures. Disbursement arrangements are summarized in Table 5.2 below, and estimated disbursements in Table 5.3 below. Retroactive financing of up to FRF20.0 million (10 percent of loan amount) will be provided to help cover eligible start-up expenditures for goods or civil works made on or after April 1, 1996 (date the appraisal started). Table 5.2 Disbursement Arrangements Category Amount (mill.) Expenditures to be financed FRE US$ equiv. 1. Civil Works 32.5 6.3 70 percent of expenditures 2. Equipment and 145.0 28.0 100 percent of foreign expenditures Vehicles 100 percent of local expenditures (ex-factory cost) 85 percent of local expenditures for other items procured locally 3. Consultants' 2.5 0.5 100 percent of expenditures Services and Training 4. Unallocated 20.0 3.9 TOTAL 200.0 38.7 5.15 Withdrawal applications will be fully documented except for those against contracts for goods under US$250,000, for works under US$350,000, for services of consulting firms under US$100,000, for services of individual consultants under US$50,000, and for training. Claims for expenditures for contracts below this amount, and other expenditures not covered by a contract, will be disbursed against Statements of Expenditure (SOEs). SOEs should contain information as agreed with the Bank during negotiations, and supporting documentation related to SOEs will be retained by the agency in charge for periodic inspection by the Bank and external auditors. 5.16 A Special Account in French francs with an authorized allocation of FRF12 million (US$2.3 million equivalent, representing 4 months average disbursements over the life of the loan), and an initial deposit of FRF6 million, will be established at the Central Bank of Tunisia. The Special Account should be replenished monthly, or more often when the total debits from the Special Account are equal to one-third of the amount advanced to the Special Account. It should be used for all small and medium-sized transactions with a value of less than 20 percent of the amount advanced to the Special Account. .Normal documentation requirements apply for replenishment requests, in addition to a copy of the bank statement from the institution holding the account, detailing the transactions made and reconciled by the Borrower (PCU).  - 20 - Tahle 5.3 Estimated Disbursements Bank FY 1997 1998 1999 2000 2001 2002 2003 in FRF million: Annual 10.0 20.0 40.0 40.0 40.0 30.0 20.0 Cumulative 10.0 30.0 70.0 110.0 150.0 180.0 200.0 in US$ million eq.: Annual 1.9 3.9 7.7 7.7 7.7 5.8 3.9 Cumulative 1.9 5.8 13.5 21.3 29.0 34.8 38.7 E. Accounts and Audit 5.17 The PCU will establish and maintain separate project accounts and records for project expenditures, including the Special Account. These records will be audited in accordance with the "Guidelines for Financial Reporting and Auditing of Projects and Disbursements under SOEs, Financed by the World Bank" (March 1982). The PCU will maintain a consolidated account of all expenditures under the project. These accounts will be audited annually by Government auditors in accordance with appropriate auditing principles, under terms of reference approved by the Bank. The audit reports will be furnished to the Bank six months after the end of each year, and will include separate opinions on the adequacy of SOEs and the Special Account. F. Monitoring. Evaluation, and Reporting 5.18 Required reports are described above regarding project management (para. 5.4), procurement (para. 5.13), disbursement (para. 5.16), and accounts and audit (para. 5.17). In addition, assurances have been obtained that the project's impact will be monitored, in terms of both individual STCs and their impact on the industrial sector, specifically as regards the competitiveness upgrading process. A number of project performance indicators have been developed, as described below. 5.19 Project Output Indicators. These indicators measure the quantity and quality of services that will be provided by the STCs. The output quantity indicators are mainly concerned with the execution of program and performance contracts (PPCs). In order to monitor the execution of the PPCs, a number of common indicators have been agreed for each technical center. These indicators are as follows: (a) Financial Autonomy Ratio, defined as the share of revenues from category a and b services (para. 2.18) to total operating expenditure. This ratio excludes rent paid by the center and interest expenses; (b) Technical Staff Ratio, defined as the ratio of technical personnel to total staff of the technical center; (c) Productivity Ratio, defined as the ratio of the number of days spent by operational personnel on revenue-earning activities (categories a and b) to total number of days; and  - 21 - (dI) Market Penetration? Ratio. defined as the ratio of the number of enterprises using the services of the technical centers to the total number of enterprises in the sector concerned. 5.20 The output quality indicators will be compiled through STC client surveys. Biennial surveys of industrial enterprises will be undertaken to solicit their opinion of these enterprises regarding their awareness of the technical centers, as well as their appraisal of the quality of services offered by the STCs, where appropriate, and to gather additional information to monitor project impact. Institutional arrangements for carrying out the survey, the formulation of representative samples for each sector, and specific survey content have all been agreed, and are described in Annex 5.1. 5.21 Project Outcome/lmpact Indicators. The above-mentioned biennial survey will also be used to provide quantitative data to construct the following additional indicators to monitor project impact: (e) Evolution of value added for enterprises using the services of STCs, in relation to the evolution of sectoral value added; (f) Evolution of productivity for enterprises using the services of STCs, in relation to the evolution of sectoral productivity; (g) Evolution of exports for enterprises using the services of STCs, in relation to the evolution of sectoral exports; and (h) Evolution of investment for enterprises using the services of STCs, in relation to the evolution of sectoral investment. G. Bank Sunervision 5.22 Regular Bank supervision will seek to: (a) reach a shared opinion with the implementing agency and the supervisory board of the progress made by the existing STCs in meeting the objectives (i) of the reform policy, and (ii) contained in the PPCs; (b) review with the STCs possible changes in their equipment needs; (c) review with the new STCs their work programs regarding developmental and institutional aspects and capital investments; (d) review the need to update or modify project performance indicators; and (e) define adjustments in the PCU's role and functions in the light of experience. For the metrology component, supervision will focus on the implementation aspects of this component, including: (a) confirmation of allocation of project implementation responsibility within the national metrology system, and related action plans; (b) identification of project beneficiaries; (c) possible need for a thorough institutional capacity review of mandated institution; (d) financing plans; and (e) procurement activities.  - 22 - VI. BENEFITS AND RISKS Project Benefits 6.1 The pro ject will help Tunisia's economy to prepare for the challenges of the FTA with the EU, by reducing the disruption and costs to the industrial fabric which the FTA is expected to cause in the short term. The strengthening of Tunisia's industrial support infrastructure, to make it more efficient and responsive to the needs of private enterprises, will contribute to the competitiveness upgrading of industrial enterprises to international standards. Subprojects to be funded under the project are expected to have rates of return of at least 12 percent. 6.2 The project will help develop Tunisian capacity to provide specialized advice to industry. In addition, it will play a significant role in the development and diffusion of productivity-enhancing and environmentally sustainable technologies, which will improve productivity and efficiency in the industrial sector. The project will also foster the private provision of services to industry by refocusing the activities of the technical support institutions. The project will benefit (a) STCs as well as private lahoratories and consulting firms, (b) the Tunisian manufacturing sector, and (c) the Tunisian economy. 6.3 The STCs will benefit from the project through: (a) clarified mandates and closer ties to firmns in their respective sectors; (b) increased autonomy in management, personnel recruitment, and operational flexibility; (c) increased contribution to the industrial sector and its related impact on staff motivation and pay, due to the incentive scheme; (d) strengthening of capital investment screening by introduction of financial and economic analysis methodology and extension of market studies: (e) financing of capital investments, enabling the introduction of up-to-date technology; (f) introduction of domestic calibration means, which will facilitate STC accreditation; and (g) closer cooperation among STCs. resulting in cross-fertilization (para. 5.2). Private laboratories and consulting firms will benefit from: (a) divestiture of STCs' activities that compete with their own; (b) the STCs' new emphasis on a complementary approach; and (c) access to domestic capacity in the metrology system. 6.4 The manufacturing sectors covered by existing or planned STCs will benefit-from (a) the STCs' stronger client orientation, which will make them more accessible and responsive through (i) the professional associations' ability to influence STC activities, and (ii) the PPC mechanism; (b) increased technical focus of STC staff, who will be encouraged to deliver a value-added service through the PPC's incentive scheme; (c) greater awareness among industrialists regarding services provided by STCs; and (d) the establishment of new STCs. 6.5 The Tunisian economy as a whole will benefit from (a) higher quality goods produced by local industry supported by an upgraded technological infrastructure; (b) budgetary savings through reduced overlap among support institutions, reduced STC inefficiencies, and possible reduced direct and indirect cost of foreign calibration of metrology instruments, due to the establishment of an NMS; (c) increased competitiveness of Tunisian goods on international markets through broader and easier access to domestic product and process certification; and (d) increased productivity and introduction of environmentally sustainable technologies in industries receiving enhanced assistance from STCs.  - 23 Risks 6.6 Institutional. There is a risk that the institutional reform of the existing STCs may not be fully implemented, for example by not applying negative incentives, when applicable, under the performance contracts. This would enable the STCs to continue past practices, rather than reorient their activities clearly toward satisfying the expressed needs of private sector firms. The consultative process underway with the STCs, key representatives of the concerned sectors (who make up three-quarters of the boards of the STCs), and GoT during the preparation of the program and performance contracts should mitigate this risk. Also, GoT is fully convinced of the need for and soundness of the proposed reform, and has sent a letter to the Bank regarding its reform policy (para. 2.21). The reforms will nonetheless be an important focus of supervision during project implementation. 6.7 Economic. There is also an economic risk that project funds might not disburse fully, in particular for the new STCs and the metrology component. This risk does not appear significant in light of the urgency felt by all parties in Tunisia to establish the new STCs and to put in place a national metrology system. In addition, the pooling system for funds available for STCs under the project (para. 4.21) should limit this risk considerably. However, the agreed mid-term review and possible subsequent adjustment to project components mitigate this risk. VII. AGREEMENTS REACHED 7.] Ag,reements have been reached on the following: (a) GoT's reform program for the support institutions, which is set out in a letter of development policy addressed to the Bank (para. 2.21); (b) For each existing and new STC, the signature of a program and performance contract acceptable to the Bank will be an eligibility criterion for entering into a financing agreement with the Borrower (paras. 4.11 and 4.15); (c) For each proposed new STC, receipt by the Bank of a feasibility study establishing its viability will be an eligibility criterion for entering into a financing agreement with the Borrower (para. 4.15); (d) The study to determine the basis on which the NMS should be set up will be completed by March 31, 1997 (para. 4.19); (e) No single STC can utilize more than US$6 million equivalent of Loan funds (para. 4.21); (f) Each STC shall sign a financing agreement acceptable to the Bank with the Borrower for making the proceeds of the Loan available (para. 4.23); (g) GoT will ensure adequate financing for the technical assistance and training components, in the event and to the extent that other donors do not fully cover these needs (para. 4.23);  24 - (h) Financial and economic analysis for investment projects for both new and existing STCs will be carried out according to the methodology agreed with the Bank, and all proposed investments above the free limit will be reviewed by the Bank for prior approval (para. 4.32); (i) A mid-term review of the project will be carried out no later than December 31. 