Tunisia - Societe Nationale d'Investissement Project

Ifl7Y i IRESTRICTED m.' . .- '- 'FILE COPY Report No. DB-2Z5b sL _ I._ _ _ _ _ _ _ _ _ 1 +' This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be pubjished nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE REORGANIZATION OF T HE SOCIETE NATIONALE: D'INVESTISSEMENT IN TUNISIA April 22, 1966 Developmlenit Finance Companies Department  CURRENCY EQUIVALENTS Currency Unit - Tunisian Dinar (D) US $1.00 = D 0. 525 D 1.000 = US $1. 905 US $1 million = D 525, 000 D 1 million = US $1, 905, 000  SOCIETE NATIONALE D'INVESTISSEMENT TABLE OF CONTENTS Page Paragraph SUM4ARY AND CONCLUSIONS i I. HISTORY 1 1 II. TUNISIAN INDUSTRY AND INDUSTRIALFINANCE Growth of Industry 2 4 Financing of Industry 4 13 III. THE SOCIETE NATIONALE D'INVESTISSEMENT History 6 24 Objective of the Reorganization 7 28 Ownershi.p 7 29 Financial Resources 8 31 Relatic,ns with Government 10 36 Board and Management 10 38 Operating Policies 11 42 IV. PROSPECTS Volume of Business 12 43 Profitability 12 45 SNI's Contributtion to the Economy 13 49 V. PROPOSED LOAN AND INVESTMENT 13 50 This report was prepared by Mr. R. A. Morton of IFC on the basis of information received in Tunisia and in Washington between January 1964 and April 1966.  SOCIETE NATIONALE D'INVESTISSEMENT LIST OF ANNEXES I. (i) Distribution of Shares: A) Before reorganization B) After capital reduction, June 28, 1965 C) After reorganization (ii) Tunisian banks investing in SNI (iii) Foreign institutions investing in SNI II. Portfolio of Equities, December 31, 1965 III. Loans Outstanding, December 3L, 1965 IV. Summaar Balance Sheets 1962-65 V. Summary Profit & Loss Accounts 1962-65 VI. Policy Statement  SUMMARY AND CONCLUSIONS i. During 1964 and 1965 IFC made, at the invitation of the Government, a study of development financing institutions in Tunisia. From this study emerged proposals, in agreement with the Government, for the recrganization of the Societe Nationale d'Investissement and its conversion into a privately-owned development finance company offering various forms of medium- and long-term finance to the private industrial and tourist sectors. ii. From its establishment in 1959 with a share capital of D 2,000,000, held 58% by Government and its agencies and 42% by over 80,000 small Tunisian investors, SNI confined its activities to the provision of equity capital to new enterprises (some of which it promoted itself) and to a few expanding ones. Other Government-controlled financial institutions provided medium-term financing and Government itself provided much equity capital directly, in order to assure as far as possible the desired pace of industrialization. Operating with this limited scope, and with only its own equity capital for resources, SNI was not profitable. Its difficulties were compounded by several changes in management and by lack of competent staff. iii. The reorganization agreed between IFC and the Government in- volves a reduction in SNI's capita.l, the enlargement of its total finan- cial resources, substantial assistance to it from Government in various forms, provision of strong management, and close cooperation with 'the Societe Tunisienne de Banque (STB), the largest banking institution in Tunisia. The last two objectives have been attained by the appointment of Mr. Abdelaziz Mathari, President and General Manager of STB, to hold the same office in SNI as well. He will be assisted by an experienced foreign adviser. The reorganizati.on is.now approaching completion. iv. The reorganized SNI will. have a key role in the substantial investment in private industrial and. tourist sectors predicted during the 1965-68 Four-Year Plan. It will be specialized in providing medium- and long-term financial assistance to these sectors. v. It is recommended that IFC should invest D 300,000 ($570,000) in the reorganized SNI and that the Bank should provide a $5 million line of credit to it. The IFC investment and Bank loan would be ac- companied by the purchase of shares by a representative selection of Tunisian and foreign financial institutions. vi. T:he terms and conditions of the Bank's loan would be those customary ia loans to development finance companies. The interest rate applied to each portion of the loan would be the Bank's current rate at the time of crediting that portion. The amortization schedule would be agreed in advance, subject to amendment to conform to the repayment schedules of the loans made by SNI from Bank funds. The loan would 'be used for cost of goods in individual projects for whi.ch SNI makes loans and equity investments, and unless the Bank were to  - ii - agree otherwise, would be for foreign currency expenditures only. All project,s to be financed from the Bank loan, except those needing less than $50,000, would be subject to prior approval by the Bank.  