Tunisia - Second Small and Medium Scale Industry Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15470 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TUNISIA SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT (LOAN 2911-TUN) MARCH 28, 1996 Private Sector Development, Finance and Infrastructure Division Country Department I Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: Tunisian Dinar (DT) 1989 US$ = DT0.95 1990 US$ = DT 0.88 1991 US$ = DT 0.92 1992 US$ = DT 0.88 1993 US$ = DT 1.00 1994 US$ = DT 1.01 1995 US$ = DT 0.95 ABBREVIATIONS AND ACRONYMS API Agence de Promotion de lIndustrie BCT Banque Centrale de Tunisie (Central Bank) BDET Banque de Developpement Economique de Tunisie BS Banque de Sud BT Banque de Tunisie BTEI Banque de Tunisie et des Emirats d'Investissement CCD Le Centre de Conseil et de Developpement pour les PME (Center for Advice and Development of SME), within UTICA EU European Union FOPRODI Fonds de Promotion et de Decentralisation Industrielles (Industry Promotion and Decentralization Fund) ICR Implementation Completion Report PICP Private Investment Credit Project SAR Staff Appraisal Report STB Societe Tunisienne de Banque SMI Small and Medium Industries SSI Small Scale Industries SSI II Small and Medium Scale Industry Development Project UTICA Union Tunisienne de lIndustrie, du Commerce, et de l'Artisanat  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TUNISIA SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT (Loan 291 1-TUN) TABLE OF CONTENTS PREFACE .............................I EVALUATION SUMMARY .............................i Project Objectives .............................i Implementation Experience and Results ............................. ii Key Lessons Learned ............................. iv A. Statement of Objectives .............................I B. Achievement of Objectives .............................2 C. Major Factors Affecting the Project .............................5 D. Proiect Sustainabilitv .............................6 E. Bank Performance .............................7 F Borrower Performance .............................9 G. Assessment of Outcome ............................. 10 H. Future Operation ............................. 10 I. Key Lessons Learned ............................. 10 STATISTICAL TABLES ............................ 12 ANNEX: Implementation Completion Report from Agence de Promotion de / Industrie This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.   IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TUNISIA SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT (Loan 291 1-TUN) PREFACE This is the Implementation Completion Report (ICR) for the Second Small and Medium Scale Industry Development Project (SMI II) to the Republic of Tunisia. The Loan in the amount of US$28 million equivalent was approved by the Board on February 16, 1988 and made effective on February 2, 1989. The loan closed on its original closing date of June 30, 1995. The final disbursement was on November 9, 1995, at which time 95% of the Loan had been disbursed. The remaining amount of US$1.5 million will be canceled once the Bank receives the refund of the outstanding balance in the Special Account of US$334,401. T1his ICR was prepared by Laurie Effron of the Private Sector Development, Finance, and Infrastructure Division, Country Department 1 of the Middle East and North Africa Region and reviewed by Amir Al-Khafaji, Division Chief, and Rene Costa, Project Advisor in Country Department 1. Preparation of the ICR is based on material in the project files, interviews with task managers who appraised and supervised the project, and infornation received from the participating banks on the sub-loans. A report on the implementation of one of the project's components was received from the executing agency involved, Agence de Promotion de l'Industrie, and is attached as an Annex. The report was sent for comment to the Govemnment and the implementing agencies (including the participating banks). Comments were received from only one of the five participating banks and have been incorporated into the report, to the extent possible.   i IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TUNISIA SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT (Loan 291 1-TUN) EVALUATION SUMMARY Introduction (i) The Second Small and Medium Scale Industry Development Project (Loan 291 1-TUN), SMI IL, was approved by the Board on Februaiy 16, 1988. It followed successful operations promoting small-scale industrial development in the late 1970s and early 1980s (a pilot line of credit under Loans 1504 and 1505-TUN and a first small-scale industry project, Loan 1969-TUN). The SMI II project was prepared, appraised and presented to the Board while three other lines of credit, more narrowly targeted to specific industries (electrical, mechanical and export), were underway (Loans 2113, 2522, 2554-TUN), and while the Industrial Trade and Policy Adjustment Loan (Loan 2781-TUN) was being appraised and implemented. Project Objectives (ui) As presented in the Staff Appraisal Report (SAR), the objectives of the project were: (a) to increase financial resources available to and strengthen the term lending operations of commercial banks so as to establish medium and long-term instruments for SMI financing; (b) to finance economically and financially sound and technically feasible projects in the small and medium scale sector; (c) to foster a new class of industrial entrepreneurs to provide managers and technicians to the industrial sector; (d) to create employment at an investment cost per job lower than the national average in the industrial sector. (iii) To ensure that these objectives were achieved, the Project Agreement specified the eligibility criteria for sub-projects to be financed under the Loan, including maximum investment, maximun investment cost per job, and a minimum economic rate of return (no specific financial rate of return was specified). (iv) These objectives were consistent with: (a) Government policy on promoting smail enterprises; (b) data that supported the notion that smaller enterprises were associated with lower-cost employment creation; (c) positive Bank experience in Tunisia with lines of credit; and (d) prevailing wisdom that targeted lines of credit were an efficient way to achieve a given set of objectives. At the same time, however, Bank staff identified a major issue of targeting SMI: when access to subsidies depended on meeting criteria that included ceilings on investment costs, firms had incentives to underestimate their project costs in order to qualify for the subsidies, resulting in cost over-runs during implementation and over-  ii indebtedness (para. 3). In addition, the objective of fostering a new class of industrial entrepreneurs was based on the questionable assumption that employment in a small enterprise constituted sufficient training for owners, managers and technicians; this is the weakest of the four stated objectives (para 5). Implementation Experience and Results (v) Achievement of results. The objective of channeling incremental financial resources through commercial banks to SMIs was partly achieved; the other objectives less so or not at all. About 60% of the funds under the Loan were disbursed through commercial banks, and the remaining funds to firms were disbursed through development banks. In terms of whether the funds went in fact to SMIs, criteria for maximum investments costs were met at the time of sub-project appraisal, but were sometimes exceeded by significant amounts (more than 100%) during implementation (para. 6). An important objective was to strengthen commercial banks' term lending to SMIs: if this is judged by the quality of the portfolio, and the quality is judged by the incidence of arrears, then for two of the three commercial banks, this objective was not met. While the portfolio of sub-projects financed under the Loan may not be representative of the quality of all term lending by these banks (as one of the participating banks has noted), in two of the three commercial banks