Tunisia - Transport strategy study

Report No. 14846-TUN Republic of Tunisia Transport Strategy Study Summary Report February 1997 Private Sector Development, Finance and Infrastructure Division Maghreb and Iran Department Middle East and North Afric.a Regional Office Document of the World Bank  EXCHANGE RATE (April 1995) Currency unit = Tunisian Dinar (D) D 1 US$1.08 US$1 = D 0.92 ABBREVIATIONS km = kilometer km2 = square kilometer m = meter cm3 = cubic centimeter mtd = millions of Tunisian dinars mt = millions of metric tons v/d = vehicles per day pvu = private vehicle unit GLOSSARY OF ACRONYMS BOT Build-Operate-Transfer CTN Compagnie tunisienne de navigation CMR Conseil ministeriel restreint DGPC Direction generale des ponts et chaussees DGPE Direction generale de la planification et des etudes DGTT Direction generale des transports terrestres DMM Direction de la marine marchande EPIC Etablissement public a caractere industriel EU European Union FTA Free Trade Agreement MEH Ministere de l'equipement et de l'habitat MT Ministere du transport OPAT Office des ports aeriens de Tunisie OPNT Office des ports nationaux tunisiens PDRT Plan directeur regional de transport de Tunis PTC Poids total en charge (Total laden weight) SMLT Societe du metro leger de Tunis SNCFT Socite nationale des chemins defer tunisiens SNTRI Societe nationale des transports intergouvernorat SRTM Societe regionale de transport de marchandises SRTV Societe regionale de transport de voyageurs STAM Societe tunisienne d'acconage et de manutention STM Societe de transport de marchandises TIR Transport international par route TSTC Tunisian Sea Transport Company Vice President Mr. Kemal Dervis Director Mr. Daniel Ritchie Division Chief Mr. Amir Al-Khafaji Task Manager Mr. Michel Loir, Transport Economist  REPUBLIC OF TUNISIA TRANSPORT STRATEGY STUDY TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1. TRANSPORT IN TUNISIA TO DAY: PURSUING TOO MANY GOALS .............1 A. Country background . B. Main features of transport infrastructure: a fairly well developed system . 2 C. Dramatic increases in traffic and major public sector involvement in service delivery .3 D. Past investment policy: a need to focus more on economic priorities .3 E. Current service delivery: still room for improvement .6 CHAPTER 2. BETTER TRANSPORT FACILITIES: THE KEY TO INTERNATIONAL COMPETITIVENESS 10 A. The macroeconomic outlook: laying the conditions for sustainable growth ...................... 10 B. Seven basic principles for the Ninth Transportation Plan 11................................................ 1 CHAPTER 3. THE NINTH TRANSPORT PLAN: STRATEGIC DIRECTIONS ........................ 26 A. Maritime transport: growth through privatization .26 B. Commercial ports: promoting productivity and facilitating trade .28 C. Railways: transforming SNCFT into a commercial enterprise .30 D. Intercity transportation: better and safer roads .31 E. Integrating public transit into urban planning .35 F. Air transport: promoting international competitiveness .36 G. Intermodal transport: promoting Tunisian companies .40 TABLES AND ANNEXES Table 1.1 Railway operating efficiency in Tunisia: international comparison . 7 Table 1.2 Productivity per hour of ship berth .8 ANNEX 1: Table Al. 1: Public investment in the transportation sector .42 ANNEX 2: Table A2. 1: Structure and growth of air transport in Tunisia .43 Table A2.2: Tunisian port traffic statistics, 1986-1994 .44 Table A2.3: Railway statistics, 1980-1994 .45 Table A2.4: Bus traiisport companies and their activities, 1994 46 This report is the work of a team led by Michel Loir. Karim Jacques Budin contributed the material on rail transport, Claude Archambault on intercity transport, Jaffar Bentchikou on road infrastructure, and Bernard Simon (assisted by Stephane Grandguillaume) on urban transport. Ovadia Salama, of O&DA Consulting, provided hindsights on changes in the international market picture and their implications. Hans Peters served as peer reviewer. Valuable comments were received from Hedi Larbi and Sikander Rahim   REPUBLIC OF TUNISIA TRANSPORT STRATEGY STUDY Executive Summary; Key Conclusions and Recommendations Foreword 1. The Government has identified needs for strategic studies in preparation for the Ninth Plan (1997-2001). This report, based on the findings of a major mission to Tunisia in May 1995, is a response to the Government's request for support, through the Bank's economic and sector work program, with formulation of a transport strategy that will give Tunisia a head start in the 21st century economic race. The Summary Report describes the strengths and weaknesses of the transport sector in 1995, and sets out the guiding principles underlying the strategic choices recommended in the area of transport policy and investment. The Detailed Report provides detailed analytical data by subsector, discusses available options, and explains the rationale behind the proposed strategy. Transport and economic development in Tunisia to date 2. Tunisia is a country of contrasts covering a territory of close to 164,000 km2, with a population approaching nine million. Its GNP per capita, US$1,800 in 1994, puts it in the front rank of the Bank's Maghreb member countries. Development is concentrated in its northern and east- central regions, which while together representing only 16% of its entire territory account for approximately two-thirds of national employment. Tunisia switched in 1986 to market-based and outward-oriented economic policies. Its structural adjustment reforms have met with success: whereas growth in GDP averaged no more than 3.2% annually from 1981 to 1986, it then surged to an annual average of 4.8% between 1987 and 1994. 3. The transport system is comparatively well developed. An embryonic freeway network and some 6,000 km of national roads link the key economic centers and carry the bulk of road traffic. A rail network approximately 2,000 km in length comprises a main line along the Tunis-Gabes corridor, an international line connecting with the Algerian network, and lines in the south used for hauling phosphates. There are three ports in the Tunis area plus five others outside it, which meet present needs almost completely. Six airports cater to air traffic needs, with Tunis the largest and Monastir and Jerba the main gateways for tourism. Urban transport infrastructure has unfortunately not kept pace with the needs of the rapidly growing Tunis population. The government has been going ahead with gradual deregulation of the transport market since 1989; while fMIl deregulation has been achieved in the road freight subsector, which is also being privatized, progress has been more limited in other subsectors. 4. The role of government capital spending in transport sector investment has been decisive, as may be seen from the fact that the public sector still accounted for the great majority until recently. Investment policy has been judicious for the most part, despite some mistakes in assessing the demonstration effects of infrastructure facilities. Ports and airports have been built too far in advance of real needs, and unwarranted priority has long been given to the rail system. On the other hand, expansion of the road network has not kept up with traffic growth, and road maintenance leaves much to be desired. The maritime sector has been slow to adopt new technologies. Urban traffic congestion is reaching serious levels in Tunis. Examination of the three last development plans reveals important  - ii - priority shifts to allow better coverage of real economic needs. The share of road investments has increasedfrom 37.5% of the Sixth Plan to 53% of the Ninth, unlike that of railway investments, which has fallen from 35.8% to about 11%. 5. While transport services at present are relatively good, there is room for improvement. In the case of road freight haulage, the comparatively high proportion (75%) of traffic handled by small trucking firms and individual owner-operators reveals a major productivity gap. Tunisian firms play virtually no part in the international road transport scene. In passenger transport, the poor financial state of the public enterprises concerned goes hand in hand with an increase in rental services, whose economic effectiveness is open to question and which exacerbate the road safety problem. The dwindling reliance on rail passenger services attests to their sub-standard quality. The productivity of Tunisia's railways is low. The same is true of its ports, where cargo-handling is slow and costly, and imported goods can be held up for as long as 30 days. The national shipping fleet is obsolete. Urban transport supply is short of demand by at least 20%. Finally, the state of the country's roads leaves much to be desired. Only about 50% of paved roads are in good repair, as against 85% or higher in the industrial countries. Road users could probably save the equivalent of the road investment budget were the proportion of traffic using bad roads to be reduced by just 10%. Better transport facilities: the means to international competitiveness 6. Tunisia has to face new challenges. It must, for instance: create more jobs in order to ensure employment for the rapidly growing urban work force; offset the tendency toward lower returns on capital, especially as the capital base is now broadening; revitalize those engines of growth, the leading export industries, which need to be "brought up to speed"; and protect the environment. Recent Bank economic work on Tunisia envisages two scenarios, both assuming continuation of reforms to bring about a return to macroeconomic stability and eliminate distortions. The high-growth scenario, which assumes sustainable growth of about 6% a year, requires reduction of the public deficit and revitalization of the domestic economy through heightened competition. In this regard, the Free Trade Agreement (FTA) with the European Union will create opportunities, which will increase the faster the implementation process goes. Additional gains can be expected from the trade liberalization provided for under the Uruguay Round agreements. But there are risks as well, since domestic products will be more vulnerable to foreign competition. Because transport is an intermediary good with a pervasive influence on productivity, raising its level of effectiveness will contribute greatly to the achievement of the country's growth objectives. 