1999 (para. 5.6); (j) Employment of consultants and procurement of goods and works will be undertaken in accordance, respectively, with the Bank's Consultants and Procurement Guidelines; also standard bidding documents for ICB, as well as the format and content of the bid evaluation reports, have been agreed with the Borrower (para. 5.12); and (k) Adequate monitoring and evaluation of the project will be carried out, including: (i) Semi-annual progress reports on project implementation, no later than March 31 and September 30 each year (para. 5.4); (ii) Quarterly statements on procurement (para. 5.13); (iii) Annual audits of the project accounts, including the Special Account, no later than six months after the end of each fiscal year (para. 5.17); (iv) The use of agreed project performance indicators to measure the degree to which the project's objectives are being achieved (paras. 5.18-21); and (v) A biennial survey of industrial firms, aimed at assessing the firms' views regarding the STCs as well as compiling quantitative data to monitor the project's impact, no later than March 31 every other year (paras. 5.20-21); and 7.2 The following will be the conditions of effectiveness of the proposed loan: (a) Receipt by the Bank of at least two signed financing agreements satisfactory to the Bank (para. 4.23); and (b) The PCU shall have been established under terms of reference and operational arrangements satisfactory to the Bank, and its Director shall have been appointed (para. 5.2-4). 7.3 The condition for each disbursement for each STC is that the Bank shall have approved the investment project in respect of which withdrawals are requested (para. 4.33). 7.4 On the basis of the above agreements, the project is considered suitable for a Bank loan in the amount of FRF200 million for seventeen years, including five years of grace, to the Republic of Tunisia, at the Bank's standard interest rate for PIBOR-based French franc single currency loans.  REPUBLIC OF TUNISIA INDUSTRY SUPPORT INSTITUTIONS UPGRADING PROJECT STAFF APPRAISAL REPORT ANNEXES Annex 2.1 Letter of Development Policy Annex 3.1 International Experience with Technical Support Institutions Annex 4.1 Existing STCs CETIME CETTEX CNCC CTMCCV Annex 4.2 Proposed New STCs Annex 4.3 National Metrology System Annex 4.4 Project Costs and Financing by Institution and Component Annex 4.5 Methodology for Financial and Economic Analysis Annex 4.6 Examples of Financial and Economic Analysis Annex 5.1 Performance Monitoring Indicators Annex 5.2 Selected Documents and Data Available in the Project File  I  Annex 2.1 Page 1 of 4 Republic of Tunisia Ministry of Industry May 2, 1996 to: Mr. James Wolfensohn President of the I1BRD Subject: Letter of general policy Bd: Industry Support Institutions Upgrading Project Dear Mr. President, Tunisia's industrial sector is widely diversified and contains a large number of small and medium sized family businesses that are generally under-capitalized. In recent years they have developed under the shelter of tariff and administrative barriers and have not experienced any significant competition. The growing trend in the world economy toward free trade has led Tunisia to adopt and implement a structural adjustment program that will steadily lead, over time, to the liberalization of its economy. In addition, and to strengthen its economy's links to international markets, Tunisia has become a signatory of the GAIT agreements, and has signed an agreement with the European Union with a view to the introduction, according to a fixed timetable, of a free trade zone. The Government of Tunisia has been examining the situation of the country's industrial enterprises in order to create the best conditions for promoting their adaptation to the new economic context in which Tunisia must henceforth operate. A number of complementary actions have been identified and are currently being carried out using various instruments and in close conjunction with representatives of the private sector. One specific instrument is the upgrading program (Programme de Mise a Niveau) which consists of a series of measures aimed at enterprises and their environment, and designed to help the productive system to adapt to the requirements for opening Tunisia's economy. This program has two components, which focus on the enterprise and its environment respectively.  Annex 2.1 Page 2 of 4 The agency responsible for the enterprise upgrading program is the steering committee (COP1L), which is made up of representatives of the State, of financial institutions, of U77CA"' and of the UGTF. This first component of the program targets all private sector industrial enterprises having a potential for growth and competitiveness, regardless of size, sector or location. It is based on firms' voluntary participation in the upgrading process, which is sought through three main types of action: intangible investments, physical investments and financial restructuring. The second component of the program relates to basic infrastructure (mdustrial zones, free zones, economic information ...) and technological infrastructure. The program will be carried out in two stages. The first stage (1996 - 2000) will involve the adaptation of Tunisia's industry so as to meet international competition. The second stage (2001 - 2005) will see the consolidation of the process and its application to the commercial sector. In the context of this effort, the authorities have deemed it necessary to restructure, upgrade and strengthen existing technical support institutions so that they can perform their task of helping enterprises in a suitably energetic manner. The institutions concerned are the Centre National du Cuir et de la Chaiwsure (CNCC), the Caere Technique des Matiriaur de Construction de la Ciramique et du Verre (CTMCCV), the Centre Technique des Industries AU#canique et Electrique (CEM ), and the Centre Technique du Textile (C Ex). This restructuring will take place at several levels: refocusing of activities to avoid competing with the private sector, organization supporting the marketing of the centers' services, technical upgrading and skills strengthening, new management procedures and the setting of objectives for the sale of services. In addition, the authorities also feel it necessary to provide some other industrial sectors with their own technical centers so as to help enhance their competitiveness: the wood and furmiture, packaging, chemicals and agroindustry sectors would be the first to benefit. The establishment of these centers would follow detailed feasibility studies (now under way) which would in particular assess firms' demand for such services. '/ The Tunisian confederation of employers. 2/ ThL' Tunisian trades union.  Annex 2.1 Page 3 of 4 Over the past year, diagnostic studies and action plans were carried out with assistance from the Bank and a Japanese grant: these led to the identification of the approach to te followed in order to achieve the objectives described above. A program to upgrade existing support institutions has been prepared. This program focuses particularly on steps to be taken by all the institutions concernedl, such as the introduction of program and performance contracts that clearly define the relationship between the State and these institutions. The program and performance contract will introduce total management autonomy and accountability so that these institutions can become independent and responsive to the needs of their sectors. Furthermore, the contract will provide for the possible later privatization of these institutions, with which partners, such as professional organizations and the State, would contract for the provision of services on the same basis as corporate clients. This process will be facilitated by the introduction of appropriate organizational measures, including recruitment and remuneration conditions, as well as cost accounting, etc. The said support institutions upgrading program includes actions specific to each institution, with special reference to the following: - refocusing of activities and internal reorganization of physical, human and financial resources through the definition of three service categories benefitting respectively individual enterprises, the sector as a whole and the State; development of new activities such as industrial metrology and the specialized training needed to raise the level of technology used; - cessation or transfer of certain activities that can be carried out by the private sector; - definition, after a market or feasibility study, and implementation of a program to strengthen physical plant and equipment, and skills. The new technical centers should follow from the outset the approach laid out for the existing centers. Along with the study carried out with the assistance of the Bank and the Japanese grant, whose results were briefly mentioned above, the authorities have also amended the institutional framework in order to increase the management autonomy of the centers and to set them more firmly in their industrial context. These changes were among the recommendations of the saidl study. Thus the new law relating to technical centers in industrial sectors, promulgated ink November 1994 (law No. 94-123), and decree No. 95-439 of March 13, 1995 establishing model  Annex 2.1 Page 4 of 4 statutes for technical centers, made major changes in the management of these centers by entrusting their guidance to the relevant professional organizations and associating the latter with their operations. This is a step allowing these centers to be run by representative professional bodies. In an upcoming phase the authorities will need to facilitate the cessation or transfer of certair. activities at existing technical centers, and the release from some centers of some of the non-operational staff who are no longer needed as a result of this transfer process and/or of the reorientation towards technical skills. The authorities will undertake these actions in the context of the program and performance contracts which will govern all the technical centers. It is thus evident that Tunisia attaches special importance to the upgrading, restructuring and development of its system of support institutions for industrial sector enterprises, so as to create the necessary conditions for their solid participation in the new context of membership in the world economy. To this end, Tunisia counts on the Bank's cooperation and assistance in implementing this program. Yours faithfully, Slabeddine BOUGUERRA Minister of Industry  Annex 3.1 Page 1 of 6 INTERNATIONAL EXPERIENCE WITH TECHNICAL SUPPORT INSTITUTIONS A recent ASTTP study' has documented the key characteristics of Technology support Institutions (TI). Of particular interest was how these TIs are organized, how they operate, their management background and modus operandi, and their approach to services and income generation. The issue of efficiency and the relative importance of alternative technology policies, incentive measures and technical institutions (TIs) were of particular emphasis in this study. I. Methodologv of the studv: The paper examined 6 economies: India, Korea, Taiwan, Canada, Hungary and Mexico. While in different geographical areas and at different stages of development all had an important industrial base. Several sectors of industrial activity were chosen to take account of technology intensity, industrial structure, economies of scale and age of the industry. Different types of survey instruments were used to ensure that the largest and most varied sample of firms, policy-makers, industry-leaders and consumers were used in each country. n1. Why do firms acguire technolol!y and how? 1. Why do firms seek technology? 3 to improve product competitiveness in domestic and/or export markets. D To increase their production levels 3 To increase productivity 2. How do firms acquire technology and why? The evidence suggests that in developing economies, there is significant interdependence betweerL internal and external sources of innovation. * Internal sources of innovation: such as in-house R&D departments and laboratories, are mostly used by companies seeking to develop new technology, which they cart patent and copyright and which they will be able to exploit exclusively or modify tc the specifications of the market to which they are seeking to cater. 