concerned, 60% of the sub-loans are in arrears. For the third commercial bank, only 15% of the sub-loans are in arrears. For all five participating banks, 50% of the sub- loans are in arrears, 16% under litigation; term lending sfill requires strengthening to improve the quality of the appraisal and/or supervision (para 7). One of the participating banks has attributed the poor performance in part to the fact that about half of the firms financed under the Loan started up operations just as the impact of the Gulf War hit the Tunisian economy. While this may help explain some of the problems, all the banks' portfolios did not suffer equally: the clients of the bank with the healthy portfolio also started up operations at the same time as the clients of the other banks. This calls into question the validity of the Gulf War explanation (paras 16 and 17). (vi) In terms of the viability of the investments financed, partial information from several of the participating banks indicates that 50% of them suffered significant (at least 35/o) cost over-runs. Given the available evidence on the incidence of arrears, it is likely that the financial and economic rates of return expected at appraisal were not realized in a large proportion of the investments (para 8). (vii) In terms of employment creation, the Project was expected to result in the creation of about 4,000 jobs, at an average cost of US$17,500 (end-1987 termns). Less than half, or 1,951 jobs, were created, at an average cost of US$34,500 (current terms, including 6%-8% inflation p.a). The maximum cost of job to be created, according to the Project Agreement, was DT30,000, increased in 1990 to DT40,000. Several participating banks ignored the criterion, with no indication that other acceptable criteria had been met, and some investments were financed under the Loan with average cost of job created of over DT1 00,000. Thus, the objective was not achieved, in terms of numbers of jobs created or in terms of low cost (para 9). (viii) Finally, the technical assistance components to the banks and support institutions (API and UTlCA) were to contribute to the overall objectives of the Project by strengthening new and existing SMIs to formulate and carry out investment projects. The API component was identified mainly by inputs, and in a narrow sense, the implementation of the technical assistance and training to API can be considered satisfactory. API, however, shifted its role in the course of Project implementation from providing general technical assistance to SMIs and banks for preparing and appraising projects to serving as a one-stop shop  iii for potential investors and carrying out enterprise diagnoses on selected enterprises (about 26 during the years of Project implementation). Because of the lack of output monitoring indicators for APL it is difficult to assess whether its assistance to SMIs has been effective and contributed to the Project's objectives. With respect to UTICA, the output was expected assistance to 300 enterprises and financial self-sufficiency for this assistance from fees. A 1995 report on TIMCA's activities indicate that the targets for assistance and for financial self-sufficiency from fees were never met and the program of assistance to SMIs was discontinued in 1994. There is no mention in the files of the implementation of the banks' action plans (paras. 11-15). (ix) The Project was implemented essentially as expected in terms of use of the funds by the five participating banks and the timing of commitments and disbursements. Except for the delay in effectiveness that affected the first three years, disbursements quickly caught up to and were generally ahead of appraisal estimates for most of the rest of the implementation period (para. 10). (x) Sustainability. Given that the objectives were in general not met, the Project's achievements are unlikely to be sustainable, except possibly in an indirect sense. If financial resources to SMIs increase over time in Tunisia in the future (paras. 24-26), and banks increase the quality of such lending, this Project may have contributed to encouraging banks to address the financing needs of SNIv. (xi) Key factors. The uneven quality of the participating banks' appraisal capacities is probably the most important factor determining the selection of clients and sub-projects to finance; the generally weak ability to improve recoveries and overall performance of clients is also a contributing factor (paras. 19-22). Project design helps explain the timely conmmitment and disbursement performance: use of a number of banks, relatively wide definition of beneficiaries (compared to two previous lines of credit), and loan conditionality ensuring attractive margins to the banks (para 18). (xii) Bank and borrower performance. Identification, preparation and appraisal can all be considered satisfactory by the standards prevailing at the time (paras. 27-30). The risk of inadequate appraisal of SMIIs by commercial banks was fully recognized and the proposed Project design included: (a) action plans to strengthen the commercial banks' term lending activities; and (b) the provision of technical assistance to support institutions which would in tum help promote sound investments of new and existing SMIs. Given the standards in Tunisia at the time for loan classification, provisioning and capital requirements, the analysis of the banks can be considered satisfactory (para 29). Bank supervision, however, was inadequate in terms of scope, and between November 1991 and July 1994, after most of the funds had been committed but the Project was not closed, it was not supervised at all. No infornation was found in supervision reports or in the files on progress on a number of actions that were conditions in the legal documents and/or figured prominently as Project components in the legal documents and the SAR (paras. 31-32). On the borrowers' side, Project preparation and covenant compliance can be considered satisfactory, Project implementation less so, mainly because of the overall quality of the sub-projects financed (paras. 33-35). (xiii) Assessment of outcome. Given the incidence of arrears and information available on cost overruns, and given that employment creation was at less than 50% in terms of numbers and about double the average cost projected, the Project should be rated overall as unsatisfactory in terms of the achievement of its stated objectives (para 36).  iv Key Lessons Learned (xiv) One of the main lessons from this project is that banks' participation in financial intermediation projects should be based on analysis of their ability to intermediate, including, inter alia, the quality of their loan portfolios. Such analysis, in turn, is predicated on having in place strict prudential regulations, against which the quality of the portfolio and the profitability of the institutions can be measured. In addition, sub-project eligibility criteria should reflect the reality of the local situation and be relevant to the participating banks, so as to ensure that the banks will have an interest in respecting the criteria Finally, projects would do better to focus either on financial sector issues or real sector issues, rather than mix them both in the same project, as this one did. In this case too little analysis was done of the proper role of support institutions, and during implementation, little attention was paid to the technical assistance and training efforts that had been planned for the banks and the support institutions.