7. The transport strategy to be continued under the Ninth Plan is based on seven principles. (a) Investment in quality and with a focus on economic returns. The primary concerns here are to update capacity and to increase capital effectiveness through rigorous selection of projects which are clearly warranted in economic terms. (b) Substitution of private for public capital so as to reduce pressure on the budget, a principle that is to be applied particularly in the case of ports and highways. (C) Sharper targeting of urban transport subsidies . The United Kingdom case is studied to demonstrate that subsidization needs are reduced and more efficiently covered when there is competition for them and clear particulars are made available regarding their extent and what is expected of beneficiaries. (d) Promotion of competition and adaptation of government regulations to allow transport operators greater freedom to seek the best combination of business factors. (e) Lifting of import restrictions and reduction of customs tariff in the interests of modernization of the transportation fleet; measures designed to protect the nascent automobile industry should not operate to the detriment of transport and haulage operators. (9 Transfer of commercial services to the private sector, a move now accepted worldwide as an effective means of lowering their cost to consumers and circumventing the rigidities  - 1Hi - that characterize public enterprises. (g) Promotion of multimodal transport and strengthening of logistical services, as important steps toward international competitiveness for Tunisia. of Tunisia. Key concerns of the Ninth Transport Plan 8. In maritime transport, the future of Tunisia's shipping industry should be dictated only by its capacity to make itself competitive. Protecting the community of some 2, 000 workers employed in the local shipping subsector does not warrant the cost it imposes on the country's trade and domestic production, where employment issues are on a very much larger scale. The applicable regulations should be amended to give shippers greater freedom in choosing their operating methods and fields of activity. This is especially relevant to crew size and nationality, vessel operating schedules, and financing arrangements. The system of 48-hour advance notification for charter contracts should be abolished. A specific investment code is needed which incorporates incentives that will put Tunisians on an equal footing with their foreign competitors. The attempt should be made to develop a second, private organization to operate alongside CTN, the latter to be fully privatized once its role has been redefined. It would be advisable to seek a foreign strategic investor, with a view to better integration of the enterprise into the world trade network. The option of conversion into a ship operating company owned by a foreign holding company is worthwhile studying 9. Ample port infrastructure reserve capacity exists already, so the Ninth Plan should not include major expansion schemes other than construction of a container terminal, preferably in Bizerte, and some supplementary investment in specialized wharf facilities It is recommended that the country's port system be better integrated by improving road and rail connections. The role of OPNT should be refocused on two main functions: (I) its regulatory function should extend to sound management of government-owned port facilities, to definition and supervision of service operation contracts with the private sector, and to protection of the environment; and (ii) its facilitation function should extend to modernization of port interface arrangements, rationalization of transit procedures, and promotion of the development of a real community of port interests. Private sector participation in port construction and operation could take two forms: that of the BOT (build-operate-transfer) system in the case of the new container terminal, and that of the management services contract in the case of operation of existing facilities. As far as cargo-handling is concerned, elimination of the STAM monopoly and privatization of the agency (after a study of possible options for this step) should go hand in hand with establishment of a second, private organization that will create the opportunity for at least a minimum of competition without loss of the benefit of economies of scale. Concessions of these services would be granted to a winning bidder identified through a public competitive procurement process. The legislation of 1949 governing use of port manpower should be repealed. 10. As far as the railway sector is concerned, the strategy is to convert SNCFT into a fully commercially oriented limited liability corporation expected to compete actively with other transport modes and enterprises and to keep itself in a sound financial position. At the close of the Ninth Plan, governmentfinancial transfers to the rail sector will be strictly limited to remuneration in respect of (a) public service obligations imposed on it by government under specific agreements and (b) construction of new infrastructure. During the course of the Plan, however, one-timefinancial assistance will have to be made available for sector restructuring and infrastructure rehabilitation. SNCFT management autonomy will be reinforced as a result of its conversion into a corporation, which will be reorganized internally into three operating divisions responsible respectively for phosphate traffic, freight traffic, and passenger traffic. The closing down of non-viable services will have the particular effect of concentrating intercity passenger services along the Tunis/Sousse/Sfax/Gabes corridor and the line between Tunis and the Algerian border. Downsizing of the railway sector will be accompanied by a  - iv - program to reduce its total personnel corps to approximately 5,900 individuals. More active private sector participation will be encouraged, especially in the areas of maintenance and support activities. 11. In the case of intercity transport, highway development is a prime candidate for concessions of the BOT type. Privatization of road maintenance and corresponding cutbacks in force-account maintenance will contribute to more efficient use of budget resources, which ought to at least double relative to current amounts. The investment priority is modernization of strategic roads and others to be selected on the basis of studies; as a matter of principle, flood control measures will be included, while all stretches of road requiring work will receive standard treatment (reinforcement, pavement upgrading, stabilization of shoulders). Consideration could be given to establishment of a road fund. Special emphasis is to be given to development of urban/intercity interface facilities. By-pass roads are planned for Jendouba, Kairouan, Gabes, and Zaghouan. Regional authorities are to be more involved in the management of secondary and rural roads. The current disturbing deterioration in road safety calls for rapid action to devise appropriate responses than can be implemented during the Ninth Plan. 12. In the case of intercity transport, the highest priority is to liberalize motor vehicle imports, reorganize road-user taxation, monitor the state of repair of vehicles more closely, and put Tunisian TIR operators on an equal footing with their foreign competitors. The next highest is to privatize SNTRI and carry the sale of public freight haulage enterprises through to completion. Road transport regulations need to be relaxed where they affect aspects of production not bearing on road safety. In connection with freight operations, the informal transport market needs to be studied so the authorities may be properly informed regarding possibilities of eliminating the authorizations system by the year 2000. Provision is made for a transition period to allow intercity public transport service concessions to be put up for competitive bidding; at the end of this period, this market--except for "social" or 'political" lines--could be liberalized. 13. Performance contracts under which urban bus services are provided need to be clearer on the subject of the objectives in view. Responsibility for their administration should be decentralized at least down to governorate level, while a technical unit should be set up in Tunis to coordinate the various modes. Improving traffic management in Tunis is expected to generate substantial benefits when the many current weaknesses are taken into account. Studies should be commissioned so that traffic planning can be reexamined. Certain sections of beltways need to be widened, while intersection design should be improved to give increased capacity at minimum cost. Efficient transfer points must be developed to ensure better articulation between modes of transport and increase public transport capacity. Private sector participation should be encouraged both through the gradual development of quality seat-only bus services and subcontracting or concession of basic services. Gradual opening up of this market to competition, as well as privatization of public bus companies, is also recommended. 