'Institutions and Policies for Industrial Technology Development (Yellow cover), November 3, 1995. PrivateJPublic Sector and Technology Development Division, Asia Technical Departnent (ASTTP)  Annex 3.1 Page 2 of 6 External sources of suWort such as (i) conscious imitation of competitors; (ii) the acquisition of goods which come bundled with other information and skills; (iii) outright purchase of knowledge (consultants, public research institutions and training centers) are extensively used in developing countries. In these countries, firms often need technology that is not new (and therefore devoid of the sensitive issues surrounding R&D transfers), and lack the internal skills and financial resources necessary to use technology appropriately. By using external sources of support, firms tend to reap more benefits from economies of scale and scope and ease the strain on financial and human resources. * Firms which are competing in world markets, rely more on technology use and knowledge. Moreover, those firms with an in-house R&D department to develop new products tend to use external sources more than others. External sources of technical assistance can tak-e many shapes. : * vertical linkages between customer and suppliers and producers: This type of help is most used by firms with in-house deDartnents who are able use it as a fast and reliable source to solve problems, develop new products and improve the quality of processes. Customer relations are important to those firms in the process of catching up with foreign competitors. Medium sized firms rely heavily on this relationship for information about technological and market developments. Finally, the smallest firms use customers and suppliers for help in applied problem-solving, as a source of commercial advice and as a means of building networks of contacts. * Moreover, the data suggest that, overall, foreign licensors as well consultants and Private Contract Facilities are seldomly used because they are deemed too ex0ensive. * Public Technology Institutions, such as TIs2 have proven a popular choice among the firms surveyed in this study, particularly among small and medium sized firms with insufficient resources to seek out private external sources of knowledge.3 II. Characteristics of Technical Institutions 1. Main characteristics of Technological support institutions * Most TIs are organized along sectoral lines. 2 such as National, regional and local technical laboratories, standard universities and technical colleges. except for Canada where private sources dominate  Annex 3.1 Page 3 of 6 * Their ownership structure, however, varies greatly from country to country. In general, who owns the Technical Institutes is not an important factor in improving performance. * The ability of a TI to generate revenue can be an important incentive to be industry- oriented, but is not a necessary prerequisite. 2. Who uses Technical Institutions ? * Large firms tend to utilize TIs more intensively than small firms, but TIs serving medium-sized firms were judged the most dynamic. * A higher number of firms, irrespective of country of origin or sector of activity', tended to using publicly owned Tls than any other form of technological service facility available. * Firms in technologically mature sectors tended to use public TIs more than in other sectors. * While public TIs play a very important role, a diversity of institutions is required to serve industries which vary in their structures and in the nature of their core technologies. * Firms in all countries and all sectors, also tended to use basic technological services (such as services relating to the use and diffusion of know technologies, education and training, and standards and testing), significantly more often than advancedl services (such as contract R&D or technical problem solving). II. Patterns of Use of Technolorical SuDport Institutions The extent and purpose of its use depends however upon the size of the firm using the TI. * National TIs, which are best able to support the development of new products and therefore require complex technical skills are mostly used by the larger firms. Its use was preferred by those finrns with in-house capabilities, which could be able to develop the knowledge provided them by these TIs. Smaller firms, particularly see national TIs as difficult to interact with, cumbersome and mired in red tape. ' This assertion is not true in the case of Canada. Similarly, public Tls were cited by more firms than any other source of technology in every sector but pharmaceuticals (where use of foreign investors/licensors made private contractual sources the most frequently used).  Annex 3.1 Page 4 of 6 In contrast, regional and local Tis are preferred by medium and small sized firms in our survey. Indeed, while lacking capability in new-product development, they are considered good at helping firms solve specific product or process improvement problems by allowing third party use of their facility and providing know-how. Firms using these types of TIs have complemented them with involvement in industry associations to ensure that contacts are secured, networks are built and that the firm is being exposed to new ideas. Overall, the study reveals that those forms of assistance most generally provided by public Tis such as (i) helping firms in developing standards and (ii) granting subsidies to education and training have been taken up by all types offirms, irrespective of size. It further demonstrates, therefore, that public TIs are the best tool to promote technology diffusion among small and medium sized enterprises. IV. Making Technology Institutions work. An effective TI must be dynamic and proactive in reaching out and providing services to its industrial clients, in foreseeing what industry will need in the future and alerting firms in that regard. It must be appreciated by its clients and be able to adapt to changes in industry and do what the competition requires. For an SSI, a well functioning productivity center will offer two services primarily: training and problem solving. In general SSIs are labor intensive but very small firms. This will entail work on industrial engineering as well as in the area of business and financial management. As industry develops, TI should devote an increasing amount of activities on machinery, automation, quality control and standards. A good institute of standards and quality will assist companies through outreach, training and other mechanisms to reach export standards, and work to make local standards compatible with export market standards, and in particular for domestic industry to reach effective quality assurance standards. 2. How do you measure performance ? In order to evaluate perfornance, two particular areas should be focused on: * the extent of use by clients of various services and their degree of satisfaction in the service is important because it measures the Tls ability to penetrate the market.. In this respect, the ability of a TI to earn revenue from clients would be an indication of the value attached by clients to the service.  Annex 3.1 Page 5 of 6 * the extent of the change in the TI's company culture is important because ii demonstrates a TI's dynamism in the past, how it has trained staff and changed cultures to adapt to industries new requirements. 3. How do you manage a Technical Institute effectively? Management of well-run Technology Institutes require similar skills to the management of any other business: * Recognition of a TI's market and matching its resources to the client's needs. This is particularly important for TIs with some public sector involvement. * Recruit highly gualified technical Reople able to provide the customer with efficient services today and adapt and predict the future technological challenges of its clients. * KeeD in close touch with a TI's client base and generate income. This can be accomplished through various methods of interaction (extensive programs, regular open houses, surveys and seminars). A TI doing work for its client base, and therefore receiving increased income from contacts with clients, is an effective way to ensure that there is systematic contact with client firms. Our data suggests that formal organizational links such as membership on boards of advisers or directors do not seem to have any impact on the quantity of service provided by TIs to industry. Similarly, whether or not the CEO of the TI came from industry or research seems to make little difference. This seems to signify that relying on superficial links in themselves is not sufficient to improve performance. Instead, client orientation must be intemalized in the TI, as an integral part of its activities. 4. How do you implement change in a TI ? Client orientation entails the definition of goals and the creation of an incentive scheme to reward their achievement. Technical staff should be encouraged to be client oriented, to stay on top of their field and to work in teams. Income -eneration, if practical, should also be included as a goal and a reward, wherever possible. Effective Market Targeting: Diffusion of technology to industrial firms should be central to the roles of TIs working with industry. Industry's demand is most often for information, skills. training and the solution to Rroblems where the information know-how or answers are known to those with a technical background or simply need to be reformulated.  Annex 3.1 Page 6 of 6 V. Government Role and Reforming Technoloev Infrastructure 1. What is an appropriate role for Government? * Creation of an arnropriate environment for technologv acguisition and development and to ensure the right incentives are present. This means the presence of a local industry which operates in a competitive environment domestically and/or abroad so that Tls have demand for their product, the presence of an education system which produces high quality manpower, and a technology infrastructure endowed with equipment and people that can support industry for part of its technological needs. Where TIs don't exist, Governments might stimulate industry to join together and form TIs, initiate action itself and/or stimulate an educational institution or private groups to form TIs. 2. How can Government contribute to the reform of a TI? Where an infrastructure already exists but is not perfomiing satisfactorily reform packages have included the following components: * Hard budget constraints - by squeezing TI budgets, the government forces the TIs to better utilize the resources they have available and become demand driven institutions serving well defined clienteles. * re-focusing the TI's vision of its role, its client base and its internal procedures (including well defined incentive schemes and Dro2rams for industrv) to match that new vision, by aggressively promoting effective leadership. Reforms which do not alter the basic incentive systems shaping TIs' on-going activities, such as setting up marketing arms for TI innovations, changing the charter and composition of the Tis board or adjusting the project selection criteria have shown disappointing results since they do not change the institutions, instead simply delay necessary decisions. For SSIs, where the study has revealed near universal absence of sufficient support to SSIs, Tis should focus on pro-actively trying to expose firms to the benefits of change and generating a demand for technology improvements, as well as resolving problems brought to them.  Annex 4.1 Page 1 of 13 CENTRE TECHNIQUE DES INDUSTRIES MECANIQUES ET ELECTRIQUES (CETIME) Background The mechanical and electrical industry sector generates TD 1.1 billion turnover per year, and exports a third of its total production ( approximately TD 365 million). It employs about 46,000 people, approximately 1.6 percent of the total employed population in Tunisia. Almost 800 firms are active in the sector; most are SMEs with fewer than 50 employees each. The sector experienced strong growth in the 1980s and is expected to grow by 10 percent a year over the next four years, 1996-2000. CETIME, the Technical Center for Mechanical Industries, has existed for almost 15 years. It was created in 1982' with World Bank support as a publicly owned, autonomous agency with commercial and industrial activities. The center was expanded in 1988 with UNDP support. In the past, its revenue sources and organizational structure were determined by government decree. Its budget, statute, and activities were approved by the Ministry of National Economy at the beginning of each fiscal year. The center's board was made up by five Ministry representatives, one representative for public companies, two representatives for private companies, and one representative for banks and financial institutions. CETIME's statute is being redefined on the basis of Law 94-123, which relates to the private management of technical centers. The center currently employs 182 people, divided between the headquarters (87 people), the tooling department located in Sousse (92 people), and a small office in Sfax (3 people). In a recent survey of firms operating in the sector, all had heard of CETIME, and nearly 60 percent reported having used its services. Thus CETIME is well known in the sector. According to private sector representatives, CETIME has contributed to the development of enterprises in the mechanical and electrical industry sector, but it is not possible to quantify its past contribution. One criterion is the number of enterprises in the sector, which grew from 430 in 1982 to 800 in 1994. Under the present project, CETIME will focus on those services that private entrepreneurs need, without impeding development of private engineering and consulting firms or competing with private manufacturers. Thus, the center will divest competitive activities by selling off the units that produce prototypes, small quantities of electronic printed circuits, tools and surface treatment products. As of April 1996, the Bank and the center have agreed to launch a study to address the divestiture from the tooling unit in Sousse. Established by Law 82-45 on 25 May 1982, its statute was subsequently modified by Law 94-123 of November 1994 to make the center more autonomous.  