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TUNISIA SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT (Loan 291 1-TUN) A. Statement of Objectives 1. Following what were considered successful operations promoting small-scale industrial development (a pilot line of credit under Loans 1504 and 1 505-TUN and a first small-scale industry project, Loan 1969-TUN, all of which were given '"atisfactory" ratings by the Operations Evaluation Department), the main objective of the Second Small and Medium Scale Industry Development Project (SSI II) was to foster the development of small and medium scale industrial firms (SMIs). The objectives of this project were presented in the Staff Appraisal Report (SAR) as follows: (a) to increase financial resources available to and strengthen the term lending operations of commercial banks so as to establish medium and long-term instruments for SMI financing; (b) to finance economically and financially sound and technically feasible projects in the small and medium scale sector; (c) to foster a new class of industrial entrepreneurs to provide managers and technicians to the industrial sector; (d) to create employment at an investment cost per job lower than the national average in the industrial sector. 2. To achieve these objectives, the loan consisted of two parts: a credit line, to be channeled through three commercial and two development banks, to finance sub-projects meeting eligibility criteria (US$27.5 million), and a technical assistance component designed to strengthen two support institutions in project promotion and design and management and operation of SMIs (US$0.5 million from the loan plus bilateral grant funds); technical assistance to the commercial banks for SMI lending was to be financed by the banks themselves. 3. The objectives were consistent with: (a) general Bank support to Government's priorities for helping the Tunisian economy transition from being petroleum/phosphate-based to being more sectorally balanced and efficient, with due attention to increasing employment; (b) prevailing wisdom that targeted lines of credit were an efficient way to achieve a given set of objectives; and (c) data indicating that promotion of SMIs, as opposed to larger scale industries, was a lower-cost way to create employment. Bank staff had commented at some length, however, on experience in Tunisia with targeting and subsidies to SMIs: when criteria for access to subsidies or special programs included ceilings on investment costs, firms had an incentive to underestimate their project costs in order to qualify; the result was cost over-runs and over-indebtedness. Thus problems of targeting for small-scale enterprises had already been identified by Bank staff. 4. The objectives focused on both the financial sector and the real sector. In the financial sector, the project was aimed at strengthening financial institutions, improving incentives for commercial banks by establishing wider margins for SSI lending, and removing distortions in the  2 incentive structure by carrying out a study of the Government's targeted, subsidized investment fund.' For the real sector, the objectives included strengthening services to small enterprises by providing technical assistance and training to support institutions. 5. The objective of fostering a new class of industrial entrepreneurs was based on the assumption that employment in SMI firms constituted appropriate training for managers and technicians. The SAR did not explain how the objective was to be monitored, other than by measuring the employment created under the Loan. This in itself, however, would not be an indicator of the degree to which "a new class of entrepreneurs" had been fostered. Thus, this objective can be considered the weakest, both in terms of its logic and in terms of the ability to monitor whether it was achieved. B. Achievement of Objectives 6. The first objective, increasing financial resources to commercial banks for creating medium and long term instruments for SMI financing, was partially achieved under the Loan. About 60% of the funds under the Loan were disbursed through commercial banks, the remaining funds to the firms being disbursed through two development banks. The active interest by commercial banks in use of Bank funds for this purpose can probably be attributed to both the wider margins enjoyed by the commercial banks as a condition of Bank on-lending, and the ability of the commercial banks to count such lending as part of their 'required"financing of priority activities. All the firms financed under the Loan did not, however, meet the criteria for '"mall and medium" The maximum ceilings in the Project Agreement on investment size, although respected at the time of sub-project appraisal, were sometimes exceeded by significant cost over-runs (of over 100%). Based on information from two of the five banks on final investment costs, half of the sub-projects cost considerably more than estimated, in a period of modest inflation (5%-8% p.a.). Investments that were not to exceed DT2 million for new enterprises and DT3.3 million for existing enterprises sometimes cost in excess of DT4 million. Some banks were more vigilant than others in ensuring compliance with eligibility criteria. 7. The extent to which the remaining part of this first objective was met was modest. Strengthening term lending activities of commercial banks can be judged by the quality of the portfolio of term loans; for two out of the three participating commercial banks, over 60% of the portfolio financed under the Loan is in arrears; only one of the commercial banks (BT) has a healthy portfolio, with only 2 out 14 sub-loans in arrears (for all five banks, 50% of the sub-loans are in arrears, 15% are under litigation). While this may not be representative of all term lending by these banks,2 it is a powerful indicator that term lending still requires considerable improvement. See Table below for details. 8. The objective of financing economically and financially sound projects was not formalized by a specific minimum financial rate of return, either in the SAR or legal documents, although a 10% minimum economic rate of return was required. A review of the files shows that the participating banks usually (but not always) calculated a financial rate of return, of at least 12%, but did not generally calculate an economic rate of return. Given the evidence on cost over-runs and the rate of FOPRODI was a Government program of investment subsidies in the form of grants and highly subsidized interest rates on loans to SMA firms and to firms locating in decentralized areas of the country. Preliminary analysis by Bank staff indicated that the subsidies were higher than necessary to serve as an incentive and difficult to measure. It was thus proposed to study the scheme with the aim of developing recommendations to make FOPRODI more efficient and transparent. 2 BDET, one of the participating development banks, noted that the quality of the portfolio of 21 sub-projects fnanced under the Loan was not representative of the situation of the i 0 SMIs in their portfolio.  3 arrears, it is likely that a sizable proportion of sub-projects have not achieved an acceptable financial or economic rate of return. 9. The last two objectives dealing with employment creation were quantified in the SAR at 4,000 new jobs at an average cost of US$17,500 per job (about DT14,000 at the current exchange rate). During project implementation, employment creation was less than half that expected, and the average cost about double, with 1,950 jobs created at an average cost of about US$34,490 per job (DT31,300), in current terms. In addition, in an effort to ensure that the investment cost per job did not exceed a certain level, it was fixed in the Project Agreement at DT30,000 per job (in constant December 1987 terms) and then increased in 1990 to DT40,000 per job. Exception could be made to this criterion under specific circumstances, also specified in the Project Agreement: the average net cost per employee (new and old) should be within the limit and the enterprise had to export at least 25% of its output, and the proposed investment fulfill other priorities of Government with respect to decentralization, industrial linkage and transfer of technology. Several banks ignored the criterion requiring the cost per job created to be no greater than DT30,000; some involved an estimated investment cost per job of over DT100,000, with no indication that the other criteria were met. In the case of one participating bank, three of the eight sub-projects financed under the Loan involved a final cost per job of DT225,00 - DT400,000. Table: Sub-projects financed by banks Total Average No. of Investment cost per subprojects No. of Number of Cost Number of job in arrears" subprojects in subprojects (DT '000)* new jobs (DT) (06/95) litigation*** Objectives 100 100,000 4,000 13,950 Realized 61 61,089 1,951 31,312 31 9 BDET 23 17,476 1,020 17,130 15 7 BTEI 8 12,901 288 44,795 3 1 (class 4) BS 7 8,902 244 36,480 5 n/a BT 14 8,605 309 29,670 2 n/a STB 9 13,205 90 146,725 5 2 * Two banks gave information on actual investment costs; for the other banks, the investment costs were those estimated at sub-project appraisal. ** Does not distinguish by age of arrears, except for BTEI, where only those at least 90 days in arrears are included, and BDET where those at least 150 days are included. *** As a subset of those in arrears Note: Information provided as of 06/94 for BS and BT; 06/95 for BTEI and STB; and 12/95 for BDET. 10. On a more positive note, except for some delay in effectiveness that had an impact on the pace of commitments and disbursements during the first three fiscal years, disbursements were generally ahead of appraisal estimates for most of the implementation period and the Loan was virtually fully disbursed (Table 4). This is in sharp contrast to the two previous lines of credit (Loans 2522 and 2554), for which 50-60% of the loan amounts had to be canceled for lack of investment demand and competition from subsidized lines of credit (Table 5)3. 11. The Project also included technical assistance to the Government's Agence de Promotion de l'Industrie (API) and a private employers' group, l'Union Tunisienne de l'Industrie, du 3 In spite of these cancellations, both loans were given "satisfactory" ratings by the Operations Evaluation Department.  4 Commerce et de l'Artisanat (UTICA), two agencies providing services to SMIs, and technical assistance to the commercial banks. The technical assistance to API was to be financed by US$0.5 million from the Loan; the technical assistance to UTICA financed through a grant from Belgium; and the technical assistance to the banks financed by the banks themselves in the context of action plans each commercial bank had drawn up. The SAR quantified expected output only for UTICA, which involved assisting 300 enterprises in the 1987-90 period and covering their operating costs through fee income from assistance to the enterprises. 12. During Project implementation, API's role shifted from providing technical assistance to SMIs and to banks for preparing and appraising projects to serving as a 'bne-stop shop"for potential investors. As a result, the Project Description in the Loan Agreement was modified to reflect this, the condition of disbursement for API-related expenditures on hiring an engineer was dropped, and the expenditures were reallocated slightly. In addition, API began to carry out diagnostic studies on selected SMIs. API continued to consult with the Bank throughout Project implementation on use of the funds. API also sent a report, requested by the Bank, on the implementation of the project component and on the diagnostic studies, which is attached to the present report as Annex I. 13. Narrowly considered, the implementation of the technical assistance to API can be considered satisfactory, in the sense that the categories of inputs were achieved roughly as planned. In a larger context, however, the inclusion and implementation of this component are questionable in two respects. In the first place, API's overall mandate was not thoroughly examined during preparation and appraisal in terms of the proper role for a Government agency. One internal Bank memo recommended in 1986 that API's role be limited to promotional activities and that API not provide policy, financial or management advice. In spite of this, the Bank continued to prepare a component to strengthen API's role as advisor to banks and to enterprises. This may be due to the relatively long relationship between the Bank and API, going back to at least 1977, which the Bank did not want to jeopardy by calling into question API's basic mandate. Second, once the project component was in place to strengthen API as an advisor on SSI projects, the shift in that role appears to have been treated relatively casually: a supervision mission discussed the shift and agreed that the condition of disbursement should be dropped. There does not appear to have been a re-examination of training, equipment and technical assistance needs in light of API's changed emphasis as investment promoter. 14. The signing of the grant to finance UTICA's assistance program was a condition of effectiveness. Because it was delayed, however, the Bank accepted evidence instead that UTTICA's program would be entirely financed by TIICA itself, if necessary. The grant was put in place in 1989, however, and a supervision mission reported in September 1989 that the program was to get underway shortly. This is the last mention in the files of this component, although one of the task managers supervising the Project recalls that the program was actively underway in 1990. A report issued in Apnrl 1995 by external consultants on UTICA's 'Centre de Conseil et de Developpement pour les PME -- (CDD)"noted that between 1985 and 1989 175 enterprises were assisted by the CDD, but the average length of the intervention was only several hours. In the ensuing 3 years, about 200 enterprises were assisted by CDD, and operating costs were never covered. In 1994, in view of the costliness of the program, CDD was closed; nevertheless, a decision was made in 1995 to reactivate the service. The consultants recommended that the service be limited to sensitizing enterprises to the need to upgrade their management skills by seeking specialized consultants in their fields to do so. 15. Concerning the "action plans" that were to be carried out by the commercial banks with their own resources, no mention of them is found in the files. As noted above, of the three commercial banks participating in the Project, however, only Banque de Tunisie has an acceptable portfolio quality.  5 Even if the banks did carry out the action plans as intended, there is still considerable scope for improvement in term lending activities. C. Major Factors Affecting the Project Factors that may not be subject to control of Government or of implementing agencies 16. The relatively poor performance of most of the sub-projects, as measured by repayment rates of sub-loans, has been attributed by BDET to, among other factors,4 the Gulf War, which occurred just as a number of these enterprises started up their operations. The impact of the Gulf War was felt throughout the economy, mainly through its effect on tourism, which dropped sharply in 1991, and on all enterprises providing goods and services to tourism. BDET noted that about half of the enterprises financed under this Loan started up operations between mid- 1990 and mid- 1991. 17. While the Gulf War may help explain some of the problems experienced by the enterprises benefiting from the Loan funds, all the banks' portfolios did not suffer equally: BT had a healthy portfolio. Only 14% of the enterprises financed by BT were in arrears as of June 1994,5 in sharp contrast to the rate of arrears (38%-71%) experienced by the other banks. BT's clients started up operations at the same time as the clients of the other banks; this calls into question the validity of the explanation. The answer may lie instead in the quality of the appraisal process and/or the attention to supervision by BT compared to that of the other banks. 