14. Where airports are concerned, the Ninth Plan will need to provide for a new extension phase in the case of Tunis. Studies for a master plan and also for possible relocation of the Tunis airport are important for formulation of a long-term strategy. The institutional development proposed calls for privatization of auxiliary services, particularly ground services, on the basis of concession arrangements. In broader terms, plans could also be made for the concession of commercial spaces, possibly in conjunction with a BOT contract for the construction of new facilities. Rate schedules should reflect actual costs, and limits need to be set on the inter-airport compensation system. As regards domestic air transport services, the action plan proposed calls for completion of the privatization of Tuninter, further efforts to cut its costs, and expansion of its international operations in association with another airline. As regards Tunis Air, the recent public offering of 20% of its  -v - shares should simply be a first step toward fiul privatization. The strategy proposed involves active steps to reduce operating costs and a search for strategic investors who would take up shares in Tunis Air and strengthen its international commercial network. Finally, more extensive cooperation among the Maghreb airlines would enhance the competitiveness of Tunisian carriers and so should be pursued, even if present circumstances make any spectacular developments unlikely. In the case of domestic air service routes of uncertain profitability, the government should identify those it wishes to be kept open for political or social reasons, and be prepared to subsidize any operating deficits. These routes would be allocated after calls for tenders from the two Tunisian carriers, the anticipated results being at least a minimum of competition and creation of incentives to lower costs and subsidies. 15. Multimodal transport is a key to cost-efficient transport. Tunisian carriers are not yet able to compete with the large multimodal companies that have developed in Europe. Quota restrictions under bilateral agreements intended to make room for Tunisian shippers in the international transport picture would in fact be detrimental to their real interests. Instead, an institutional framework conducive to the development of multimodal transport would be of more benefit to Tunisian companies. If such a framework were set up, one could consider making financial incentives available for the development of TIR operations, to eliminate restrictions on vehicle imports, to conduct studies on ways to facilitate the search for foreign partners by Tunisian firms, to adhere as closely as possible to accepted international trade practices in contracts and standardized documents, and to promote better industrial logistics. Finally, particular emphasis should be placed on signing special agreements covering transport with the European Union countries, with the aim of promoting not only closer cooperation but also competition on equal terms between Tunisian and European transporters.   REPUBLIC OF TUNISIA CHAPTER 1. TRANSPORT IN TUNISIA TODAY: PURSUING Too MANY GOALS A. COUNTRY BACKGROUND 1.01 Independent since 1956, Tunisia, a country of geographical contrasts and, by Maghreb standards, of only modest size, covers a territory of approximately 164,000 km2. In 1994, it- had a population of roughly 8.8 million inhabitants, one third of them concentrated in the northeast region, which although it constitutes only a fraction of the national territory (about 7%) has an economy that accounts for approximately 40% of total employment. In the same year, there was a census of close to two million in the Greater Tunis area, where rapid urban growth (3.6% over the period 1984-1994, compared to a national population growth rate of 2.3%) had spilled over into the surrounding rural areas. Given its relatively good precipitation rate and adequate stock of infrastructure, the northeast sustains a dynamic agriculture sector as well as a concentration of industrial activities and services. The east-central region, with Sousse and Sfax as its main towns, ranks second in economic importance, with about 20 percent of the population occupying less than 9 percent of the national territory; agriculture and export industries are its main sources of production. Mountain ranges form a barrier that accounts for the economic isolation of the northwest region, where a scattered population lives primarily on agriculture. The arid climate prevailing in most other parts of the country has produced extensive deserts. The south, however, is rich in such mineral resources as phosphates and hydrocarbons, which account for the existence of a number of industrial centers. Gabes, a town of over 120,000 inhabitants, is the most important in this region. Mass tourism thrives around the Gulf of Hammamet and on the Island of Jerba, with the sunny climate, good beaches, and first-class archeological sites attracting about 4 million tourists annually. 1.02 Tunisia switched in 1986 to more market-based and outward-oriented economic policies. Its structural adjustment reforms have led to impressive results. Whereas GDP growth averaged no more than 3.8% annually from 1980 to 1986, it accelerated to reach an annual 4.8% between 1987 and 1994. The initial push forward came from tourism and from exports led by a rapidly expanding textile industry which now accounts for close to half of total export revenue. Agro-industry is another significant contributor to foreign exchange earnings, with a 10-15 % share, whereas traditional export sectors (energy, phosphate, and chemicals) have lost ground. The replacement of government capital spending by private investment since 1989 has played an important part in the country's economic revival. The challenges ahead stem from increased exposure to foreign competition following the Uruguay Round, ratified in January 1995, and the Free Trade Agreement with the European Union, signed in April 1995, which is to be implemented over a 12-year transition period. Much higher foreign direct investment than has occurred to date is essential to faster growth, for which better infrastructure is also needed. Tunisia has been affected by the chronic drought conditions of recent years, which slowed GDP growth in 1994 down to 3.4%. Agricultural development and reduction of the food deficit are at the core of government economic policy. About 40% of the population still live in rural areas, where improvements in standards of living depend on achievement of a more balanced urban/rural development pattern. Steps to improve rural roads, which provide the essential link between farms and markets, will also be important. 1.03 Government administration in Tunisia is being decentralized. The country is subdivided into 23 "governorates". Each governor represents the central government and oversees the local branches of central ministries. There are several administrative echelons between governorate and municipalities  -2- ("imadas" in rural areas), which are the basic units. Governor-chaired regional councils play a key role in the planning and execution of regional programs, doing so with support from consultative assemblies known as rural councils. Although legislation passed in 1989 defined the powers and responsibilities of governors in the decentralized system, the implementation process is hampered by the lack of technical expertise and local financial resources. At present, the role of the decentralized administration remains limited and there are frequent overlaps of responsibilities which are not conducive to development of the most appropriate strategies. The authorities are fully aware of this problem, but it will take somewhat longer and a number of additional studies before workable solutions can be identified, especially with regard to redistribution of responsibilities between the local and central levels of government. Management of the road network, one area where decentralization could lead to better roads at lower cost', is currently being reviewed by an interministerial committee, with assistance from a group of specialists. A plan of action is expected to be ready by early 1996 and implemented over a five-year period. B. MAIN FEATURES OF TRANSPORT INFRASTRUCTURE: A FAIRLY WELL DEVELOPED SYSTEM 1.04 In 1984, the classified road network consisted of some 17,000 km of roads, of which 8,875 km were paved. By 1994, it had grown by a mere 900 km overall, but paved roads then accounted for 11,700 km or two-thirds of the total. With 1.4 km of paved roads per 1,000 inhabitants, Tunisia lags far behind the industrial countries (6-10 km per 1,000 inhabitants) but ranks average among middle- income countries. The national core network consists of the 6,000 km of key roads linking the country's main economic centers. There is a relatively high proportion of "national roads" (23 %)2 but road distribution across the nation is uneven. Paved road density varies from lOm/km2 in the provinces of Kebili and Tataouine to about 1 km/km2 around Tunis, within a national average of 70m/km2. A quality deficit exists because of the irregular nature of maintenance, in rural areas especially, and capacity constraints (three-fourths of classified roads are less than 6.5m wide for daily traffic often above 7,000 vehicles). The expressway network is currently limited to 140 km between Tunis and M'saken, near Sousse. The rail network, some 2,000 km long, consists of a main line from Tunis to Gab6s and an inter-connecting line from Tunis to Ghardimaou at the Algerian border, in addition to the lines in the south over which phosphates are hauled. There is more than a sufficient number of ports-- three in Tunis and its environs and five along the coast from Bizerte to Gabes. However, vessels drawing more than 11 m cannot enter any of these ports, which also afford only limited landside access. Six airports cater to air traffic needs; the Tunis facility is the largest, while Monastir and Jerba are the main gateways for tourism. Urban transport infrastructure has not kept pace with population growth, especially in Tunis, where traffic conditions are deteriorating; the points at which the two beltways intersect with main radial roads connecting to the city center are congested at peak hours, especially the Bab Saadoun intersection. See World Development Report 1994, p.75. A study of 42 developing countries showed that where road maintenance was decentralized backlogs were shorter and roads were in a better state of repair. 