APPRAISAL OF THE REORGANIZATION OF THE SOCIETE NATIONALE D'INVESTISSEMENT I. HISTORY 1. In September 1963, the Tunisian Government requested IFC's assistance in examining the situation of the Societe Nationale d'Investissement (SNI), a developraent finance company organized in 1959 on government initiative and in which the Government held a majority of the capital stock. By agreement with the Government, an IFC mission in January/February 1964 made a study of the prospective demand for long-term ifinance in the private sector of the Tunisian economy, of the organization and operations of institutions engaged in medium- and long- term financing, and of institutionial changes desirable to meet more effectively the demand for such finance. 2. lhe mission reported that there was a shortage of long-term loan and equity capital for private industrial and other productive enterprises in Tunisia, and that there would probably be enough demand for such finance in the country to support a private development finance company. Any arrangement for filling this gap would have to take into account the poor condition of SNI, then at the end of its resources after four years of rather ineffective and unprofitable operation. It should also take into account the substantial development banking activities and experience of the S'ociete Tunisienne de Banque (STB), the largest barking institution in Tunisia. The mission noted three possible alternative courses of action: (i) SNI might be merged into a strengthened STB; or (ii) SNI might be reorganized and reoriented under private control; or (iii) a new private development finance company might be created, which would take over the sound portion of SNI's assets. The mission recommended the third alternative. In June 1964, IFC trans- mitted these conclusions to the Tumisian Government. 3. Tlhe Government preferrecd the second alternative and in January 1965 requested IFC to assist; in SNI's reorganization and to participate in its capital. An IFC consultant, Mr. E.T. Kuiper, visited Tunis in March to discuss this recrganization and to review the possi- bility of an IFC participation. He too concluded that there should be enough business to support a privately-controlled development finance company. He drew up recommendations for the reorganization of SNI, for an IFC participation in its capital, and for a Bank loan to it, which,  - 2 - with minor modifications, form the basis of the present proposals. In May 1965, the Tunisian Secretary of State for the Plan and the National Economy expressed his agreement to these recommendations. Subsequently, with IFC's agreement, the Government nominated Mr. Abdelaziz Mathari, President and General Manager of STB, to occupy the same post in SNI as well. The reiorganization and the proposed IFC investment and Bank loan were discussed with Mr. Mathari in Washington in August and October 1L965 and negotiations for the latter took place in Washington in November/ December 1965'. It has also been agreed that a number of financial insti- tutions, Tunisian and foreign, sholJld become shareholders in SNI. II. TUNISIAN INDUSTRY AND INDUSTRIAL FINAiNCE Growth of Industry 4. Tunisia is a small country (population about 4-1/2 million) and provides a limited market. It is not over-populated. The average level of general education is impressive. Infrastructure is good, agriculture is typical of the North African littoral and oil has recently been discovered in moderate quantities. Location near Western Europe is an asset. Reference is invited to the Bank's "Review of 1965-1968 Develop- ment Plan - Tunisia" (AF 39a), particularly Volume IV on industry. 5. Tunisia possessed a small manufacturing and mining sector at independence in 1956, with value added in the sector amounting to D :33 mil- lion, or 14% of gross domestic product at factor cost. Thereafter, there was little or no growth for a few years, but expansion of the sector resumed in atbout 1960 under the impulse of active governmental industrial promotion and investment, and between 1960-1964 industrial activity grew at about 6% a year - short of the Government's ambitious targets, but about the same as the rest of the economy, and a respectable achievement. By 1964, about 1 in 14 employed people were occupied in manufacturing and mining, and value added in the sector was around D 53 million. 6. Manufacturing, so far, has been principally for the Tunisian market, with food processing predominant, and industrial exports have been largely confined to a few processed agricultural and mining products., olive oil and phosphatic fertilizers in particular. 