Annex 4.1 Page 2 of 13 Main activities Information dissemination and training CETIME is entrusted with disseminating technical know-how regarding the state of foreign markets and the legal and administrative requirements for exports. It also provides updates to the Tunisian industrial directory, which provides information on the activities of its membership. The center manages a 3000-volume library and receives 80 different periodicals and trade magazines. Training is one of the most important focuses of the center's activities. CETIME provides instruction and training to workers on technical matters relating to the production process, thus contributing to the development of a specialized labor force. The center also retrains specialized workers for new subsectors in which there is demand for a skilled workforce. Technical expertise The center offers technical expertise on administrative and trade matters (such as ensuring that materials and products conform to regulations from importing countries). On behalf of the Tunisian Govemment, as well as the judiciary and CETIME members, the center also verifies and controls technical specifications, mechanical experiments, and performance reports. CETIME provides technical assistance to its membership on activity planning and sector studies. In addition, it designs or adapts specialized software relevant to the membership. It provides technical evaluation of projects and advice on the choice of production process, raw material, semi-manufactured products, and equipment. CETIME also supports its members by designing and building prototypes. Upon request, the center also creates small-scale designs, and microchips; prepares models, and treats surfaces chemically. Automation and modernization support The center lends its technical expertise to designing more efficient capital equipment for its membership, as well as to modifying existing equipment. It also assists the membership with maintenance, either by directly performing maintenance operations or by helping the firm to set up a program of capital maintenance.  Annex 4.1 Page 3 of 13 Planned activities CETIME expects to develop, based on rigorous analysis of customers' demands: a) a new center for welding b) additional mechanical, electrical and electronics laboratory c) micro electronics d) technical documentation e) sectoral data and center to monitor technological developments; and f) pedagogical material for training purposes. These investments will enable the center to develop or expand the following services: a) technical information and specialized vocational training; b) testing and analysis; c) technical assistance with a particular emphasis on quality control; and d) industrial metrology. Details of planned investments for the next two to three years are given in Annex 4.4, page 4. The financial and economic justifications for these investments have been reviewed by the Bank and found to be satisfactory. The development of specific activities will take place within the framework of a coherent strategy, combining (i) divestiture; (ii) implementation of management tools, including cost accounting; and (iii) development of a marketing strategy. The level of commercial revenues should increase from 640,000 TD in 1995 to 2.333 million in 2000. Financing CETIME's resources, TD 1.25 Million in 1995, come from sales of its products and services (TD 614,000 in 1995), as well as from government grants (TD 614,000 in 1995. CETIME, unlike other centers, was not funded through a special levy. CETIME's operating budget was estimated at TD 1.2 million for 1995. Salaries accounted for over 67 percent of the 1995 operating budget. Environmental aspects CETIME's industrial operations are fairly small and involve the design and production of electronic printed circuits and of metal and plastic transformation tools (outillage de transformation). Improvements in waste management and in indoor air quality and safety are to be undertaken, also as part of the environmental audit proposed under the project.  Annex 4.1 Page 4 of 13 CENTRE TECHNIQUE DU TEXTILE (CETTEX) Background The textile industry is a large and dynamic sector of the Tunisian economy. It comprises 2,200 enterprises, 80 percent of which have fewer than 100 workers. The sector employs more than 210,000 people, about 9 percent of Tunisia's employed labor force and half of Tunisia's industrial employment. However, the sector is severely lacking a qualified specialized work force. Technical staff makes up only 0.4 percent of the sector's work force (roughly 840 people); the rest is unskilled labor. Although textile exports reached TD 1.6 biUion in 1994, the sector is not as integrated as its Moroccan competitor. Overall, the sector lacks the up-to-date capital goods necessary to compete with its East Asian or Mediterranean counterparts. CETTEX, the Technical Center for Textile Industry, is the newest technical center in Tunisia. It was established in 1990 as an autonomous publicly owned agency responsible for commercial and industrial activities.2 It became operational only in 1994 after almost twenty years of discussions between the Ministry responsible for Industry and sector representatives to determine who would have the controlling power to establish the center. In the past, CETIEX's revenue sources and organizational structure were determined by Government decree.3 Its budget, statute, and activities were approved by the Ministry of National Economy at the beginning of each fiscal year. CETTEX's statute and management organization have been redefined on the basis of Law 94-123 of November 1994 relating to the private management of technical centers. In 1995, the center employed 40 people. It is planning to recruit 25 more people by 1997 to reach its planned ceiling of 65 people. From the beginning of its operations, CEITEX has maintained an attitude that makes it a highly regarded institution. It has: (i) followed a general rule of promoting partnerships with private sector enterprises, as illustrated by the sector-wide agreement on the use of existing laboratories; (ii) limited its technical assistance effort to only 30 percent of all training services, with the objective of eliciting private sector initiative; and (iii) maintained a ceiling on its own staff. The center works closely with FENATEX, the professional association that coordinates the activities and defends the interests of all firms in the sector. In addition, CEITEX interacts with private sector representatives in working groups, which study issues 2 Established by Law 90-111 on December 31, 1990 3 Decree 91-1813 of December 2, 1991.  Annex 4.1 Page 5 of 13 related to textile laboratories, product creation and design, employee training, and strategic sector studies. Main activities Technical assistance The center, with the help of external experts, provides its membership with hands-on assistance in marketing, operation improvement, quality enhancement and control, feasibility studies for new projects, and reorganization planning. Private firms in the sector consider technical assistance to be the center's most important activity because it is most likely to affect the competitiveness of these firms. In 1995, it has provided 1,250 man/day of experts, half of which were foreign experts, for 120 technical assistance operations. Training program The center provides systematic training to workers through its member firms, in the form of interlocking modules covering all aspects of the sector's activity and all types of textile workers, from product designers to manual laborers. Training classes are designed to incorporate the most up-to-date information and work methods. Classes include clothing conception and design, knitting and other manufacturing techniques, quality enhancement and control, human resource management, and marketing. Furthermore, the center regularly finances studies to assess training needs in the textile sector. The center also helps build networks of private training centers. in the two years of the center's activity, the membership has been extremely satisfied with the results of the training program. In 1995, it has organized 40 courses attended by 300 workers. The number of workers attending these courses is expected to double in 1996. Information dissemination and marketing The center has been assisting other professional organizations, such as FENATEX, in creating and implementing a modern and coherent promotion and marketing campaign for textile goods "Made in Tunisia", both within Tunisia and internationally. In this context, CETTEX has focused on coordinating and organizing the participation of textile enterprises in trade shows both domestically and abroad. It has devised a marketing strategy aimed at the European print media and has produced and financed commercials for television. Finally, in addition to its marketing activity, CETTEX manages a database with information on the 2100 firms operating in the sector, and produces a yearly directory in conjunction with FENATEX. Research and Development CETIEX's approach to R&D has been to act in conjunction with other bodies active in R&D. At this stage, R&D activity in the sector is still embryonic and CE`TEX has  Annex 4.1 Page 6 of 13 established a laboratory to compensate for the general lack of technical equipment. The laboratory will focus on testing and research activities needed by the sector that are not being undertaken by other labs. This will ensure that no tasks will be duplicated, that optimal use is made of sector resources, and that all equipment available is adequate for the tasks undertaken. Financins CETTEX was funded by a special 1 percent levy on Tunisian textile sales and imports, paid by textile companies. Currently it receives a subsidy from the Industrial Upgrading Fund (FODEC). CITEX's resources, estimated at TD 2.8 million in 1995, come from sales of its products and services (TD 150,000 in 1995, CETTEX's second full year of activity), as well as from government subsidies (TD 2.6 million in 1995). Salaries were estimated at TD 600,000 in 1995, approximately 60% of its operating budget, and 21 % of total budget expenditures. Planned activities CETTEX's development plan is based on thorough needs analysis and economic justification. It includes: a) laboratory equipment, as determined by the working group professionals from the textile sector and laboratory owners; b) creating and equipping two training centers, one in Tunis and one in Sfax. C) computers and office equipment; d) vehicles; e) office fittings for the center in Tunis and its local branches. Details of planned investments for the next two to three years are given in Annex 4.4, page 5. The financial and economic justifications for these investments have been reviewed by the Bank and found to be satisfactory. The development plan will enable CETTEX to respond to its clients' needs in four high priority areas: a) technical assistance to individual firms, b) training of specialized workers, c) sector promotion, and d) testing and product analysis. CETTEX proportion of self financing should increase from 16% in 1995 to 42% in 2001.  Annex 4.1 Page 7 of 13 CENTRE NATIONAL DU CUIR ET DE LA CHAUSSURE (CNCC) Background The leather sector is a dynamic sector in Tunisia. It has grown an average of 28 percent a year from 1987 to 1993 and has become the second most important source of exports for the Tunisian economy. Currently, over 400 private companies operate in this field, employing over 36000 people, about 10 percent of Tunisia's industrial manufacturing employment. The sector has undergone a significant evolution recently, but is still dominated by craftsmen who specialize in low price-low quality goods and therefore lack the commercial and technical infrastructure to effectively export. The bulk of the production of shoes and other leather goods is for domestic consumption. In 1993 only 21 percent of total production was targeted for export, most of which was produced by foreign-owned enterprises. Investment in the sector has remained weak4. The sector's average stock of capital goods is outdated and investment in machinery is low, less than 2 percent of total industrial investment in the last ten years. Consequently, Tunisian shoe and leather manufacturers continue to remain behind their international competitors. CNCC, the National Center for Leather and the shoemaking industry is the oldest technical center in Tunisia. It was created in 19695 as an autonomous publicly owned agency with commercial and industrial activities, to foster the development of leather and shoemaking sector. In the past, its revenue sources and organizational structure were determined by government decree6, and its budget, statute and activities were approved by the Ministry of National Economy at the beginning of each fiscal year. Currently, CNCC's statute and management structure are being redefined on the basis of Law 94-123 relating to private management of technical centers. The center currently employs 91 people, 14 of whom are on short term contracts. Of the 77 people on the permanent staff, 18 percent (14 people) are engineers and skilled technicians. 4 Investment has averaged only 1.5% of total investment in manufacturing industries over the life-span of the VIII economic plan. 5 Established through Law 69-9 on January 24,1969, its statute was modified on June 2,1982 (Law 82-89) and on October 20, 1993( Law 93-101) to take into account the changes in the leather industry. 6 Decree 94-1061 of May 9, 1994.  