2 See C.Kessides, "Institutional Options for Provision of Infrastructure," in World Bank Discussion Paper no. 212 -IIA, page 22. "National roads" typically account for 2-10% of the total network in most industrialized countries. Of course, the higher proportion shown for Tunisia is partly attributable to the much less developed state of its network.  - 3 - C. DRAMATIC INCREASES IN TRAFFIC AND MAJOR PUBLIC SECTOR INVOLVEMENT IN SERVICE DELIVERY 1.05 Road traffic increased at an annual rate of 11 %--much faster than GDP-- between 1977 and 1982, slowed to about 4% annually over the next five years, only to shoot up in recent years as a result of structural reforms. The deregulation of road freight transport in 1989 led to a major increase of 14% annually in heavy vehicle traffic between 1990 and 1994, compared to about 7% for passenger traffic. Private haulage operators already control two-thirds of the for-hire market and can be expected to control it fully once the privatization of government-owned trucking companies has been completed. Intercity passenger transport comprises bus services provided by public enterprises (SNTRI, Societe nationale des transports intergouvernorats, which operates nationwide, plus 12 regional companies mostly operating within the boundaries of their particular governorates) and by privately-owned collective taxis licensed to operate on fixed itineraries. In rural areas, mixed transport of passengers and goods authorized at governorate level is the general rule. Urban transport services are provided by 12 regional companies plus taxis. The Greater Tunis area is an exception in tandem with a publicly owned bus company; small-scale private bus operators have been allowed in since 1990 but their share of the market is still negligible. 1.06 Port traffic increased at an average annual rate of 3% to about 18 million tons by 1994, although it has been quasi stagnant since 1989. Port administration is the responsibility of OPNT (Office des ports nationaux tunisiens), a public agency, whose mandate also extends to towage and pilotage, as well as to custody and storage of cargo in regional ports. In the Tunis port system, cargo handling is the monopoly of a STAM (Societe tunisienne d'acconage et de manutention), a public enterprise, which in other ports has to compete with small private firms. Maritime transport is provided chiefly by CTN (Compagnie tunisienne de navigation), another public enterprise. A few private shipowners have been allowed into the tramping business since 1982 and into the liner trade since 1995. General air traffic grew rapidly between 1986 and 1994, but charter traffic much faster (at an annual 12%, approximately) than regular traffic (5% annually). Government-owned Tunis Air is the national flag carrier for regular international transport. The local private sector is active on both the charter and domestic markets. SNCFT (Societe nationale des chemins de fer tunisiens) is the public enterprise responsible for the country's rail system. Traffic development over the period 1980-1994 was weak, with number of passengers in the range 25-30 million and freight volume in the range 8-12 million metric tons. SNCFT commands only a 5 % share of passenger traffic and about 28 % of freight traffic, which consists mainly of haulage of phosphates and their derivates. D. PAST INVESTMENT POLICY: A NEED TO FOCUS MORE ON ECONOMIC PRIORITIES3 1.07 Government influence on transport has been all the more decisive because the sector was long in the hands of a vast public sector which as late as 1993 still accounted for nearly 70% of national output4. The government budget has thus been the primary source of transport investment funding. Although maintaining a judicious balance between short-term growth and long-term development objectives is one of the major difficulties of strategic planning, Tunisia's past transport investment policies appear generally to have struck such a balance, even if they may sometimes have given too 3 Data related to the Plan ViII investments are provisional estimates. 4 Lakhoua, F., Role etpoids de secteurpublique en Tunisie, 1995.  - 4 - much weight to the equable distribution of development throughout the national territory and overestimated the structuring effects and external economies stemming from infrastructure investments. Where transport is concerned, Tunisia's natural priorities can be deduced from three sets of factors: the paramount importance of roads for domestic transport, the paramount importance of shipping for foreign trade (only 5% of import and export operations take place over land or air routes), and the difficult of managing the traffic congestion risks that accompany fast urban growth. While it is therefore obvious that emphasis should be given to road, port, maritime, and urban transport infrastructure investments, it has to be recognized that these priorities have not always been soundly implemented: too much has been made in the past of creating rail facilities, the "metro du Sahel" epitomizing the kind of investment that has given disappointing results; the construction of new roll on-roll off berths in Sousse and Zarzis was premature, and the new airport capacity in Tabarka and Tozeur is also well ahead of demand; rural roads have often been paved for the wrong5 reasons; expansion of the road network has not kept pace with traffic development, and road maintenance is well short of needs; main ports have been slow to adjust to new technologies, and by and large the merchant fleet is obsolete; urban traffic congestion in Tunis is becoming more and more serious. Chart I. Public Transport Investment in Tunisia 60 50 P e 40 r * Road transport c _ Railw ays e 30 0 Ports & Shipping 1.08 DuringMthe 1980s, transport and communications investmentsrepresentedAirports and airlines a g .08 0 ~~Plan VI Plan V II Plan V III 1.8 During the 1980s, transport and communications investments represented between 1 % and 4 % of GDP in most developing countries. In Tunisia, the proportion for transport alone was around near 3%, suggesting that, if anything, problems are less a matter of inadequate budget allocations than of the way resources are distributed among modes of transport. In comparative terms, the transport sector absorbed 10% of total investment funds under the Sixth Plan, 12.4% under the Seventh, and a probable 13 % under the Eighth. Details of the structure of transport sector investment are given in the annex to this report6. It is clear, as may be seen from Chart 1, that there have been significant priority changes from one Plan to another. 5 Paving roads was the easy way around the lack of funding for maintenance of unpaved rural roads, which therefore deteriorated rapidly, prompting protests from the population. The right solution would have been to provide local authorities with adequate decentralized funding and technical support. 6 The annex details investment activity by sector.  - 5 - 1.09 Under the Sixth Plan, land transport investments represented 73% of the total and were split evenly between roads and railways, a surprising fact given the low level of rail traffic at the time, the early 1980s (13% of freight traffic, excluding haulage of phosphates, and 6% of passenger traffic). The ambitious railway expansion project led to costly investments which have failed to achieve their objectives. Infrastructure investment figures were as follows: D 170 million spent on intercity roads (about a third of it on maintenance and rehabilitation, and close to 30% on construction of rural roads by the central authorities); and D 15 million on urban road systems. Local governments invested close to D 60 million on rural and urban roads. Very little investment was made in shipping, each of the government-owned shipping lines purchasing one bulk-carrier. In the case of ports, the main investments were made as part of the Third Ports Project, an operation which had Bank financing, and which included dredging and construction of 350m of quays at Rades, plus construction of about 500m of general cargo and roll-on/roll-off berths at Sfax. In retrospect, the Sixth Plan was not sufficiently focused on the country's real economic priorities. 1.10 Some adjustment came with the Seventh Plan, which allocated more resources to roads (54%). The share of intercity roads rose to two-thirds of road infrastructure investments, with the Tunis- Hammamet freeway as the main item (D 50 million). The sum allocated for rural road construction by the Ministry of Infrastructure was 50% lower in real terms than under the Sixth Plan7, a reduction offset however by the surge in other, special rural road programs under the sponsorship of the Ministry of Planning and other ministries (PDRI, PRD). Overall, rural roads absorbed about as much funding as intercity roads, raising two issues: one of balance between road traffic needs and rural needs, and the other of consistency in rural roads development policy. Resources allocated to urban networks roughly doubled in real terms, but that was still too little. Railway investments, although appreciably reduced, still accounted for an inordinate proportion of the total (about 23%). The maritime sector was largely neglected: fishing ports, together with construction activities at Zarzis, mainly an oil port, absorbed most of the funding allocated to this sector; there was very little modernization or procurement of port equipment, partly because of the severe financial constraints under which the government-owned cargo-handling company was then operating. The air transport sector nearly doubled its share of investment funds to some 18% of the total: a third of all investment in airport facilities went to construction of the Tabarka airport, while other funds were allocated for extensions at Tunis, Monastir, and Jerba airports; replacement of the Tunis Air fleet and development of Tuninter boosted investments in airlines from the Sixth Plan figure of D 70 million to D 166 million. 