18. The generally good commitrment and disbursement performance can be attributed to the Project design and associated conditionality: the beneficiaries were relatively broadly defined, in contrast to the two previous lines of credit, which were narrowly targeted to certain sectors of the economy, and thus more vulnerable to economic downturns; the Loan was appropriately sized, in contrast to the two previous lines of credit, which proved to be over-dimensioned; and it was channeled through a number of banks, including commercial banks, again in contrast to the two previous lines of credit which used only three development banks. In addition, loan conditionality specified adequate margins to the commercial banks for lending under the Loan (it was negotiated prior to interest rate liberalization), thus ensuring commercial banks' interest. Factors at least partly subject to the implementing agencies' control 19. The participating banks bear the responsibility for selecting and appraising the sub- projects to finance. The banks also bear responsibility for supervision during the investment and operating phases, and for following up at the earliest signs of difficulties in repayments. The process of improving loan recoveries includes becoming proactive in helping troubled enterprises restructure, financially as well as operationally. 20. A number of the investments ran into substantial cost over-runs. One factor causing this may be the tendency to underestimate investment costs so as to be eligible for subsidies under a program targeted to SMIs and/or for the Bank line of credit, which stipulated maximum investment costs. A number of these sub-projects were very close to the maximum amounts at the outset. Rather BDET also attributes poor performance to unfortunate choice of sectors of activity, particularly textiles, and to the failure of a number of foreign partners to honor their comnmnitments. These factors are part of normnal commercial risk, however, to be assessed by the entrepreneurs and the banks. This is the latest date for which information from BT is available. Comparison of information from June 1994 for the other four banks leads to identical conclusions.  6 than insisting that the enterprises finance the cost over-runs with equity financing, the participating banks may have extended further loans, as was the case in the past, thus being partly responsible for the over-indebtedness of the enterprises. 21. Improving repayment performance of their clients may not, however, be entirely within the control of the banks. Development banks in particular, because they are not allowed to manage current accounts, cannot as easily track their clients' operations as commercial banks can. In addition, recent work in the banking sector in Tunisia indicates that recovery procedures are weak in general. Even the stronger commercial banks have not had great success, in spite of concentrating their efforts, in improving recoveries. 22. A number of factors may account for difficulties in recoveries: (a) constraints in the legal system, including the laws governing loan recoveries; laws governing enterprises in difficulties, which leaves final decisions about disposal of assets up to the judiciary; the cumbersome workings of the judicial system, which is slow and costly; and (b) the intemal policies and procedures of the banks themselves: some banks are only now, in 1995, becoming conscious of the need to develop a proactive approach to working with their clients. At the time of the Project's implementation (1989-95), Tunisian banks were still emerging from a heavily controlled financial environment, where all interest rates decided by the authorities, and lending decisions were subject to a priori approval from the Central Bank (interest rates were liberalized and a priori approval was abolished in 1988). Moving from such a system to one where banks take a pro-active approach to their clients, including developing an effective early warning system and a well-staffed work out department, may take several years. D. Project Sustainability 23. As noted above (paras 6-9), only one of the four objectives stated in the SAR can be considered partly achieved. Financial resources available to commercial banks for making term loans to SMIs were increased during project implementation, probably on an incremental basis. The other objectives as stated in the SAR were not met. Narrowly considered, project achievements cannot be considered sustainable. 24. If long term resources to SMIs through the banking system show an upward trend, it could be argued that this Project may have indirectly contributed to such an increase. It is not clear that this will be the case, however. First, although Government authorities continue to voice concern for and interest in promoting SMIIs, particularly through bank lending, the recently revised Investment Code reduces the categories of enterprises eligible for investment subsidies. Traditional bank financing may be too costly for the more marginal SMIs, which is economically appropriate, but may mean a decrease in overall SMI lending. On the other hand, the 1994 banking law now permits commercial banks to lend long term, where they had previously not been allowed; once greater term transformation is permitted by the Central Bank, term lending through commercial banks may increase, and at least some of the beneficiaries may be SMIs. 25. Second, the Free Trade Agreement recently signed with the European Union (EU) includes a schedule for gradually eliminating all protection from European imports (except for agricultural products) over a twelve year period. Existing SMIs producing essentially for the domestic market will thus face greater competition and investment demand may decrease. To counter adverse effects on domestic enterprises, the Government, with the help of the EU, is implementing a 'Competitiveness upgrading program'" to be targeted mainly at SMIs affected by the liberalization. In addition, lending interest rates on 'priority" activities, including lending to SMIs, are soon to be  7 liberalized, thereby allowing banks to realize greater margins on such lending than in the past; these factors may increase investments lending to SMIs. 26. In spite of efforts to promote bank lending to SMIs, stricter prudential regulations make it more costly for banks to make such loans. This is the third, and perhaps most important, factor mitigating against efforts to increase lending to SMIs: new prudential regulations, in effect since 1992, make it more costly for banks to take larger risks. Lending to new SMIs that do not belong to one of the forty or so large dominant groups in Tunisia is considered by some Tunisian bankers to be considerably riskier than lending to the large, known groups; if these loans fall into arrears or if the enterprises fail to produce timely financial information, the banks are required to make provisions. Such prudential regulations are likely to have their intended effect: to make the banks more prudent, thereby reducing their willingness to lend to SMIs. On balance, it is difficult to predict whether commercial bank lending to SMls will increase over time. E. Bank Performance 27. The identification of the Project in 1984 was consistent with both Govemment priorities and Bank strategy for supporting those priorities. It continued the on-going work in lines of credit, but was considered a follow up operation to an earlier one in support of SMIs (Loan 1969, approved in 1981), rather than a continuation of other lines of credit under implementation or preparation that were targeted to specific industries (Loan 2113, approved in 1982; Loan 2522, subsequently approved in 1985; and Loan 2554, subsequently approved in 1986). In its consistency, and given the conventional wisdom at the time about lines of credit (targeting was OK, the financial institutions should be strong according to whatever measures were available, the incentives right), identification can be considered satisfactory. 