Annex 4.1 Page 8 of 13 Main activities Promotion and marketing of the leather and shoemaking industry: CNCC organizes and manages domestic trade shows, such as Promocuir (promotional exposition of leather and shoe goods that is held in Tunis every year) and coordinates Tunisian presence in trade shows abroad. In addition, it organizes, finances, and manages regular meetings between local and foreign businessmen active in the leather sector, and assists in setting up joint ventures and other business partnerships within the domestic sector and with foreign businessmen . CNCC offers information on resources available for subcontracting in the sector and matches them with demand the through a database containing more than a thousand references. Information dissemination and training The center publishes several magazines and periodicals to ensure dissemination of latest available information on matters of interest to the membership and their potential business partners. In addition, it offers instruction on business-related issues (marketing and distribution techniques, optimization of resources) as well assistance with the use of the latest available technologies. Research and development support The center plans, designs and develops methods for working and treating leather more cheaply and efficiently. The center is managing laboratories for all the leather-related activities in which the membership is involved. It is currently managing, on a pilot basis, a treatment plant to make leather water resistant. The plant conducts specialized tests on materials and then provides technical assistance to any firm interested in the process. Technical assistance The center owns several specialized factories that are used, on a pilot basis, to provide technical support in the areas of leather tanning and residual water processing. It also runs a fine leather shoe factory to assist its members in the design and manufacture of fine leather shoes. Financin2 CNCC was financed through a special 1.5 percent levy on the turnover of the shoe industry and is now is financed in part by Government funds channeled through the FODEC, the Industrial Upgrading Fund. Currently, CNCC's level of self-financing is  Annex 4.1 Page 9 of 13 estimated between 5 and 7 percent its total income. Participation in trade shows accounted for over a fifth of revenues. For 1996, CNCC's expenses are projected to reach were estimated at TD 1.6 million, with wages and salaries representing over half of total expenses. Areas for reform CNCC is currently facing a number of challenges, including: a) a low level of self financing--between 5 and 7 percent of its total income. b) 77 staff, of whom only 18% are engineers or specialized technicians. c) little or no cost-sharing by enterprises for the wide range of services performs for the sector; and d) a low utilization rate (between 30 and 50 percent of capacity) for laboratory equipment and pilot manufacturing units. Planned Activities Within the framework of the reform program, which implies profound changes in the way CNCC operates, it will be necessary to make modest investments for technical upgrading of: a) equipment to complement the services performed by the laboratories b) machinery to complement the pilot production unit for shoes c) equipment to complement the testing unit for leather produced by tanneries Details of planned investments for the next two to three years are given in Annex 4.4, page 6. The financial and economic justifications for these investments have been reviewed by the Bank and found to be satisfactory. This equipment should support CNCC's three pronged reform program which involves: a) Reducing the range of services provided by focusing on (i) technical assistance, (ii)testing and certification, (iii)training in specialized areas, (iv)sectoral promotion activities and (v)informing enterprises on trends in fashion and design. b) Reducing its administrative personnel by about 20 people to allow the recruitment of qualified engineers and technicians.  Annlex 4.1 Page 1 0 of 13 c) Developing plans to market the center's services. With implementation of these reforms, CNCC's "commercial revenue should increase from 20% to 31 % between 1996 and 2000. Environmental asDect The CNCC equipped its tannery in 1992 with a wastewater treatment plant of 20m3/day capacity. This plant is used for both the treatment of its own effluent and for experimenting with different treatment schemes that are more relevant to the needs of the center's industrial clients. Further improvements in the environmental management of the CNCC's small scale tannery, treatment plant, and demonstration shoe production unit will be accomplished as part of the environmental audit proposed under the project.  Annex 4.1 Page 11 of 13 CENTRE TECHNIQUE DES MATERIAUX DE CONSTRUCTION DE LA CERAMIQUE ET DU VTERRE (CTMCCV7) The building materials, ceramics and glass industries sector consists of approximately 1200 firms, 250 of which manufacture goods. Most firms in the sector are small in size and employ less than 50 workers each. The sector currently employs approximately 61,000 people, around 2.5 percent of the total employed population in Tunisia and 14.5 percent of industrial employment. The sector suffers from a lack of technically qualified staff at all levels. The sector is dynamic in the Tunisian economy, generating a turnover of approximately TD 992 million. The CTMCCV, the Technical Center for Building Materials, Ceramics, and Glass Industries was created in 19827 as an autonomous publicly owned agency with commercial and industrial activities. In the past, its budget, statute, and activities were set by government decree.8 Its board was composed of three Government representatives, one representative from the financial sector, and four from firms active in the sector (one for public firms and three for private firms). Its chief executive officer was nominated by the Minister of the National Economy, under guidance from the professional organization representing firms in the sector. CTMCCV's statute has now been redefined on the basis of what was stipulated in Law 94-123 relating to the private management of Technical centers. Its role is to support the promotion and development of the sector, help increase the productivity and technical proficiency of both public and private firms, and participate with other agencies in regulating the sector. Its main characteristics are: a) modest proportion of revenue generated by services sold to individual enterprises; b) under-utilization of human resources and equipment, resulting in low productivity; c) modest level of partnership with local research and training institutions or enterprises but good access to bilateral assistance programs, which enables the center to benefit from state-of-the-art equipment and technical assistance. The center employed 80 people in 1995 (25 of whom are technical staff), divided between headquarters and two regional centers, in Sfax and Sousse. The regional centers are responsible for providing technical assistance on site and for representing the center commercially. 7 Law 82-46 of May 25, 1982. B Decree 82-1283 of September 18, 1982  Annex 4.1 Page 12 of 13 Main activities Information dissemination and training The center is entrusted with disseminating technical and commercial know-how within the industry. In response to demand from enterprises in the sector, estimated at 226,000 for the VIII plan, and expected to surpass it during the IX plan. The center also retrains specialized workers for new sectors of activity. It conducts seminars and training programs for industrialists, engineers, and technicians in the subsectors. In 1995, the center organized several seminars on issues such as ceramics production technology, glass production technology, creation of a quality control system, and making specialized health-care products using ceramics. Furthermore CTMCCV cooperates with academia to provide hands-on training and placement to university students and young professionals finishing their studies in related fields. It also disseminates information through the publication of specialized magazines and periodicals. Technical assistance and experise The center provides its membership with technical assistance on issues such as clays, sands, and limestone layer diagnostics; studies of the environmental impacts of activities; and raw material and product testing. It also provides energy and technological audits upon request. Research and development In conjunction with Tunisian universities, the center focuses on applied research to devise and implement new products with industrial potential. On demand, the center designs and creates new types of ceramics, marbles, and masonry. Financing In addition to the receipts resulting from services provided (TD 100,000 or 12 percent of total turnover, from 103 operations on behalf of 51 clients), CTMCCV was financed by a special levy paid by companies in the sector, and now through the Industrial upgrading fund (FODEC). FODEC subsidy for 1995 was estimated at TD 405,000, making up about 46% of the centers resources. For 1995, CTMCCV's budget included TD 880,000 for operating expenditures and TD 300,000 for investment expenditures. Wages and salaries accounted for approximately TD 600,000.  Annex 4.1 Page 13 of 13 The reform effort Within the framework of the reform program, CTMCCV's development plan requires the following investments: a) a series of small additional investments for on- and off-site testing units and laboratories dealing with concrete, cement, glass, ceramics, bricks; for energy audits; and for metrology b) supplemental equipment including vehicles, information technology, office furniture, etc. Details of planned investments for the next two to three years are given in Annex 4.4, page 7. The financial and economic justifications for these investments have been reviewed by the Bank and found to be satisfactory. This equipment should increase the impact of this center on the technical upgrading of this sector, if combined with the following measures: a) divesting (by selling to private entrepreneurs) the activities of small-scale production of ceramics, marble, and bricks; b) reviewing research activities and pursuing only those undertaken in partnership with enterprises; c) increasing the ratio of technical to administrative staff so that the former eventually comprise 45 to 50 percent of total staff; d) upgrading human resources through training, and by motivating staff through introducing flexibility into the wage policy; e) developing a marketing strategy based on cost accounting. With implementation of these reforms, the level of commercial revenues are expected to increase from 12.3% to 50% between 1995 and 1999. Environmental aspects CTMCCV's production operations are also of semi-industrial nature and are mainly out of used due to the lack of demand. In addition, these operations are due to be sold or dismantled under the restructuring scheme proposed under the project.   Annex 4.2 Page I of 3 PROPOSED NEW SECTORAL TECHNICAL CENTERS A. Technical Center for Chemical Industries 1. This center will support the technical upgrading of private enterprises in the chemicals industries. These enterprises account for only 25 percent of total sectoral value added because of the size and current public ownership of the Tunisian fertilizer industry. The main subsectors are in the manufacturing process -- paints and inks, soap, perfumes and cosmetics - and not in basic heavy production. 2. The committee that undertook the preparatory studies, has identified, in part based on the experience of other countries, the following main activities for this center, to be confirmed by the results of the feasibility study: a) Technical services for the sector as a whole - Organization of seminars and workshops - Enterprise awareness of modem technology - Research and development to adapt modem technology - Technology information services - Sectoral studies b) Technical assistance to individual firms (commercial services) - Testing inputs and outputs, for conformity to norms and standards - Tan'ming - Quality assurance services - Other competitiveness enhancing and services - Techno-economic studies - Technology studies - Enviromnental impact studies - Technical assistance to improve safety of chemical products - Preparation of best-practice guides - Diffusion of technical and commercial information - Strategic studies c) Services for the Public Sector - Training of public institutions' personnel - Sectoral and strategic studies - Technical assistance to public institutions - Public information services  Annex 4.2 Page 2 of 3 B. Technical Center for Wood and Furniture 3. This center will focus on the technical needs of manufacturing enterprises in the wood and furniture sector, which has long been protected by high tariffs. Accordingly, the furniture sector is not very competitive given its structure, its low productivity and quality and the lack of standards.Ninety percent of the inputs for this industry are imported. The relevant professional association has been seeking the creation of a technical center since the 1980s. Another feature of this sector is the predominant share of artisans and the small size of production units. 