7. The industrialization effort of the past few years has concentrated on import substitution industries. Some enterprises have not been sucess- ful, but the failure of output to reach the targets set for 1962-1964, despite the Government's success in raising investment approximately to projected levels, was due principally to a combination of underesti- mated costs and slow realization of projects as well as the low utiLization  - 3 - of sone installations. In the coming years, Tunisia should devote more attention to export industries, including tourism. 8. Tourism is, in fact, a sector of great potential importance for the Tunisian economy. It has been a net contributor of foreign exchange since 1963. Total receipts doubled between 1962 and 1964, mnd appear to have risen by another third during 1965 to some D 6-7 million. It is thought likely that they will rise to well over D 10 million by 1968. Government initiative in hotels over the years has equipped Tunisia with a number of hotels of high standing and a nucleus of trained hotel staff. 9. The Government has launched a Four-Year Plan (1965-68). In industry, the target is to increase value added by 15% per annum, with industrial employment rising from 97,000 in 1964 to 133,000 in 1968. To achieve this, net investment in industry over the four years is fore- cast at about D 110 million, compared to about D 75 million from 1960 to 1964. The Bank's recent review of this plan indicates that these targets are probably over-ambitious, but there is no reason to suppose that industrial investment will not be at least as great as in the recent past, and it will probably continue to increase. Output may lag behind projections, but it will benefit to some extent from the delayed effects of 196S2-64 investments. Heavy further investment in hotels, particularly in the non-luxury classes, and in other tourist facilities, is envisaged for the next years and, with active government encourage- ment, the private sector is undertaking a very substantial part of it. 10. Since 1959-60, the Government has taken the lead in industrial investment principally because it felt there was no one else to do so. The majority of industrial establishments existing at independence had been established by foreign initiative. While there were a few success- ful Tunisian industrialists, most Tunisian businessmen remained attached to the long commercial traditions of Tunisia. After independence, foreign settlers began to leave and, in some cases, foreign industrialists went as well. Various political setbacks to confidence tended to deter investors and the vigorous nature of the Government's intervention in these circumstances roused fears that the Government desired to preempt a large part of the industrial sector. 11. The Government has now affirmed that it will take a less active part irl industrial promotion mnd investment in future, and that it will encourage private industrial enterprise, Tunisian and foreign, more vigorously. The need to lighten the heavy burden on public resources and to mobilize more fully all the resources of the private sector has encouraged this change. Though they are still hesitant, there are reasonable prospects that private investors will respond to this new emphasis in governmental policy, of which the Government's initiative in reorganizing SNI has offered evidence.  12. For some years the Goverrnment has provided special incerAJ&Trs to private industrial investors and has granted applications for right;s of r3- patriation of dividends and capital to foreign investors. Tunisia signed the Settlement of Investment Disputes Convention on May 5, 1965, the first country to do so. The Government is now studying a number of new measures, including the adoption of an investment code, the establishment of an investment promotion center and the starting of an industrial management training program. Financing of Industry 13. There have been two principal domestic sources of finance for industry in the past few years. One has been direct equity investment by the Government itself or its agencies; the other has been medium-term lending by the commercial banks, based partly on their own resources and rediscount faci- lities with the Central Bank, and partly on special US-supplied resources distributed through STB and the Banque Nationale Agricole (BI'JA). 