28. Project preparation was ultimately carried out by the Bank (with some input from API on the API-related component) over about eighteen months, from mid-1985 through October 1986 (Table 3). It can also be considered satisfactory. The focus of the preparation gradually shifted (due perhaps in part to a change in task manager), from the need to strengthen support institutions for SMIs to the issues confronting banks in their financing of SMIs. Preparation included proposals for strengthening commercial banks to improve their appraisal and supervision of SMIs, through three sources: through action plans to be carried out by the banks themselves, by strengthening API to help with project proposals from new SMIs and by strengthening UTICA to help with project proposals from existing SMIs. In addition, the risk was clearly identified that the commercial banks would not adequately appraise SMIs. The preparation was thus consistent in its approach to involving commercial banks in SMI lending, in full recognition of the risks, and with effort made to mitigate against them. Preparation staff also recognized real sector constraints, but noted that an adjustment loan was under preparation, which was eventually put in place, to deal with the relevant policy issues (this was the ITPAL, see Table 2). 29. Given the standards prevailing in 1987for analysis of banks, both within Tunisia and within the Bank, the appraisal of the participating banks can be considered satisfactory. Judged by today's standards, however, post-OD8.30 (issued several years after the appraisal mission), the Bank's appraisal of the participating banks would be considered inadequate. In addition, the SAR was contradictory in its presentation of eligibility criteria for participation in the Project: near the top of the list was: (a) the number of branches, which doesn't explain how two development banks were included; and (b) the condition of the medium and long term portfolio; the SAR then goes on to note  8 that the portfolio condition couldn't really be analyzed.6 The choice of banks was based mainly on their participation in previous Bank lines of credit. In light of the application of new, stricter prudential regulations in Tunisia, and audits of international standards, we know today that some of the participating banks were among the weaker ones in the system in terms of portfolio quality, provisioning for loan loss, and capital adequacy. 30. The need to include a limit on the cost per job created was questioned during the internal review process, with the argument that minimum econormic and financial rates of return were sufficient to ensure viability. Since the limit on cost per job was not respected during implementation, it would have been advisable if this criterion, and the associated objective, had been dropped. 31. For the first three years of the Project implementation (1989-1991), Bank supervision can be considered adequate in terms of frequency (roughly once a year), but not in terms of scope: (a) commnitments were approved by the Bank for sub-projects that did not meet eligibility criteria as defined in thc Loan Agreement in terms of maximum cost per job created and estimated rates of return (paras. 8 & 9); given the focus in the Project Agreement on the cost-per-job and the fact that the Bank bothered to amend the legal document in this respect during implementation, the lack of attention as to whether sub-projects actually met these criteria is particularly striking; (b) the Loan Agreement stipulated that a study was to be carried out of FOPRODL the program of investment subsidies for SMI; there is no mention of this study in the files, although one of the task managers has reported that the Bank did receive the study, with some delay, and made comments. There is no evidence, however, that the Bank ever followed up on whether the study's recommendations were carried out, as required by the Loan Agreement.' (c) there is no mention in the supervision reports of Government reimbursement to BDET of foreign exchange losses, also in the Loan Agreement, although one of the task managers has noted that this was reviewed during supervision missions and that reimbursements remained problematic. 8 (d) the technical assistance program to UTICA was supposed to be an integral part of the Project, but supervision reports are virtually silent on the follow up as to either the input or the expected provision of assistance to SMIs and increase in fee income on that account (see para. 14); (e) there is no mention in supervision reports of banks' action plans for strengthening term lending for commercial banks that was a focus of attention during preparation and at appraisal; (f) there is no mention in supervision reports or in the files that the Bank ever systematically reviewed on-lending rates of participating banks, as required under the Loan Agreement; this may be due to the fact that interest rates were generally liberalized in 1988, after the 6 The task manager involved at appraisal noted that the team carried out a detailed analysis of the banks' term portfolios. Given the less strict standards of loan classification prevailing at the time in Tunisia, however, the portfolios probably looked much healthier than they would today. A subsequent consultant's report in 1995 noted that FOPRODI has undergone a number of changes since 1990, both legal and in practice, and as a result of these changes, the portion of FOPRODI subsidies used by SMI has declined sharply between 1990 and 1995. Since the study carried out during Project implementation is not available, it is impossible to determine whether its recommendations were in part responsible for the subsequent changes. BDET has recently reported that the amounts due to BDET by Government on account of foreign exchange losses should rapidly decrease as of 1996. BDET has been predicting this decrease for a number of years now.  9 Loan was negotiated, but to the extent that SMI investment lending was still subject to interest rate ceilings, this should have been monitored. 32. In addition, two and a half years elapsed between the supervision mission of November 1991, when the funds were virtually fully committed, and July 1994. It was only in 1994 that a supervision mission requested information on the portfolios of sub-projects in terms of final investment costs, financial performance of the enterprises and repayments of the sub-loans. It is arguable whether more intense or thorough supervision missions could have improved the quality of the results, but at a minimum, more attention could have been paid to ensuring that sub-project eligibility criteria were respected, and if necessary, altered to fit reality. In addition, once the sub-projects were under implementation, a more pro-active approach to examining their performance might have encouraged the participating banks to take a similarly pro-active approach to monitoring their repayments. Total resources allocated to supervision were about 32 staff weeks over about six years, or about five staff weeks per year; it appears that this was too little. In conclusion, Bank supervision of this Project can be considered deficient. F. Borrower Performance 33. To the extent that the implementing agencies, including API, actively participated in project preparation, it can be considered satisfactory. Participating banks were responsive in terms of promptly providing the information requested by Bank staff, including action plans for strengthening term lending operations. 34. Implementation, however, was less satisfactory in several respects. As noted above (paras. 