4. Given the multiple needs of this sector, a committee that visited technical centers abroad, initially decided that the center should focus on the following services: a) documentation and technical information, b) technical assistance, c) training and sectoral promotion (trade fairs), and d) testing and quality control. This technical center will be launched in partnership with a foreign center such as CTBA irn France. C. Technical Center for WraDpin2 and Packagine 5. This technical center already exists as a departnent of INNORPI, the national institute for standards and patents. This department was created in 1988 with the support of UNDP. Its services help Tunisian exporters develop their knowledge of the packaging requirements in. foreign markets. It also offers technical assistance to packaging producers (cardboard), drafts standards, and tests products. 6. The department is made up of three units: design, a test laboratory for cardboard packaging and another for metallic packaging; it employs 8 people. Its turnover was modest - less than TD 10,000 in 1993. 7. The objectives for its development as a full-fledged technical center are to: a) develop a "commercial" behavior, based on the results of market analysis, and b) augment laboratory equipment to respond to the needs of Tunisia's agro-industry. D. Technical Center for Aero-Industrv 8. The design of the center is challenging, given the scope of potential activities and the multiplicity of subsectors (24) and sectoral associations (30) that come under the umbrella of the  Annex 4.2 Page 3 of 3 agro-industry association. Within the Ministry of Industry, a separate department is responsible for the agro-industry sector; this department was transferred from the Ministry of Agriculture in early 1995. 9. The agro-industrial sector is large and diversified, encompassing various products, including fisheries, breweries, etc. It employs 60,000 workers and comprises 5,000 production units, the majority of which small and medium scale enterprises, with total value added of TD 415 million in 1994, roughly 20 percent of total industrial value added. In 1994, exports of agro- industrial products amounted to TD 220 million. 10. The on-going feasibility study has three objectives. First, to determine which subsectors will be served by the proposed center, given that some of them -- the olive oil industry, for example -- have already set up laboratories or research centers on their own. Second, to identify priority activities; according to industry representatives, the sector needs a wide range of upgrading measures. The main focus is likely to be quality assurance, testing and certification, and environmental management. Third, to determine whether the center should take over LCAE's laboratory for inspecting food products.   Annex 4.3 Page 1 of 2 NATIONAL METROLOGY SYSTEM 1. The main issues related to this component are: (i) the current gap in the accreditation and certification system in Tunisia, (ii) the alternatives for building a national measurement system (NMS), (iii) the expected outcome of the planned study on this topic. 2. Metrology is broadly defined as both a scientific field applying to measurement and as activities undertaken in measurement and include: measurement theory, definition of measurement units and their physical translation, features of measurement instruments, measurement methods and standards, organizations dealing with measurement execution. 3. An NMS is essential to achieve measurement credibility; it is composed of calibration equipment, know-how, means of information, etc.; it exists in almost every country possessing an industrial base. According to international practice an NMS is composed of relatively standard functions allocated to a national institute/primary laboratory, certified calibration laboratories/centers, licensed metrology services. Such a system does not yet exist in Tunisia, where partial elements can nonetheless be found. 4. Traceability, which ensures that each measurement can be reliably traced to a higher reference standard, and ultimately to the central national and intemational standards, is the most important aspect of metrology because without it there can be no equality with measurements in other countries. Thus, it is impossible for a country to enter into certification agreements with other countries if it cannot demonstrate traceability in all parts of its metrology system. 5. Establishing the traceability chain in various metrology fields is one of the basic issues to address when introducing measurement systems in the country. This can be achieved in two ways, which differ with respect to the costs, implementation, and maintenance of the traceability system. If the system is established to ensure that only one or very few pieces of equipment have to be sent abroad for each field of measurement, this normally means a greater initial investment in equipment and training of personnel, but lower operating costs. This level of investment is possible only for a primary laboratory working on a scientific or high industrial calibration level. Alternatively, lower initial investment is possible in some fields if more equipment is sent abroad for calibration, but this will eliminate the possibility of maintaining the traceability within the country and result in higher operating costs. This choice must be discussed thoroughly in each measurement field. 6. Once the metrology structure has been determined, it is important that a detailed study be made about the metrology needs of national and/or accredited laboratories  Annex 4.3 Page 2 of 2 for each field measurement. The differences between legal and industrial metrology should also be clarified. A metrology system can be established based on either of two principles: - a centralized system with one National Metrology Laboratory at the top, or - a decentralized system with several specialized national metrology laboratories. 7. The advantage of a centralized system is that it is easy to manage, but it is very costly to establish. The advantage of a decentralized system is that it can be based on laboratories, equipment, and expertise that already exist in different institutions. The disadvantages could be that coordination among the laboratories might not be smooth, and that both equipment and training might require improvement. 8. A study of this issue has been launched with the financial support of the European Commission, as part of their ECU 5 million technical assistance progran for quality promotion in Tunisia. According to its terms of reference, the study (action number 13) should: (i) identify technical and manpower requirements to calibrate the measuring instrument, (ii) evaluate the extent of traceability, and (iii) recommend a structure for a Tunisian metrology organization. A call for tenders for executing of this study was issued in February 1995. Review of bids took place in November 1995, and completion of the study is expected in late 1996. 9. Given that the Bank was satisfied with the terms of reference of the study and with the technical proposal of the selected consulting firm, it has been agreed that the investments identified through the study will be, after review by the Bank, financed by the project. It will enable the access of Tunisian laboratories, and ultimately Tunisian industries, to local certification capacity.  Financing Plan and Project Cost Annex 4.4 Page 1 of 7 Financing Plan Project Cost Tunisian Dinars (million) Local Foreign Total Local Foreign Total GoT/STCs 7.6 7.6 Existing STCs 2.5 19.6 22.2 GoT/STCs/EC 14.8 14.8 New STCs 3.6 20.8 24.4 IBRD 37.1 37.1 Environment 0.1 2.9 3.0 Metrology 1.4 8.6 10.0 TOTAL 7.6 52.0 S9.6 TOTAL 7.6 52.0 59.6 US Dollars (million) Local Foreign Total Local Foreign Total GoT/STCs 7.9 7.9 Existing STCs 2.7 20.4 23.1 GoTlSTCs/EC 15.4 15.4 New STCs 3.7 21.7 25.5 IBRD 38.7 38.7 Environment 0.1 3.0 31 Metrology 1.4 9.0 10.4 TOTAL 7.9 54.1 -62.1 TOTAL 7.9 54.1 62.1 French Francs (million) Local Foreign Total Local Foreign Total GoT/STCs 41.0 41.0 Existing STCs 13.7 105.6 119.3 GoT/STCs/EC - 79.8 79.8 New STCs 19.3 112.3 131.6 IBRD - 200.0 200.0 Environment 0.7 15.5 16.2 Metrology 7.3 46.5 53.9 TOTAL 41.0 279.9 320.9 TOTAL 41.0 279.9 320.9 Note: DD,TX: Custom duties and taxes T.A.: Technical Assistance  Financing Plan by category of expenditure Annex 4.4 Page 2 of X TD'ooOs World Bank Financing Equipment Vehicles Civil Works T.A. Total Existing centers 12,624 1,530 728 465 15,347 New Centers 7,249 1.182 5,355 - 13,786 Environment 870 _- 870 Metrology 6,090 - 1,050 - 7,140 TOTAL 26,833 2,712 7,133 465 37,143 Govemment/Centers Equipment Vehicles Civil Works DD TX Total Existing centers 507 270 312 1,457 2,546 New Centers - 209 2,295 1,083 3,587 Environment - 130 130 Metrology - - 450 910 1,360 TOTAL 507 479 3,057 3,580 7,622 Other Donors | Training and TA Total Existing centers 4,265 4,265 New Centers 7,060 7,060 Environment 2,000 2,000 Metrology 1,500 1,500 TOTAL 14,825 14,826 Grand Total Total Existing centers 22,158 New Centers 24,432 Environment 3,000 Metrology 10,000 TOTAL 59,590 Note: DD,TX: Custom duties and taxes T.A.: Technical Assistance  Financing Plan by category of expenditure Annex 4.4 Page 3 of 7 USS million World Bank Equipment Vehicles Civil works T.A. Total Existing centers 13.2 1.6 0.8 0.5 16.0 New Centers 7.6 1.2 5.6 14.4 Environment 0.9 - - 0.9 Metrology 6.3 1.1 7.4 TOTAL 28.0 2.8 7.4 0.5 38.7 GoT/ STC Equipment Vehicdes Civil Works DD, TX Total Existing centers 0.5 0.3 0.3 1.5 2.7 New Centers - 0.2 2.4 1.1 3.7 Environment - - 0.1 0.1 Metrology - - 0.5 0.9 1:4 LTOTAL 0.5 0.5 3.2 3.7 7.9 Other Donors Training and TA Total Existing centers 4.4 4.4 New Centers 7.4 7.4 Environment 2.1 2.1 Metrology 1.6 1.6 TOTAL 15.4 15.4 Grand Total Total Existing centers 23.1 New Centers 25.5 Environment 3.1 Metrology 10.4 TOTAL 62.1 Note: DD,TX: Custom duties and taxes TA.: Technical Assistance  Financing Plan by category of expenditure Annex 4.4 Page 4 of ' FF million World Bank Equipment Vehicles Civil works T.A. Total Existing centers 68.0 8.2 3.9 2.5 82.6 New Centers 39.0 6.4 28.8 _ 74.2 Environment 4.7 - _ 4.7 Metrology 32.8 5.7 _ 38.5 TOTAL 144.5 14.6 38.4 2.5 200.0 GoT/ STC Equipment Vehices Civil Works DD, TX Total Existing centers 2.7 1.5 1.7 7.8 13.7 New Centers 1.1 12.4 5.8 19.3 Environment - 0.7 0.7 Metrology 2.4 4.9 7.3 TOTAL 2.7 2.6 16.5 19.3 41.0 Other Donors Training and TA Total Existing centers 23.0 23.0 New Centers 38.0 38.0 Environment 10.8 10.8 Metrology 8.1 8.1 TOTAL 79.8 79.8 Grand Total Total Existing centers 119.3 New Centers 131.6 Environment 16.2 Metrology 53.9 TOTAL 320.9 Note: DD,TX: Custom duties and taxes T.A.: Technical Assistance  Annex 4.4 Page 5 of 7 Total Project Costs TD'000 T.A & of whitc Equipment Vehicles Civil Works Training Subtotal DD,TX Existing STCs. 14.6 1.8 1.0 4.7 22.2 1.5 New STCs 8.3 1.4 7.7 7.1 24.4 1.1 Environment 1.0 2.0 3.0 0.1 Subtotal STCs 23.9 3.2 8.7 13.8 49.6 2.7 Metrology 7.0 1.5 1.5 10.0 0.9 GRAND TOTAL 30.9 3.2 10.2 15.3 59.6 3.6 USS million TA & of which Equipment Vehicles Civil Works Training Subtotal DD,TX Existing STCs. 15.2 1.9 1.1 4.9 23.1 1.5 New STCs 8.7 1.4 8.0 7.4 25.5 1.1 Environment 1.0 2.1 3.1 0.1 Subtotal STCs 24.9 3.3 9.1 14A 51.7 2.8 Metrology 7.3 1.6 1.6 10.4 0.9 -GRAND TOTAL 32.2 3.3 10.6 15.9 62.1 3.7 FF million TA & of which Equipment Vehicles Civil Works Training Subtotal DD,TX Existing STCs. 78.6 9.7 5.6 25.5 119.3 7.8 New STCs 44.9 7.,5 41.2 38.0 131.6 5.8 Environment 5.4 10.8 16.2 0.7 Subtotal STCa 128.8 17.2 46.8 74.3 267.1 14.4 Metrology 37.7 8.1 8.1 53.9 4.9 GRAND TOTAL 166.5 17.2 54.9 82.3 320.9 19.3  Annex 4.4 Page 6 of 7 Existing STCs (TD000) of which Equipment Vehicles Civil Works TA & Training TOTAL DD,TX CETIME 3,889 260 70 2,435 6,654 432 CETTEX 1,350 270 450 800 2,870 113 CNCC 920 200 0 1,215 2,335 87 CTMCCV 1,135 170 0 280 1,585 96 TOTAL 7,294 900 520 4,730 13,444 729  Annex 4.41 Page 7 of 7 New STCs (TD'OOOs) of which Equipment Vehicles Civil Works TA & Training TOTAL DD,TX Chemical Inds. 1,462 400 1,300 1,500 4,662 190 Wood&Fumiture 1,936 320 2,670 1,790 6,716 252 Packaging 2,207 330 850 1,860 5,247 287 Agrotndustry 2,727 340 2,830 1,910 7,807 355 TOTAL 8,332 1390 7,650 7,060 24,432 1,083 TABLE 7 11/21/96   Annex 4.5 Page 1 of 2 METHODOLOGY FOR FINANCIAL AND ECONOMIC ANALYSIS A. Obiectives A.1. To choose among alternatives, the most financially profitable investnent for both the existing and new technical centers A.2. Maximize the positive economic impact of investments on the concerned sector B. Stens for Financial Analvsis B. I. Market study estimate actual and potential demand by indusrial enterprises for services provided by technical centers Estimate service provision over 5 years; evaluate the proportion of services for the state, for a group of enterprises or the sector, and for individual enterprises, following the methdology specified in performance contracts for the exrsting technical centers * perform sensitivity analysis for changes in demand in response to changes in price for each service provided by technical centers - determine whether there exist private sector providers of services similar to those offered, or planned to be offered, by technical centers, in order to spin-off such services to private sector providers B.2. Financial benefits of investments * using the infonration obtained through the step B.1., estimate the revenue of technical center investments for the period 1996-2006 B.3. Estimate investment costs (at market nrices) and direct and indirect operations costs B.4. Calculate Financial Internal Rate of Retumn (FIRR) * the rate that makes the present value of stream of costs and benefits equal  Annex 4.5 Page 2 of 2 C. Economic Analysis C. 1. Market study * same step as B.1 C.2. Economic beefits of investments * RReesimate the benefits calculated through step B.2. (at border prices for services