14. The Government itself took large equity participations in key industries, such as phosphates, iron ore, steel, petroleum refining, sugar and paper pulp. SNI, STB, BNA, the social security fund and the government- owned insurance company also took substantial participations. Thus a number of new industrial companies were started in which the majority of the share capital was held by the Government and its agencies. In some cases, foreign partners held a substantial minority of the capital and in a few cases (sugar and steel) the Government organized a campaign to distribute shares among small Tunisian subieoribers. The distribution of share ownership in some of these companies was such that when SNI passed under private control the companies themselves became privately controlled, though their substantial capital needs may make it hard to maintain this. In spite of these large governmental equity subscriptions, however, most of the new companies estab- lished in the past few years have been under-capitalized, and have carried an excessive load of medium-term debt. 15. Most active in the term-lending field has been STB, established by the Government in 1958 as a wholly Tunisian-owned bank in a field hitherto occupied by French institutions, and in which the Government now holds about 56% of the issued shares. Under dynamic and competent manage- ment, STB has become the largest commercial bank in the country and has also been active in the promotion and financing of industry and tourism. Its importance in the commercial banking sector was increased when it took a 50% interest in a new commercial bank, formed in 1964 from the merger of a banking subsidiary with the Tunisian operations of the Credit Lyonnais. 16. STB has organized several industrial companies and taken share participations. Most of its equity portfolio, now totalling over I) 1 mil- lion, was acquired in this way. Its term-lending to industry has been alnost  exclusively at medium-term with funds from three principal sources: (i) own resources, backed up by the rediscount facilities of the Central Bank, which have been extensively employed; (ii) a special dinar revolving fund (Fonds Special Renouvelable - FSR) from US counterpart funds, now amounting to D 2.7 million; and (iii) a US$ 5 million loan from the Development Loan Fund. A few of STB's loans, made with government guarantee, have had a ten-year life and the two US funds permitted long-term loans, but, in practice, STB has seldom provided financing beyond five years. In addition to its industrial financing, STB carries on an extensive program of residential construction financing. 17. STB's activities in the industrial field are likely to be sub- stantially reduced in the coming years. For monetary reasons, the Central Bank is anxious to limit discounting of medium-term credits on a large scale. To this end, it has ruled that all commercial banks should employ at least l1C of their call and term deposits in medium- term loans. It has also imposed discount ceilings on each bank. The former measure should result in the commercial banks, other than STB, expanding their medium-term lending (they have done little up to now) but the latter, affecting STB, should operate to reduce the total volune of such credits made by the banking system as a whole. Moreover, STB's two US funds are virtually fully coramitted and, in the future, only repayments will be available for new lending. 18. Another important public financial institution in Tunisia is BNA, established by the Government in 1959 under its control. It specializes in agricultural financing, including particular responsibilities for cooperative credit, but has extensive commercial banking activities as well. It too has available a revolving dinar fund of US counterpart money and a US dollar loan. Despite its concentration on agriculture, it has made funds available for industries processing agricultural products, centering around a successful group of companies which BNA itself promot;ed and controls. 19. One final important source of industrial finance has been foreign suppliers' credits. Under special French and other European governmental aid arrangements, credits of up to twenty years' duration have been ob- tained for the new steel mill and for the proposed government-sponsored expansion in the textile industry. However, most of the credits obtained have been medium-term and the burden of them is increasing, both on Tunisia's baLance of payments and on the firms that have contracted therm.  - 6 - 20. There is a small and inactive market for securities in Tunis, which has not played any significant role in industrial financing. 21. The Tunisian financial system has thus made available to new and expanding industrial enterprises a fairly large amount of medium- term credit. It is unlikely that any sound projects were prevented from going forward through lack of financing, but many companies have been created with an unsound financial structure. The main shortage to date has been in long-term loan funds, and there has also been less equity capital available than would have been desirable. Medium-term credit is now becoming scarcer, as a result of Central Bank policy and the exhaustion of STB's special resources. 22. Interest rates have been .pn the low siae in- Tunisi.,