1.11 The ongoing Eighth Plan (1992-1996) provides close to D 2.9 billion for transport investments. The proportion of funds earmarked for roads is practically unchanged at 53%, construction of the new stretch of freeway (Hammamet-M'Saken) being the largest project. The pace of rural road building has slackened off, although it will still absorb some D 200 million under various budgets, or nearly as much as the total allocation to urban road networks. The Greater Tunis area has absorbed most of the resources earmarked for urban infrastructure; despite this increased funding, however, the program is unlikely to meet the needs of the city population, mainly because its implementation rate during the first three years of the Eighth Plan period was among the lowest. The intercity road heavy maintenance program accounted for only a fifth of the Ministry of Infrastructure investment budget. One positive change was the much higher priority given to shipping investments, but procurement delays have slowed down implementation. Port investments, on a smaller though 7 The Ministry of Infrastructure and Housing (MEH) built 400 km of roads under the Seventh Plan.  -6- adequate scale, are being channeled into construction of new roll-on/roll-off terminals, procurement of tugboats, equipping of the container terminal at Rades, and extension of the oil facilities at Bizerte. In the case of the rail sector, investments covered by the performance contract between SNCFT and the authorities come to a total of D 188 million, with 36% allocated for rolling stock. While provision is included for laying double track on a portion of the Borj Cedria-Kalaa Kebira line, there is nevertheless a net priority shift in favor of maintenance (which now accounts for about 55 % of planned infrastructure investments). Investment in air transport increased fourfold to D 700 million, indicating a reordering of priorities in favor of modernization with a view to expansion of market shares. For airlines, most investments were made by Tunis Air for renewal and expansion of its fleet. E. CURRENT SERVICE DELIVERY: STILL ROOM FOR IMPROVEMENT 1.12 Road transport: The data base on the condition of the road network is old and provides little informnation on current state of repair. According to the most up-to-date indicators, 55 % of paved roads were in good repair in 19888, as against 85 % or more in the industrial countries. Further deterioration is likely to have occurred between 1988 and 1995, as 50% more maintenance would have been normal had budget constraints not been so severe. The authorities tend to concentrate resources on primary roads and neglect the rest, especially rural roads. Most road shoulders are left to deteriorate (a process all the faster as roads are narrow), with the consequent adverse effects on road conservation and road safety. Surface dressing is used extensively as a substitute for the heavier maintenance main roads require when traffic growth is rapid. There is considerable pavement deterioration, while the fact that not all stretches of road are treated in the same fashion can interfere with traffic flow and at times create unsafe conditions. Insufficient attention is paid to bridge construction and rehabilitation, with the result that part of the network is flood-prone, which leads to road closings and additional deterioration in winter. In short, road policy still shows weaknesses that are economically costly. It is generally accepted that vehicle operating costs increase by 70% when road conditions are bad. With a daily traffic volume of 27 million vehicle-km nationwide9 and average vehicle operating costs of D 0.4 per kin, Tunisia would save roughly D 160 million a year--i.e. the equivalent of the road investment budget--if 10% of traffic were switched from bad to good roads 10. In the freight trucking subsector alone, privatization has led to a strong supply response which has increased productivity and brought tariffs back to their mid-1980s level. However, the Ministry of Transport has estimated tractor-trailer operating costs at the equivalent of US$1.7/kmi1, or at least 50% above costs in France. The fact that Tunisian truckers are virtually absent from the international road transport scene points to both productivity and quality shortcomings on their part, the impact of which affects domestic firms that have no alternative to hiring local carriers. The obsolescence of the road vehicle fleet is a widespread problem with adverse effects on both the economic and the ecological plane. 1.13 Rail transport: Between 1980 and 1994, despite massive government financial support, strategic studies, and implementation of action plans, the competitiveness of Tunisia's rail system continued to deteriorate in all its markets, with the exception of ore transport, where it has a 8 World Development Report 1994, Infrastructure forDevelopment Table 32. 9 Findings from the 1992 traffic survey showed a total of 22.7 million vehicle-km. (See DGPC, General Traffic Census. 1992.) 10 The HDM III model shows that the average operating cost of a vehicle increases by close to 40% on a change from smooth roads (2,000 IRI) to moderately rough roads (6,000 IRI). 1 1 DGPE data of June 20, 1995, for a Scania tractor-trailer. The Tunisian currency equivalent was D 1,523.  - 7 - monopoly. In overall terms, the share of the general transport market held by the rail system has fallen off by half since the 1970s. This loss of competitiveness, which remained largely hidden until just a few years ago as a result of the de facto protection afforded the system by a regulatory framework hardly conducive to competition, has clearly accelerated since 1992, following development of the expressway network and the steps taken to deregulate freight transport and privatize the road transport subsector. The explanation for this loss is to be found primarily in Tunisia's economic geography, since it is a small country whose economic activity is heavily concentrated around Tunis and along the Tunis/Sousse/Sfax corridor. In both the passenger and freight subsectors, distances are short, and in the case of freight there is the additional problem that unit quantities are often low--two factors that inevitably undermine the economic competitiveness of rail compared to road. The shortcomings affecting SNCFT's commercial policy until just recently and its often mediocre service quality level (failure to keep to freight dispatch timetables, passenger train delays and lack of comfort) have contributed to the stagnation of rail traffic despite a rapidly expanding general transport market. System technical productivity is poor, so that production costs are high in relative terms. System traffic density is low.12 Although the equipment in use is of good technical quality in general, there are some serious shortcomings were traction stock is concerned and in infrastructure maintenance. The locomotive fleet is mixed, and availability rates, frankly bad for many years (less than 60% between 1988 and 1992), are an indication of the mediocre level of maintenance services, even though they improved to some extent in 1994 (65%)13; in any case, they will be seriously handicapped over the next few years by the poor quality of the two series introduced just recently. In the area of infrastructure maintenance, the slow pace of replacement operations and the lack of maintenance expertise have contributed, especially along the main Tunis/Sousse/Sfax corridor, to a significant drop in passenger-train commercial speeds (Tunis/Sfax running times: 3 hours 25 minutes in 1980 compared to 4 hours 15 minutes currently). On the other hand, manpower productivity has improved slowly but steadily since 198014. Further improvements are possible, however, and in fact will be needed to bring the manpower costs/traffic receipts ratio to a level consistent with sustainable SNCFT financial equilibrium. The system's overall productivity level is weak, as the comparators listed in the accompanying table, No. 1.1, indicate. Table 1.1 Railway operating efficiency: international comparison Tunisia Morocco France US (Pass.) US (Freight) Kms of line/10,000km2 118 41 593 195 195 '000 traffic units/km of line 1.35 3.40 3.43 0.24 8.64 Traffic units/employee 336 448 566 409 7983 '000 passenger/km/car 3180 3210 5609 4937 Locomotive availability 58% 82% 93% 83% 90% Average trip length (km): -passenger 37 190 76 461 -freight 189 167 365 859 Data shown are for 1992, except in the case of Morocco, where they are for 1994 12 Rail traffic density (in millions oftraffic units per km of line): Tunisia, 1.67; Morocco, 3.73; France, 3.43; US, 8.76. 13 Locomotive availability: Morocco, 81%; France, 93%; US, 90%. 14 Manpower productivity (in thousands of traffic units per employee per annum): Tunisia (1994), 405; Morocco, 505; France, 566; US, 648.  - 8 - 1.14 Maritime transport: The Tunisian flag's small share of the maritime transport sector (about 20%) actually conceals a larger share in liner trade, essential in the export of manufactured goods and agricultural products. Liner trade, now being liberalized, was for a long time organized on the cartel system, to the detriment of shippers. The national shipping line, CTN, operates a fleet of 10 freighters with an average age of 18 years. Its modernization plans are slow to materialize, owing to procurement delays. A small company, it suffers the effects of diseconomies of scale by comparison with is foreign competitors. Its vessels are of less than optimum size given traffic and roundtrip voyage times. Crews are too large and lengthy port calls in Tunisia include extensive idle time. Although any attempt to measure the differences between shipping lines connected with Tunisia and those plying Atlantic or Far East routes runs into intricate comparability issues, there is definite evidence of incremental costsl5. It is known, for instance, that non-conference rates applied by outsiders are generally 25% lower than conference rates, or that it costs US$530 to ship a container from Tunis to Rotterdam, more or less what it costs to ship it from Tunis to Casablanca which is much closer. Very telling was the signifianct difference between c.o.b. and f.o.b. costs during the period 1988-1991 (close to 7%) compared to a world average of 3.2% and a European Union average of 1.5%16. Even if such data can hardly be used as a basis for conclusions regarding the extent of differences, they point unequivocally to the existence of price and quality differentials. In 1992, the Tunisian private sector entered the maritime transport market, where, though limited to tramping initially, it has been operating regular line services since 1995. So far, this presence has been no more than modest, first because the resources to cover the cost of competitive vessels are not available, and second because intervention by the authorities through their tender specifications and by the remaining members of maritime cartels continue to limit private sector operators' opportunities to gain access to a broader market. 1.15 Ports: This is a sector of primary importance to the Tunisian economy. However, wide enough use is not made of the most effective kinds of technology. For instance, the containerization rate was only 21 % in 1994. As for port infrastructure, the combination of under-utilized berths (the current average throughput figure of 555 metric tons per meter in Tunisia must be compared to averages of 800-1,000 t and 5,000-10,000 t for general cargo and container berths respectively in efficient world ports) with waiting times (port statistics for 1994 show that an average of 36% of ships spend time waiting prior to berthing) is enough indication of low productivity. When at berth, ships are generally the focus of operations no more than 12 hours per day. Specialized container handling equipment has been brought into operation only recently. Inefficient procedures, remittal of documentation by traditional methods, systematic customs inspection, and exploitative commercialization within port precincts all play their part in lengthening transit merchandise turnaround times (as much as 30 days in the case of imports). Port manpower supply exceeds actual demand. Port services are costly and of low quality. The accompanying table, No. 1.2, compares Tunisian and international productivity figures. 15 See Maghreb Transport and Trade Facilitation Studv, World Bank, 1995. 16 See Ma2hreb Transport and Trade Facilitation Study op. cit., Table 2. 1.  - 9 - Table 1.2: Productivity per hour of ship berth (in metric tons) Conventiona Ro-Ro Bulk carriers i cargo vessels Container ships Tankers (solids/liquids ships) Tunisian ports 28 38 42 312 69 Efficient world 60-80 80-100 150-200 (200- 500-1000 300-600 ports I _I _ 300)* ___ * with gantry-cranes and specialized transfer equipment 1.16 Air Transport: Tunisian carriers provide services that conform fully with the industry standards observed worldwide, and their safety record is good. The national airline, Tunis Air, has shown a degree of commercial dynamism that has enabled it to adapt to a changed and more competitive market and to play an active part in transporting tourists. However, it is handicapped not only by its size and procedural constraints stemming from its public enterprise status, but also by a series of incremental costs (ascribable in part to overstaffing) that result in direct flight costs about 20- 30% higher than the US industry average. Tunis Air is in a buoyant financial situation, but is committed to a fleet replacement program at a time when competitive pressures are intensifying in the wake of European Union deregulation and the "open skies" policy advocated by the US. Since 1992, domestic air services have been provided by a private company, Tuninter, which has succeeded in increasing its traffic volume by 50% in two years but whose future may be undermined by a chronic deficit. As for the country's airports, they have generally kept pace with traffic growth and provide user services of good quality. The only reservations that might be expressed are that full advantage is not taken of existing commercial potential because airport administration is a public sector monopoly, and that investment funds are diverted into the creation of capacity levels not warranted by current demand, as has occurred in the case of Tabarka airport. 1.17 Urban transport: Bus services in Tunis are overcrowded at peak hours. SNT reports nine passengers per m2 when six is the acceptable standard. About half of all trips are made on foot. The conservative estimate is that it would take at least a 20% increase in bus services to cover unmet demand. In terms of operations productivity, the public enterprises appear to be reasonably efficient. Fleet (SNT, STS, SORETRAS) availability rates are in the 75-90% range, which is on the low side for SNT and STS. Number of employees per bus ranges from 4.5 to 6.3; while this is within normal limits (3-8), there is room for improvement, especially in maintenance operations, where greater reliance on contracting out is to be recommended. SNT and STS average distance per day figures, at 240 and 311 km respectively, are good. On the other hand, the SORETRAS figure of 158 km looks mediocre, since it is as low as in Paris, where traffic congestion is much heavier than in Sfax. Bus company finances, however, present a serious problem. The authorities are not paying enough compensation to offset the constraints that come with providing a public service, particularly the transport of school children. As a result, the companies are hard put to expand their fleets and ensure a reasonable level of user satisfaction. The declining quality of urban public transport services threatens to shrink their market share and exacerbate urban congestion.  - 10- CHAPTER 11. BETTER TRANSPORT FACILITIES: THE KEY TO INTERNATIONAL COMPETITIVENESS A. THE MACROECONOMIC OUTLOOK: LAYING THE CONDITIONS FOR SUSTAINABLE GROWTH 2.01 Restoring macroeconomic balance and promoting the private sector. Despite several years of sound economic performance, Tunisia is now facing a new set of challenges. It must create enough jobs to bring down unemployment among a working-age urban population that is growing rapidly. It must deal with the incipient tendency to diminishing returns as the economy develops and becomes more capital-intensive. It must revitalize those engines of growth, such as the textiles industry, that are in urgent need of upgrading in their management methods and techniques'7. And it must address the physical degradation of its coastline and farmlands, and its rapidly depleting groundwater reserves. If Tunisia is to develop rapidly, the public sector will have to free up resources that can be put to better use by the private sector. In the early 1990s, the public sector's share of GDP and gross investment was still 70 per cent. A recent Bank study of the Tunisian economy18 sets out two scenarios, both of them based on the assumption that reforms will be undertaken to redress the macroeconomic balance and eliminate distortions. The high-growth scenario (which projects sustainable annual growth at 6 per cent) implies reducing the budgetary deficit, which in turn means streamlining Government expenditures, restructuring and privatizing public enterprises, and revitalizing the domestic economy by promoting a greater degree of competition. Enhancing Tunisia's international competitiveness will require a number of improvements, including better infrastructure, a market-determined exchange rate, and a more flexible structure of wages and domestic prices. A major factor in achieving this high- growth scenario will be the transport sector, which as a supplier of a key intermediate good can have a far-reaching impact on productivity. 2.02 Trade liberalization: The progress of regional integration within the European Union (EU) and the reduction of world trade barriers in the wake of the Uruguay Round imply that Tunisia needs to adopt an export-oriented policy for its continuing growth and industrialization. Yet while such a policy will open up new opportunities for the country, it also brings a degree of risk. The Free Trade Agreement with the EU will remove the restrictive trade agreements that formerly protected producers within the Union, and will allow Tunisia to promote exports in sectors where it has comparative advantages over other competitors, including its physical proximity to Europe. On the other hand, Tunisian firms will now see their domestic market flung open to new competition from European producers. The Uruguay Round will also have the effect of reducing protection for goods traded under most-favored-nation rules: since EU members can now look beyond Tunisia for imports that were previously covered by preferential agreements, Tunisia may have to seek new markets abroad for such products. Likewise, the lifting of restrictions under the Multifibre Arrangement (MFA) will make the European market more competitive, but the producing countries that benefited most under the MFA will inevitably lose ground to other exporters under the new, more liberal regime. In a more open trading world, Tunisia will have to develop new lines of product specialization. Full convertibility of 17 The textile industry will have to modernize if it is to keep up with international standards. The investment needed to meet foreign competition is estimated at 700 million Tunisian dollars, including 200 million for management upgrading. See Economic Memorandum 1995, "Towards the 21st Century".  - 11 - the Dinar will help promote industrial and commercial efficiency, but it will leave little room for lax macroeconomic policy, and is likely to require much stricter financial discipline. The stakes are high - swift implementation of the free-trade agreement is expected to raise Tunisia's annual GDP growth rate by 3 to 5 per cent, while progress with Uruguay Round trade liberalization measures should add another 0.2 to 0.3 per cent. B. SEVEN BASIC PRINCIPLES FOR THE NINTH TRANSPORTATION PLAN Seeking quality and economic returns through investment 2.03 If Tunisia's products are to become more competitive, and its economic development more balanced, substantial improvements will be required in its transportation infrastructure and services. In the case of infrastructure, which is generally in the hands of the Government, a selective approach is needed, one that avoids investing too many resources in ventures where returns are questionable. Pouring public funds into such ventures will tend to crowd out private investors from financial markets, and will impose growth-retarding fiscal burdens on producers and consumers alike. The public investment program must therefore aim for quality, and should try to enlist participation by private capital. East Asian countries, which saw remarkable growth between 1960 and 199019, owe their success in part, no doubt, to increased overall investment, which rose from 20 per cent to 35 per cent of GDP between 1965 and 1990, but also to the fact that the share of private capital in that investment was twice as high as the norm in middle-income countries. It has been observed that Tunisia's investment rates during the period 1980-1986 were just as high (with gross investment running at about 30 per cent of GDP), but it did not reap results commensurate with those in East Asia - GDP per capita rose only slightly more than one per cent per year, or one-fifth as quickly. At the risk of pressing the analogy too far, the fact that the rate of investment declined to about 24 per cent of GDP over the period 1987 1994, while the growth of income per capita doubled, suggests that it was the rationalization of investment since 1987, rather than its absolute amount, that has been the driving force behind the remarkable improvement in Tunisia's economic performance. It is still true, nonetheless, that the country's growth has been much less dynamic than that in East Asia. The rebound in the investment rate to about 28 per cent of GDP since 1992, under the impulse of the private sector, augurs well for accelerating growth, but there are clearly some tough economic choices to be made. 2.04 With respect to transportation, the accelerating share of public investment that has been devoted to this sector over the past fifteen years has been a positive factor in making up for the rather weak showing of private sector investment in equipment. In fact, the public sector still accounted for almost 70 per cent of the industry's output in 1993, and it can be assumed that this pattern prevails as well in the overall investment picture. Yet while the level of transportation investment appears on average to be higher (see para. 1.07 above), it is not clear that this has translated into a comparable contribution by the sector to GDP. The overall share of the transportation and telecommunications industries in GDP has been rising steadily over the last fifteen years, from about 5 per cent in 1981- 1986 to 7 per cent for the past eight years20. Taken by itself, however, transportation has contributed barely 5 per cent to GDP, a rather poor perfornance for a country at Tunisia's stage of development21. 19 Per capita growth in income was 5.5% between 1960 and 1990, a performance unmatched anywhere in the world (see IBRD, "The East Asian Miracle: Economic Growth and Public Policy" (1993). 20 Source: Ministry of Economic Development (cited in the 1995 Economic memorandum, Table 4.2). 21 During the 1 980s, transportation services accounted for 5 to 10% of value added in most developing countries.  - 12 - All of this suggests the need to pursue the rationalization of transportation investment, if the economic growth rate is to rise to the targeted 6 percent level during the period of the Ninth Plan. As long as infrastructure investments in general, and those in transportation in particular, have unit elasticity with respect to GDP, then the volume of investment will have to be 50 per cent higher at constant prices if constraints on growth are to be overcome. Rationalizing investments would allow this volume to be reduced. 2.05 Greater priority should be accorded to highways than they received under the Eighth Plan. Growth in the currently low level of automobile ownership per capita (about one-tenth the European average) and increasing automobile travel, both of which are a result of faster economic growth, can be expected to raise highway traffic volumes by 6 to 7 per cent a year under the high-growth scenario, which would represent a doubling in twelve years. More money should thus be devoted to the road- widening program to help ward off traffic congestion. Efforts are needed, as well, to fill in the many gaps in the still largely unpaved roads network (see para. 1.0422), and to bring existing highways up to standard in terms of safety, signals and road-sign deployment. Rural road construction programs seem to be well conceived; their share in total transportation investment should be maintained, since they are among the most effective tools for reducing economic disparities within the country. A major adjustment is needed in order to free up more funds for roadway maintenance. The maintenance budget, including routine and need-occasioned work, represented about 32 per cent of the total national highways allocation under the Sixth Plan, but this proportion fell to less than 30 per cent under the Eighth Plan, and rebounded to 35 per cent for the period 1992-1994. The current budget for road reinforcement and resurfacing should be increased by at least 50 per cent. Urban roadway systems demand more attention, especially in Tunis, where the expansion of transportation infrastructure and services is essential to maintain balance as the city develops. As with the highways, steps will have to be taken to avoid the kind of congestion that can be anticipated from the projected 5 to 7 per cent annual increase in transportation demand. In the country's ports, the most pressing need is for investment to allow access for modern transport vessels, especially the container and "RO-RO" types, while continuing to accommodate existing activities. As to the railways, investment should be channeled into the most actively used lines, with the stress on track renovation, improved telecommunications systems and signaling, before launching into the more costly undertaking of doubling existing tracks. Finally, it is perhaps in the area of ground transportation that there is greatest scope for quality improvement. Investments in a modern vehicle fleet, in highway safety and in anti- pollution measures are all important areas for attention. Reducing the fiscal burden through greater private investment 2.06 The need to modernize the transportation systems creates major financial demands that the Government is in no position to cover on its own. Its contribution to financing of the economy (current expenditures plus investment) has already dropped sharply, to 30 per cent of GDP (1994). Reductions in capital contributions (grants and temporary assistance) have been particularly steep, from 5.9 per cent in 1986 to barely 1.8 per cent in 1994. Under the policy of budgetary restraint, the forecast deficit for 1996 is only 2 per cent, and this should fall to no more than one per cent by 2003, to be consistent with the high-growth scenario. According to the Bank's projections, Government capital outlays will decline proportionately from almost 7 per cent of GDP in 1994, to about 5.5 per cent in 2003. Since transportation investments will have to stay at least level with GDP growth, it is clear that businesses are going to have to assume a larger share of financing infrastructure expenses that have been covered 22 In Europe, the density of paved roads exceeds 10,000 km per million inhabitants, or ten times the density in Tunisia.  - 13 - until now by government. Increased reliance will have to be placed on private initiative and participation, to ensure the best economic return on funds invested. The financial risk that the private investor must assume is the best guarantee that investment projects will be selected judiciously. Moreover, such projects will be free of the procedural constraints that weigh upon public expenditure, ranging from the uncertainties inherent in parliamentary budget debates to the plethora of controls on commitments and disbursements. 