that are crntly provided overseas, or at prices offered by local suppliers when such suppliers exist) and estmate the benefits of investments for the sectr (for exmple, increase in exports, savings in resource utiolon, productivity improveents) C.3. Estimate costs as in ste, B.3.. but at om,ortmuitV cost rather han market mices C.4. Calculate the Eomic intemai Bt of Retun - same step as B.4  Annex 4.6 Page I of 14 FINANCIAL AND ECONOMIC ANALYSIS OF INVESTMENTS CASE EXAMPLES The purpose of the agreed financial and economic analysis methodology is to ensure that technical centers, both existing and new, will chose the most cost effective investment among various alternatives, while maximinng the positive impact of their assistance on the sector. A methodology for financial and economic analysis of each category of proposed subproject was discussed and agreed with the Tunisun authorities. the management of each existing technical center, as well as the General Directors of the new technical centers during the appraisal mission (see Annex 4.6). Furthermore, the mission reviewed the economic justification of the pipeline of proposed investments of the existing techical centers, prepared by these centers and agreed, where necessary, on appropriat modifications and improvements. The main elements of the financial analysis are as follows: a) Market study to determine (i) what sevices are needed by private industies that are not being offered by the private sector, and (ii) the willingness of private enterprises to pay for these services. b) Technical study to determine the required investments at market prioes to meet the demand for a given service. c) Calcuation of the financial rate of retun of the investment to verify the financial viability for the institution to provide the service at an acceptable price. The following procedures are required for economic analysis to deermine the economic inpact of the investment on the sector as a whole: a) Market study is modified to include the benefits to the sector as a whole. b) Technical study is modified to reesdmate investment costs at border prices. c) Economic rate of return is calculated to verify economic viability of investments.  Annex 4.6 Page 2 of 14 B. FINANCIAL ANALYSIS: CETIME's Dimensional MeIrolo=v Laboratory. 1. Mechanical and Electrical Industries: The mechanical and electrical industry generates TD 1. 1 billion turnover per year, and exports a third of its total production (approximately TD 365 million). It employs approximately 46,000 people, 1.6 % of the total employed population in Tunisia. About 800 firms are active in the sector, most of them are SME's with fewer than 50 employees each. While the sector experienced strong growth in the 1980's, in order to realize its expected growth of 1O percent a year over the next four years, it will have to enhance its competitiveness to meet the challenge of a free trade area with the E.U. 2. Marked Analysis for Metrology Laborutory A survey was performed on a sample of 60 entegrises by CETIME, in collbon with CETIM SENLIS (France), to determine the serices the entepries in the sector require from a techical center like CETIME and how much they are willing to pay for these services. Pivate sector enterprises expsed an interest in receiving the following sevices from the Dimensional Metrology Labortory. (DML): a) Calibration and meastuing of ouMigMent The market suvy revealed that 35 out of the 40 enteprises that are cerfifiod with ISO 9000, have expressed a clear need for this srvice. Accordingly, between 35 and 40 enterprises are expected to use the service the fit year, with an estimatd inicrease of 10 enterprises a year during the subsequent four year period. Price sensitivity analysis was performed and the unit price for the service were set according to the result of this analysis. The expected yearly turnover for the first five yeas of activity is summarized below. TD'OOO 1 2 3 4 5 Turnover 101.68 129.6 157.52 185.44 213.36  Annex 4.6 Page 3 of 14 b) Training Based on the results of the suwvey, the center is expected to organize training seminars on Dimensional Metrology issues as well as professional cerdfication courses for metrolgogy personnel. The revenue from providing this training is estimated at TD 10,000 for the first year and 15,000 is subsequent years. In addition, training courses can be organized upon request from enterprises in the sector. Revenue from this activity is estimated at TD 5,000 per course. Demand for such seminar is estimated at one firm, for a revenue of TD 5,000, for the first year and increase by one every year thereafter. Price sensitivity analysis was performed and prices for this service were set accordingly. Turnover was esfimated as follows: TD'OOO 1 2 3 4 5 Training-& Seminars.- 10 15 15 15 15 Seminars on Request 5 10 15 20 25 Turnover 1S 25 30 35 40 c) Technical Assistance Technical assistance is required by enterprises in the creation of their own metrology departments. It will involve assa in the development of the terms of reference, acquisition and installation of equipment, mgement of metrology laboratories and problem solving. Price sensitivity analysis was performed and prices for these services were set up accordingly. Tumover was estimated as follows: TD'000 1 2. 3 4 5 Turnover 25 35 40 40 40  Annex 4.6 Page 4 of 14 Tumover for the metrology laboratory as a whole is therefore summnrized below: TD'OOO 1 2 3 4 5 Turnover 141.68 189.6 227.52 260.44 293.36 3. Invcmen4 operating costs and altwaive The cost of the investnent in the components highlighted by the survey and described above are esfimated at TD 420,000, of which TD 70,000 for office fitting. Oprating costs are summarized below: TD'000 1 2 3 4 5 Wages & Salaies 20 26.5 36.5 36.5 36.5 Operating Costs 9.0 9.0 9.0 9.0 9.0 Total Operating Costs 29 35.5 45.5 45.5 45.5 4. Rnu"es and Beacnft Based on the above calculations, cash flow is therefore estimated as follows: 7D'000 1 2 3 4 5 Turnover 141.7 189.6 227.5 260.4 293.4 Opeaig Costs 29.0 35.5 45.5 45.5 45.5 Cash Flow 112.7 154.1 182.0 214.9 247.9  Annex 4.6 Page 5 of 14 5. Calculation of the financial rate of return For the Dimensional metrology Laboratory, the Financial rate of return (i) is obtained by applying the following formula: 112.68 + 154.1 + 182.02 + 214.94 + 247.86 - 420 = 0 (l+i) (1+i)2 (1 +i)3 (1+i)4 (1+i)5 i = 28.1% 6. Sensiivity Analysis The intemal rate of return was recalculated on a number of altemative scenarios. The original scenario is depicted on page 10 of this anne-x Scenario 1: Increasing overead costs by TD 30,000 (66% in later years of total operating costs in later years). Results: IRR is reduced from 28.1% in the original scenario, described above, to 20.0%. Conclusion: An underesdmation of overhead costs is plausible and affect the investment's rate of retur. However, the retuns on the investmenets are sufficient to cover considerably higher overheads. Scenario 2: Reducing turnover by 30% . Results: IRR is reduced from 28.1% in the originil scenario, to 10.2%. Conclusion: The investment is, predictably, very sensitive to a reduction in turnover. However, this scenario is not considered likely, based on CETIME's current client base and turnover. Scenario 3: Increasing salaries by 100%. Results: IRR is reduced from 28.1% in the original scenario, to 20.1%. Conclusion: Increasing salaries is a plausible scenario given the need to attract talented skiiled personnel from the private sector. However, even in the case of a doubling of wages and salaries, the return is still sufficient to justify the investment  Annex 4.6 Page 6 of 14 Scenario 4: a) Reducing turnover by 15%. b) Increasing operating costs by 10%. Results: IRR is reduced from 28.1% in the original scenario to 18.5%. Conclusion: This is a more likely scenario, which however will not change the investnent decision. Scenario 5: a) Reducing turnover by 15%. b) Increasing operating costs by 10%. c) Increasing wages by 50% Results: IRR is reduced from 28.1% in the original scenario to 13.7%/ Conclusion: In the eventuality that scenario 4 occurs in conjunction with an increase in salaries of 50%, both of which are reasonably likely possibilities, the retun on the investment will still be high enough to justify the investment Scenario 6: a) Reducing turover by 20%. b) Incrng opqting costs by 20%. Results: IRR is reduced from 28.1% to 14.3%. Conclusion: This is considered a worst case scenario. Based on CETIME's current financial situation, and the results of the market analysis and survey, this is an unmlikely scenario.  Annex 4.6 Page 7 of 14 C. ECONOMIC ANALYSIS: CNCC's Laboratories. A market analysis of a 40 enterprise sample in the sector, performed with the support of a consultant, revealed a need for investments to upgrade CNCC's laboratory capacity. These investments will increase CNCC's capacity to performn tests to ensure conformity with international, and especially European, regulations as well as product quality control and environmental testing. This investment is expected to have economic benefits for the sector as a whole. In order to quantify these benefits, CNCC formulated the following hypotheses, based on the results of the market analysis and survey, as well as international experience. Each has been submitted to sensitivity analysis, details of which are shown in section 5, below. HYPOTHESIS # 1. CNCC's client base is expected to evolve as follows: 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Number of 35 50 70 90 103 118 136 156 179 206 Enterprises L. Quantifying Economiw Benefis Reinforcing the laboratory will bring benefits to client enterprises who seek to monitor the confonnity of the existing product to existing international regulations and standards. The cost of performing these tests abroad are currently four times higher than performing the tests in Tumsi_ The number of companies which are expected to take advantage of this service, and its economic: benefit to them are shown below: 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Number of 10 15 20 30 35 40 46 53 61 70 Enterprises Gains on Services 7 13 25 50 62 74 89 107 131 157 CM '000)  Annex 4.6 Page 8 of 14 Moreover, a laboratory able to perform the necessary analyses and tests will allow enterprises to ensure the quality of their product and to minimize complaints and returns after the sale of the product. HYPOTHESIS # 2 The market analysis and enterprise survey indicated that the elimination of these costs is expected to result in savings to client enterprises equivalent to 1% of their turnover. Based on the market analysis and survey, the average turnover of potential client enterprises was estimated at TD 1 million. The number of companies which are expected to take advantage of these services, and the economic benefit to them, based on these hypotheses is shown below: 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Number of 35 50 70 90 103 118 136 156 179 206 Enterprises Gains on Services 350 500 700 900 1030 1180 1360 1560 1790 2060 (TD'000) Therefore, the stream of financial and economic benefits, including the benefits to entrises who could have access to CNCC tests rather than overseas tests, is shown below: TD'OOOs 1996 1997 1998 .1999 2000 2001 2002 2003 2004 2005 2006 Financial Benefits 38 42 S0 65 86 99 113 130 150 174 202 Economic 38 399 563 790 1036 1191 1367 1579 1817 1995 2419 Benefits 2. Investment costs Investment prices at border prices have been estimated at 260,000 TD.  Annex 4.6 Page 9 of 14 3. Operating costs TD'OOOs 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 At narket prices 83 83 83 83 83 87 87 87 87 87 87 At border prices 106 106 106 106 106 111 111 111 111 111 111 Taking account of economic rettrns from the sector as a whole, investment performance would reflect the following: TD'OOOs 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Turnover 38 399 563 790 1036 1191 1367 1579 1817 1995 2419 Opeating Costs 106 106 106 106 106 111 111 111 111 111 i 1 Net Cash Flow -68 293 4S7 684 930 1080 1256 1468 1706 1834 2308 4. Calculation of the economJc rate of rdurn For CNCC's Laboratory, the economic rate of retun (i) is obtained by applying the following fozmula: -68.8 + 293 + 457 + 684 + 930 .... 