7-9, 31), sub-project criteria were not always respected at the outset and during implementation, costs of investment sometimes exceeded by significant amounts the maximum established in the Project Agreement. Second, as measured by repayment rates of the sub-loans, the quality of the sub-projects has not been good. It is difficult to know whether this is due to deficient appraisal methods, including perhaps inadequate attention to debt-service capacity and associated risk factors, or deficient supervision methods, which do not detect problems early enough and/or do not actively seek solutions to enterprises in difficulty, such as financial restructuring (increasing equity, rescheduling debts), new partners, outside technical or marketing advice.9 35. Covenant compliance was generally satisfactory, under both the Loan and Project Agreements (Table 7), with the significant exceptions of participating banks: (a) conducting their operations in accordance with sound financial standards and practices (Project Agreement, Section 2.01), given the high proportion of subloans in arrears; and (b) respecting the eligibility criteria for investment projects (Project Agreement, Schedule 1, and see paras 6-9). In many cases, where there was no compliance or partial compliance, the Bank bears part of the responsibility, as in the case, for example, of the requirement to review with the Borrower at least once a year rates of interest paid by beneficiary enterprises. Special mention should be made of compliance with audit covenants, as the record shows (Table 10) that compliance is better than that mentioned in supervision reports. When audit compliance is corrected to take into account the years in which Project Account audits were not due because there were no disbursements, the overall compliance rate is 74% (reports received as a BDET has noted that the relatively poor repayment rates are due to poor choice of sector of activity, deficiencies in foreign partners, and the Gulf War. As noted above, however, the sector of activity as well foreign partners are an integral part of the commercial risk to be assessed by entrepreneur and bank alike; and the Gulf War has not been an equally significant factor for all banks, thus begging the question why it should have been so for only some of them.  10 proportion of those due). In addition, compliance on Financial statement audits is 96%. When the issue of Project Account audits was raised in 1994 with participating banks, some of them were unaware of the requirement (although Project Account audits were received for some of the banks up until 1991); this is at least partly the responsibility of the Bank. G. Assessment of Outcome 36. The four main objectives of the project can be put in two categories: to channel greater resources to SMIs for carrying out viable sub-projects; and to create employment at a relatively low cost. On both counts, the Project should be rated as unsatisfactory. This rating is based on: (a) evidence of cost overruns; for the two banks reporting actual investment costs, 50% of the sub- projects had significant cost over-runs (mostly between 35% and 250%); (b) the average incidence of arrears on sub-loan repayments: 30 out of 61, or about 50%; (c) the incidence of sub-loans under litigation, which usually implies arrears of at least one year and little possibility of finding an amicable arrangement: 10 out of 60, or 16%. It is unlikely that the overallfinancial viability of the sub-projects attained a satisfactory leveL (d) employment creation was not at the low average cost anticipated, even taking into account the effects of inflation; and (e) the ceiling on the investment cost per job created was not always respected even at the outset of the sub-projects, and was further exceeded during implementation due to cost overruns. H. Future Operation 37. In a narrow, project-related sense, the main task for the participating banks will be to continue to monitor the performance of the enterprises financed under the Loan and to take a pro-active role in following up on clients that show early signs of problems as well as in working with clients already having problems. The obvious measure of success would be an improvement in the quality of the portfolio in terms of a reduction in the proportion of the portfolio experiencing arrears. 38. In a larger sense, however, the banks should focus their efforts on the entire portfolio, and not limit their efforts to those 61 enterprises financed under the Loan. The on-going Private Investment Credit Project (PICP) involves over ten banks, and supervision has been closely monitoring their portfolio quality (three of the banks under this Project are also participating currently in the PICP) and their action plans, whose objectives include, inter alia, improvement in the quality of their portfolios and an increase in their recovery rates. Supervision has begun to focus on the general weakness in recoveries and will be pursuing this further. It will be interesting to follow up, a number of years from now, the evolution of the banks' portfolios in terms of overall quality. I. Key Lessons Learned 39. The four major lessons that can be drawn from this Project are: (a) the critical role of good prudential regulations: only by having strict, objective criteria for measuring the quality of the banks' portfolios and for accounting for income can adequate appraisals be carried out on potential participants in lines of credit. In the absence of such prudential regulations, it is extremely difficult to measure whether objective eligibility criteria are met for participation in on-lending activities (see next point); (b) the importance of objective eligibility criteria for bank participation in on-lending activities, to include the quality of the loan portfolio as a key indicator of the ability of the bank to channel funds to viable sub-projects. The eligibility criteria for participation in the PICP does not explicitly include quality of the loan portfolio, although this is being closely monitored. It will be  11 interesting to see whether PICP is any more successful in terms of the quality of the sub-projects financed than SMI II has been; (c) the importance of eligibility criteria for sub-projects that reflect the reality of the local situation and are relevant to the participating banks; this will ensure that the banks have an interest in respecting them and be able to do so. The on-going PICP uses eligibility criteria for sub- projects that are mostly relevant to the participating financial institutions (with the exception of the economnic rate of return and environmental clearance, which are relevant to the society). and (d) it is preferable to focus efforts on either financial sector issues or real sector issues in a given project, rather than mix both in one project. The on-going PICP deals solely with financial institution issues and a project under preparation in Tunisia (the Private Industry Support Infrastructure Upgrading Project) focuses on support institutions for private enterprises, with due attention to the analysis of the proper role, status, staffing, organization, and effectiveness of operations of these institutions.  12 Implementation Completion Report Republic of Tunisia Second Small and Medium Scale Industry Development (Loan 291 1-TUN) STATISTICAL TABLES Table 1: Summary of Assessments Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan/Credit Disbursement: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Studies Included in Project Table 7: Status of Legal Covenants Table 8: Bank Resources: Staff Inputs Table 9: Bank Resources: Missions Table 10: Participating banks audit compliance  13 Implementation Completion Report Republic of Tunisia Second Small and Medium Scale Industry Development (Loan 291 1-TUN) Table 1: Summary of Assessments A. Achievement of Objective Substantial Partial Negligible Not applicable Macro policies aI a ai CE Sector policies ai lx Li o Financial objectives ax L aa Institutional development La a Li Physical objective ai ES] La ai Poverty reduction L Li Li ES Gender issue nI a L [ Other social objective ni i a S Environmental objective nl LI La ES Public sector management Li Li Li ES Private sector management E] L L i Lower-eost employment n[ Li Li creation B. Project sustainabilitv Likely Unlikely Uncertain a E] Li C. Bank performance Highly satisfactory Satisfactorv Deficient Identification Li IX Li Preparation Li ES] Li Appraisal Li E] Li Supervision Li a S D. Borrower performance Highly Satisfactory Deficient satisfactory Preparation i x L Implementation Li L ES Covenant Compliance L lx Li E: Assessment of Outcome Highly Satisfactory Unsatisfactory Highly satisfactory Unsatisfactory Li LiES Li  14 Implementation Completion Report Republic of Tunisia Second Small and Medium Scale Industry Development (Loan 291 1-TUN) Table 2: Related Bank Loans Loan (name) Loan number Purpose Year of Status Original loan amnount approval Preceding operations Small-Scale Industry Line of credit to 1981 Closed 12/31/88 Development Project targeted industries $27.35 mn disbursed Loan 1969 $2.65 nn canceled $30 mn Electrical and Mechanical Line of credit to 1982 Closed 12/31/87 Industries Project targeted industries $20.9 mn disbursed Loan 2113 $9.6 mn canceled $30.5 mn Export Industries Project Line of credit to 1985 Closed 06/30/92 Loan 2522 targeted industries $25.76 mn disbursed $50 mn $24.24 inn canceled Second Electrical and Mechanical Line of credit to 1986 Closed 06/30/92 Industries targeted industries $20.86 mnn disbursed Loan 2554 $33.14 mn canceled $54 mn Industrial Trade and Policv Adjustment loan to 1987 Closed 12/31/89 Adjustment Loan reform trade and price $150 mn disbursed Loan 2781 policy $150 nn Following operations Private Investment Credit Project Lines of credit to all 1993 Ongoing Loans 3671-80 economic sectors Scheduled to close 120 tnn 12/31/99  15 Implementation Completion Report Republic of Tunisia Second Small and Medium Scale Industry Development (Loan 2911 -TUN) Table 3: Project Timetable Steps in project cycle Date planned Date actual! latest estimate Identification (Executive Project Summary) September 1984 September 1984 Preparation May 1985 May 1985 Appraisal October 1986 November 1986 Negotiations February 1987 December 1987 Board presentation June 25, 1987 February 16, 1988 Signing April 13, 1988 Effectiveness September 1987 February 2, 1989 Midterm review of commitments December 31, 1989 Sept. 1989 and Oct. 1990 Project completion December 31, 1994 December 31, 1994 Loan closing June30, 1995 June30, 1995 Table 4: Loan Disbursement: Cumulative Estimated and Actual ______________________FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 Appraisal Estimate 1.6 3.9 10.0 16.8 21.8 25.4 27.5 28.0 _ Actual 0 0 6.8 17.4 25.5 26.0 26.5 26.5 26.5 Actual as % of estimate 0 0 68 104 117 102 95 95 95 Date of final disbursement = 11109/95  16 Implementation Completion Report Republic of Tunisia Second Small and Medium Scale Industry Development (Loan 291 1-TUN) Table 5: Key Indicators for Project Implementation Key implementation indicators in Estimated at appraisal Actual as of June 30, 1995 SAR Bank lending to sub-projects 100 subprojects 60 subprojects financed Total investment cost: Total investment cost: US$100 million; US$67 million; Bank lending: Bank lending: BDET: US$6.5 mn. BDET: US$6.2 mn lent for 22 sub-projects, of which 15 in arrears (71% of value lent) BS: US$ 6 million. BS: US$5.1 mn lent for 7 sub-projects, of which 5 in arrears (68% of value) as of 06/94 BT: US$ 5 million BT: US$5.2 mn lent for 14 sub-projects, of which 2 in arrears (22% of value) as of 06/94 BTEI: US$4 million BTEI: US$3.3 mn lent for 8 sub-projects, of which 3 in arrears (40% of value) STB: US$ 6 million STB: US$6.0 mn lent for 9 subprojects, of which 5 in arrears (45% of value) Job creation at lower cost than 4,000 jobs to be created About 1,900 jobs created national average Average cost/job: US$17,500 Average cost/job: US$35,000 (current terms) (in constant end -87 terms) API and UTICA to increase and Inputs: technical assistance and Inputs achieved roughly as estimated; UTICA improve assistance to SMI training defined; Outputs: API did not meet targets; API carried out diagnoses not defined; UTICA assistance of 26 SMIs to develop restructuring plans to 300 enterprises for fee to cover costs;  17 Implementation Completion Report Republic of Tunisia Second Small and Medium Scale Industry Development (Loan 291 1-TUN) Table 6: Studies Included in Project Study Purpose as defined at appraisal Status Impact of study FOPRODI To review system of incentives for According to one of Demand from SMI for small-scale enterprises the task managers, FOPRODI benefits has study was completed decreased continuously with some delay; since 1990, with legal and study not in files. administrative changes. Since study is not available, it is impossible to judge whether the changes were the result of the study's recommendations.  18 Implementation Completion Report Republic of Tunisia Second Small and Medium Scale Industry Development (Loan 291 1-TUN) Table 7: Status of Legal Covenants Section Covenant Present status Original fulfillment date Description of covenant Comments type Loani Agreement I 3 01 10 C NA Borrower commitment to objectives and _ responsibilities 3.02 (a) 3 C NA General conditions for onlending funds 3.02 (b) 2 NC once a year Borrower and Bank to review, with No mention in files or participating banks, at least once a year the supervision reports interest rates of interest paid by enterprises rates paid by borrowing enterprises 3.02 (c) 3 C December 31, 1989 and once Borrower and Bank to review the level of a year thereafter commitments made by each participating bank and to reallocate, if necessary, the uncommitted balances 3.03 3 C NA Borrower to enter into grant agreement with API l 3.04 3 C NA Borrower to enter into grant agreement with UTICA 3.07 10 CP September 30, 1988 Borrower to fumish to Bank study and Study was completed about recomrnmendations on operations of FOPRODI one year late, but not and thereafter carry out recommendations of available in files, no study information available whether recommendations carried out  19 4.01 1 NC September 30 of each year Borrower to ensure timely maintenance of No audits received for Special accounts and timely audits for Special Account nor for Account and use of Loan funds by API disbursements on behalf of __________ API 4.02 11 CP December 31, 1989 and Borrower to reimburse BDET for foreign No information available in yearly thereafter exchanges losses files; BDET has reported to missions, however, a gradual decrease in receivables from Government due to FE losses. 4.03 12 C NA Borrower to take into account the sub-loans and investments made by a participating bank to calculate that bank's ratio of priority l__________ _ __________________________ activities financing Schedule 7 3 C NA Principal terms and conditions of subsidiary l n loan agreements Proylct,4,ifrremeXnt 2.01 10 CP NA Participating banks declare commitment to A high proportion of subloans project objectives and to this end, shall financed by most participating conduct its operations in accordance with banks under this project are in l_________________________ sound financial standards and practices arrears: see Table 5. 2.02 (a) 3 C NA Sub-loans to be made in accordance with procedures and agreed terrns and conditions 2.05 (c) 9 CP annual Participating banks to report annually on Format for reporting never and (d) progress of sub-projects and forecast of seems to have been agreed activities, in a format agreed upon between between Bank and banks the Bank and each bank 3.01 1 CP June 30 each year Participating banks to submit audits within No project accounts audits six months of close of fiscal year received from BS; for other banks, several audits are rmissing: see Table 10.  20 Schedule 1 3 CP NA Eligibility criteria for investment projects The criterion for maximum investment cost per job was not systematically respected; The criterion for maximum investment cost was complied with at the time of sub-project appraisal but then exceeded, at times by substantial amounts during implementation Schedule 2 3 C NA Procedures for appraisal and approval, and terms and conditions of sub-loans Covenant types: I Accounts/audits 9 Monitoring, review and reporting 2 Financial performance/revenue generation for beneficiaries 10 Project implementation not covered by categories 1-9 3 Flow and utilization of project funds 11 Sectoral or cross-sectoral budgetary or other resource allocation 4 Counterpart funding 12 Sectoral or cross-sectoral policy/regulatory/institutional action 5 Management aspect of the project or executing agency Present status: C covenant complied with CD complied with after delay CP complied with partially NC not complied with  21 Implementation Completion Report Republic of Tunisia Second Small and Medium Scale Industrv Development (Loan 291 1-TUN) Table 8: Bank Resources: Staff Inputs Stage of project cycle Planned (weeks) Actual (weeks) Through Appraisal NA 52.4 Apraisal Board NA 8.0 Supervision NA 32.4 l Completion 6.0 5.0 TOTAL NA 97.8 Table 9: Bank Resources: Missions Activity Month/Year Days in field, N