230 - 260=0 (I+i) (1 +i)2 (+j)3 (il +i) ( +i)5 (14ii)" i - 89.7 %  Annex 4.6 Page 10 of 14 S. Sensitivity Analysis The internal rate of return was recalculated based on a number of altermative scenarios. The original scenario is depicted in page 10 of this annex. These alternative scenarios were developed by changing the hypotheses listed above, as follows: Scenario 1: Reducing the client base by 50 and 75 percent Results: IRR is reduced from 89.7% in the original scenario, described above, to 59.8% and 39.9%, respectively. Conclusion: CNCC's client base estimate was based on the assumption that it would grow by 15% yearly over 12 years. Given, CNCC's low starting point, this assumption is reasonable. However, even with a considerable lower client base estimates over 12 years, the return on he investment re high enough to justify the investmeni. . Scenario 2: Reducing the average finm's tutmover esfimate (from TD 1 million) by 25, 50, and 75 pecent. Results: IRR is reduccd from 89.7%o in the original scenario, to 75.8%; 59.8%, and 39.9%o, respectively. Conclusion: The original scenario assumes that firms with higher tuover will use tiese CNCC services. However, even if the assumption is revised to include firms with a lower urnover, the return renains high enough to justify the investment Scenario 3: Reducing efficiency gain estmates from 1 percent of average firm's tunover to 0.50, 0.25, and 0.10 percent Results: IRR is reduced from 89.7%o in the original scenario, to 59.8 %, 39.90/o, and 23.8%, respectively. Conclusion: Estimation of the efficiency gain is taken from the market survey perfomed by CNCC on a 40 enterprise sample (10% of sector's enterprises). The potential for overestimation of the benefits is limited. However, even in the case of drastic reduction in efficiency gains, the IRR remains high enough to justify the investment  Annex 4.6 Page I I of 14 Scenario 4: Increasing Operating costs by 15% and 75%. Results: IRR is reduced from 89.7% in the original scenario to 86.8% and 76% respectively. Conclusion: An increase in opeating costs does not significantly affect the investennt returns. Scenario 5: a) Reducing the average firm's turnover estimate by 75%, b) Increasing operating costs by 15%, c) Decreasing client base by 50%. Results: IRR is reduced from 89.7% in the original scenario to 23.9%. Conclusion: This is a conservative scenario. Even in this case, the expected return on investment still justifies the investment. Scenario 6: a) Reducing client base by 75%, b) Reducing the average firm's turnover esfimate by 75%, c) Reducing the average firm's efficiency gains to 0.10% of turnover. Results: IRR is reduced from 89.7% in the original scenario, to 11.2%. Conclusion: This is a worst case scenario. Based on the market analysis, and the enterprise survey performed by CNCC, as well as the outside consultant's study and conclusions, this scenario is highly unlikely.  Financial Analysis Annex 4.6 CETIME Metrology Laboratory Page 12 of 14 (Original Scenario) Technical Wages & Operations and Operating Net Year Calibration Training Assistance Turnover Investment Salaries Mairnenance costs Cashflow 0 420 -420 1 101.68 15 25 141.68 20 9 29 112.68 2 129.6 25 35 189.6 26.5 9 35.5 154.1 3 157.52 30 40 227.52 36.5 9 45.5 182.02 4 185.44 35 40 260.44 36.5 9 45.5 214.94 5 213.36 40 40 293.36 36.5 9 45.5 247.86 IRR 28.1%  Economic Analysis Annex 4.6 CNCC Laboratory Paee 13 of 14 (Origmal Scenario) Savings on CNCC Total YEAR Monwrng client Gain Cl. Economic Financial Fixed OperaLing Nct Cash IRR COSts (2) BenefiLs Benefits Turnover Investment costs Flow Calculations 0 -260 -260 1996 38 38 106 -68 -68 1997 7 35 350 357 42 399 106 293 293 1998 13 50 500 513 50 563 106 457 457 1999 25 70 700 725 65 790 106 684 684 2000 50 90 900 950 86 1036 106 930 930 2001 62 103 1030 1092 99 1191 III 1080 1080 2002 74 118 1180 1254 113 1367 111 1256 1256 2003 89 136 1360 1449 130 1579 111 1468 1468 2004 107 156 1560 1667 150 1817 111 1706 1706 2005 131 179 1790 1921 174 2095 11I 1984 1984 2006 157 206 2060 2217 202 2419 111 2308 2308 IRR 89.7%  Sensitivity Analysis: Overview Annex 4.6 Page 14 of 14 CETIME Laboratory: Sensitivity Analysis HYPOTHESIS IRR Original scenario See Page 12 28.8% Altemative scenario 1 Overhead Increase of TD 30,000 20.0% Altemative Scenano 2 Reducing Tumover by 30% 10.2% Altemative Scenario 3 Increase salaries by 200% 20.1% Aftemative scenano 4 a)Reducing Tumover by 15% 18.5% ________________b)lncreasing operating costs. by 10% ____ a) Reducing Tumover by 15% Altemative scenario 5 b)lncreasing Operating costs by 10% 13.7%/ c) Increasing wages by 50% Altemative scenario 6 a) Reducing Turnover by 20% 14.3% ________________b)increasing Operating costs by 20% CNCC Laboratory: Sensitivity Analysis HYPOTHESIS iRR Original scenario See Page 13 39.7% EAlternative Scenanio 1. Reducing client base by 50% 59.9% by 75% 39.9% Alterative scenano 2 Reducing average tumover estimate by 25% 75.8% by 50% 59.8% by 75% 39.9% Alternatve scenario 3 Reducing efficiency gain estimates to .50% 59.8% to .25% 39.9% _________________ _ ____________________________________________ by .10% 23.8% Alternative scenario 4 Increasing Operatng costs by 15% 866.8 by 75% 76.0% Altemative scenano 5 a) Reducing the average firm's tumover estimate by 75% b) Increasing operating costs by 15% 23.9% c) Decreasing client base by 50% Altemative scenano 6 a) Reducing the average firm's tumover estimate by 40% b) Increasing operating costs by 25% 61.9% Altemative scenano 7 a) Reducing client base by 75% b) Reducing average firm's estimate by 75 % 11.2% c) Reducing the average fifmfs gains to .110 of tumover  Annex 5.1 Page 1 of 6 PERFORMANCE MONITORING INDICATORS The Project's impact, both in tms of individual STCs and their impact on the industrial sector, specifically as regards the competitiveness upgrading process, will be monitored. The tentative target values for project outut indicators (see below) have been developed, and will be finalized after discussions between the authonties and the STCs to fialize the PPCs. The project outcome/impact indicators descibed in this annex have been agreed. The baseline and target values for these indicators will be determined following, and on the basis of, the first firm-level survey (see below), which will be carried out no later than December 31, 1996. A. Poject Output Indicators These indicators measure the quantity and quaity of services that will be provided thugh the project The outut quantity indicators are mainly concerned with te execution of progam and performance contracts (PPCs). In order to monitor the execution of the PPCs, a number of common indicators have been agreed upon for each technical center. These indica are as follows: (i) PFinacil Autonomy Raio, defined as the ratio of Category (a) revenues (par. 2.18) to total operating ependiture. This ratio excludes rent paid by the center and interest expenses. (u) Techncal Stfrf Ratio, defined as the tio of tecical peonnel to total staff of the technical center. (iii) Pwuiviy Ratio, defined as th rato of the number of days spent by opeaional pesonnel on evenue-earning actvities (Categories (a) and (b)) to total number of workdays. (iv) Market Pnetwmtion Raio, defined as the ratio of the number of enterprises using the sevices of the technical centers, to the total number of enterprises in the sectr concerned. The baseine and target values for the first three selected indicators are specified in the PPCs and arecsummarized in Tables 5.2 (A) to 5.2 (C), for the eisting STCs. In most cases, the taret values are defined for eah year; in other cases, only one targt value (for the last year) has been idendfied. The values for the Market Pentrxion Rao will be spefied aftr the first firm-level survey (see below).  Annex 5.1 Page 2 of 6 The Project's output quality indicators will be compiled through firm-level surveys of technical center clients and other enterprises in the concerned sectors. Agreement was reached at appraisal that annual surveys of industrial enterprises would be undertaken to solicit the opinion of these enterprises regarding the quality of services offered by technical centers, as wel as the awareness of the existence of these centers, in the case of enterprises that have not used the services of these centers. The surveys would also be used to gather additional information to monitor project impact. The first survey will be carried out no later than Decmber 31, 1996; the second survey will be carried out by March 31, 1998, with other surveys following every two years after this date. Agreements have been reached on the modality and execution of the firm-level survey. Specifically, the firm-level survey will be based on stratified random sampling to: (a) represent the entire sector; (b) cover firms of different sizes and ownership structures; and (c) answer specific questions on the relevance and quality of services provided by the existing and new technical centers. The first survey will provide data to compile the baseline values for project outcome/impact indicators; and the values for target indicators will be defined on that basis. The survey instruments will be designed to: (a) be completed in a single one hour interview, to ensure a high response rate; and (b) facilitate cross-firm and cross-sector comparison through uniform 'core' questions. The firm-level survey will be conducted every two years, and will be managed by the PrOject Coordination Unit (PCU), which may subcontract the conduct of the survey to other entities. These entities will develop the questionnaire which will be submitted to the PCU and the Bank for approval. The survey will encompass between 30 and 40 entrprises for each STC, with the foolowing composition: (a) 20% of the STC's clients, with a maximum of 20 and a minimum of 10 enterprises: half of these enterprises will be the STC's largest clients in terms of the STC's turnover; the remaunder would be chosen at random among the STC's other clients. 20% of the sample will be maintained from one survey to the next. These enterpnses will respond to both the opinion survey and a quantitative questionnaire to obtain data on the evolution of value added, productivity, exports, and investments, which will be used to formulate the four project outcomelimpact indicators below. Comparable sector-level data will be obtained from the Annual Development Report published by the Ministry of Economic Development.  Annex 5.1 Page 3 of 6 The first finn-level survey will of course only cover the existing STCs. (b) 10 enterprises that have only limited contact (e.g., seminars, etc.) with the STC. (c) 10 enterprises that have never used the services of the STC. In this manner, between 240 and 320 enterprises (for all STCs) are expected to be muvyed every two years (except for the first survey which is likely to cover 160 to 200 enteprises). The human resources required for the survey are estimated at 10O-120 days, costing about TD20,000 - 24,000. B. Project OutcomeIXmpact Indicators Tbe above survey would also be used to provide data to construct the followmng additional indicators: (v) Evolution of value added by the enteprises using the services of technical centers, in rlation to the evolution of sectoral value added. (vi) Evolution of producnviy by the enterpises using the serv of technical centers, in relation to the evolution of sectoral productivity. (vii) Evolution of aporu by the entrpris using fte services of technical centers, in relation to the evolution of sectorl exports. (viii) Evolution of imes#nen by the enteprises using the services of technical centers, in reation to the evolution of sectoral investment.  Baseline and target values for performance indicators Annex 5.1 Page 4 of 6 TABLE 5.2 (A): Financial Autonomy TD'OOO CETITME 1995 1996 1997 1998 1999 2000 2001 Totl Operating Expenditures 1254 1610 1924 2238 2557 2843 3155 Reens from catgory A 840 998 1316 1645 1986 2333 2686 Fiancial Autonomy Ratio 51% 62% 68% 74% 78% 82% 7-X5% CE77m 1995 1996 1997 1998 1999 Toal Operating Expenditubs 1000 1400 1S60 1650 1670 Revenues from categoy A 160 280 550 650 700 Fknancil Auvtonomy Ratio 16% 20% 35% 39% .42%. CNCC 1995 1996 1997 1998 1999 200 Total Operafing Expendtus 1650 1670 1690 1800 1840 PRevne frm category A 332 371 431 492 570 Financial Autonomy Ratio 20% 22% 26% 27% 31% CTMCCV 1995 1996 1997 1998 1i99 Totl Operabng Expenditures Roenues from categofy A Finarcial Autonomy Rato 13% 50%  Baseline and target values for performance indicators Annex 5.1 Page 5 cf 6 TABLE 5.2 (B): Technical Staff Ratio CE77ME 1995 1996 1997 1998 1999 2000 2001 Technical Staff Ratio 55% 57% 59% 61% 63% 66% 70% CETTEX 1995 1996 1997 1998 Technical Staff Ratio 71% 76% 78% 79% CNCC 1995 1996 1997 1998 1999 2000 2001 2002 Technical Staff Ratio 25% 60% CTMCCV 1995 1996 1997 1998 1999 Technical Staff Ratio 31% 45%  Baseline and target values for Performance Indicators Annex 5.1 Page 6 of 6 TABLE 5.2 (C): Productivity Ratio CETIME 1995 1996 1997 1998 1999 2000 2001 Produchvty Rato 40% 43% 4a% 50% 53% 58% 60% CETTEX 1995 1996 1997 1998 Productvty Ratio 86% 87.3% CNCC 1995 1998 1997 1998 1999 2000 2001 2002 Productvky Ratio- 44% - - -- CTMCCV 1995 1996 1997 1998 1999 Produeivity Ratio 55% -75%  Annex 5.2 Page l of2 SELECTED DOCUMENTS AND DATA AVAILABLE IN PROJECT FILE Existing Technical Centers CETIME: Diagnostic Study for CETIME. Draft Program and Performance Contract. Study of investment requirements for electrical, mechanical and plastic laboratories. Market study for accreditation of electrical, mechanical and plastic laboratories. Methodological note on above market study. Economic analysis of laboratory investments. Market study of microelectronics center. Market study for the laboratory of dimensional metrology. Economic analysis of mechanical laboratory. Economic benefits analysis of the trial laboratories. C.ETTEX: Diagnostic study for CETTEX. Draft program and performance contract. Market study of textile/clothing sector's needs. Market stud and economic analysis for Training center. CNCC: Diagnostic study for CNCC. Draft program and performance contract. Financial analysis of CNCC's investment requirements. Economic analysis of CNCC's investment requirements. CTMCCIV Diagnostic study for CTMCCV Draft program and performance contract. Economic and Financial Analysis for CTMCCV's investments.  Annex 5.2 Page 2 of 2 Proposed New Centers Wrapping and packaging STC: Feasibility study, including market study and preliminary financial and economic benefits analysis. Explanatory note regarding financial and economic benefits analysis hypotheses and assumptions. Other Centers: Terms of reference for feasibility study. Metrology component Terms of reference for EC- funded metrology study.  I  Tunisia 15579-TUN III 11111 l 1111111IJI1 I US$ 15