2.07 Tunisia's macroeconomic framework is favorable to the development of private investment, yet there is room for a greater private role in transportation infrastructure, where the public sector is still dominant. The system of granting concessions is an excellent way of attracting private capital into sectors of activity where the Government wishes to preserve a degree of economic control and proprietorship. It remains to be seen whether the existing institutional framework in Tunisia can offer investors the kinds of guarantee they have the right to expect, without actually removing all commercial risk for them, or giving them monopoly rents. Further study is needed to develop transportation concession contracts, selection procedures, and regulatory and arbitration mechanisms that are sufficiently compatible with international practice so that foreign investors will be willing to venture into Tunisia with their capital and expertise. The concession system is well suited to toll roads and expressways, ports, airports, urban and inter-city public transit, and in general any business where services can be rendered, and hence charged for, on an individual basis. Specific applications of this principle are forecast during the Ninth Plan. 2.08 In Tunisia, the highways network has absorbed the bulk of public funding, and it is here therefore that there is the greatest potential for alleviating the budgetary burden on the Government by enlisting contributions from private capital. Tunisia has already started down this path. The Tunisie- Autoroute corporation (T-A) was created in 1992. Some 80 per cent of its capital is held by public and para-statal enterprises and public development banks, while the remaining 20 per cent is distributed among private banks and public-works contractors. T-A has been granted a 30-year concession for the 140-km Tunis-M'Saken freeway, financed by the Government. Under its concession contract, T-A must invest 25 million Dinars in setting up tollbooths and in operational and safety equipment, or only 10 per cent of the amount invested in the road by the Government. The freeway development program will require heavy funding, and most of it will have to come from private sources. An increased private sector share in T-A and a generally more innovative approach can thus be expected. There are many examples around the world of the use of "BOT" (Build-Operate-Transfer) formulas in freeway projects, and the market is growing for specialized companies to manage them. International experts should be sought to help in developing a regulatory and contractual framework that will inspire confidence among foreign investors. Particular care needs to be paid to assessing the economic and financial aspects of concession projects, to avoid the kind of problems that beset the Mexican freeway program. The Dulles Greenway project in the United States (see Box 1) shows how far private financing can go, but it also demonstrates both the necessity and the difficulty of lining up long-term financing to match the economic life of the investment. It illustrates as well the risk - unfortunately very real in this case - that estimates of future traffic volumes may be exaggerated. The Tunisian government will have to be careful to promote projects with a real potential return, since private capital can be permanently frightened off by failures.  - 14 - Box 1: The New Frontier in Highway Privatization: the Dulles Greenway (USA) The State of Virginia found itself unable to cope with its backlog of highway infrastructure needs on the basis of traditional public finance, and turned to private capital for a solution. The building of a 22 km freeway between Dulles International Airport and the town of Leesburg , in an effort to reduce congestion on the existing roads network, was an early example of this new policy, that also served to demonstrate the conditions for success in such ventures. This was in fact the first expressway in the United States to be totally funded by private sources. The project was conceived in 1986, by a group of private investors flush with success on the real estate market of the time. Two years later, the State Assembly passed a law approving the construction of private highways in Virginia. The arduous search for suitable financing ended when institutional investors (the giant Prudential and John Hancock Mutual Life insurance companies ) expressed interest in the project. Long-term loans were used to finance 80% of the estimated cost of US$ 325 million. The balance of funding was provided by commercial banks (about 15%) in the form of long-term credits, and through capital infusions by the partners. The freeway was opened for service in September, 1995, six months ahead of the original schedule, and only 10% over budget. The Greenway corporation today has three associates: a private investor; Autostrade International SpA, an Italian company specializing in freeway management; and the construction company that built the highway. Autostrade is responsible for operating the freeway. Private funding extended to the purchase of rights-of-way for the highway: one-third (1/3) of the land needed was leased from the airport authority and the balance was purchased outright (1/3) or paid in kind by real estate holders in exchange for the building of access ramps to their properties (1/3). The Dulles Greenway freeway will revert to State ownership at the end of the 42.5 year operating concession. Tolls are subject to control by the State, which has placed an 18% ceiling on profits. One of the main arguments in favor of this program was that private sector construction of the freeway would be faster and cheaper, since the public works department itself was tied up in cumbersome regulations. Privatization extends even to road safety and security services, which have been sub-contracted to the Virginia State Police: the corporation pays the cost for a squad of exclusive patrol vehicles. Although the project was a success, there were a number of problems to overcome. The private promoters had to seek countless approvals and heed a range of regulatory restrictions. In one notable case, the investors had to pay compensation for the loss of wetlands under federal protection, and were required to replant the area and build a single-span bridge to avoid polluting the waterway. Consequently, lawyers' fees consumed considerable funds. There are serious doubts today about the project's viability, because of severe shortcomings of a commercial nature. Traffic was projected at 34,000 vehicles per day, three times the actual traffic recorded during the first few months of operation. Toll booth receipts are far lower than what is needed to cover operating costs and debt amortization. The State has offered no guarantees, and the future of the project depends now on its ability to refinance its long-term debt. There are perhaps three provisional lessons to be drawn from the experience: (a) private financing for freeways is viable, but it must be done with long-term money at modest interest rates, preferably from institutional investors like insurance companies and pension funds. (b) Great care must be taken in preparing market studies. The Dulles Greenway project relied on studies conducted during a real estate boom, and these were never updated subsequently, even though promotional problems delayed project start-up by three years. (c) No user behavior studies were ever undertaken. Although it is on a par with the average in other countries, the toll rate, at US 13 cents [per mile?] is the highest in the United States. Many users actually reacted by boycotting the new road. Had surveys been conducted, they would no doubt have led to some greater graduation in the level of tolls. (d) It is hard to imagine that Tunisia can attract private foreign capital without offering a sovereign risk guarantee.  - 15 - Subsidies: targeting and burden-sharing 2.09 Urban transit and the railways are subsidized by Government. Although users pay a higher portion of costs (two-thirds) through passenger fares than is the case in most countries23, the subsidy still represents a heavy financial burden for the Tunisian government, which spends some 40 to 50 million Dinars per year on public transportation, divided equally between bus and rail services. Capital contributions in both areas represent a further significant subsidy. Does this state assistance achieve its hoped-for results? In the cities, transit subsidies go mainly to cover the shortfall for services to students and schoolchildren, who pay only 10 per cent of the normal fare. The system is controversial, since while it is supposed to cover the full difference between the student fare and the cost of service, in fact it falls far short. The gap between subsidies received and the costs of providing the service is growing, and bus companies are obliged to dip into their maintenance and renewal budgets, and to transfer part of the burden to other users through higher fares. At a price of 2 Dinars per zone, a weekly bus pass takes a significant bite out of the average citizen's disposable income, which was estimated at 20 Dinars in 1990. Here again, subsidies do not necessarily benefit those most in need. Some of those receiving financial assistance do not really need it, while many regular, low-income transit users, who may depend entirely on the service to get to work, find it difficult to pay the fare - without mentioning the inconvenience and the time lost because of the slow service. Another, undependable, form of subsidy is provided through tax concessions for certain types of vehicle, and preferential loans. One example is the leased-vehicle replacement program, which was launched in 1989, and which costs the government close to 6 million Dinars in foregone revenues. It is not surprising that growing doubts are being expressed about government aid for this kind of service. 2.10 If subsidies are to be limited, costs will first have to be brought into line. It needs to be understood that the granting of subsidies, where the amount is set by bureaucratic fiat, with no clearly defined purpose and no monitoring of end results, provides a poor incentive for the beneficiary company to make the effort of raising its productivity and bringing its costs under control - indeed, it can be virtually certain that the government will bail it out sooner or later, to avoid the political embarrassment of a breakdown in public transit. Subsidies, it may be said, are self-perpetuating. The United Kingdom, where subsidies rose 13-fold between 1972 and 1982, provides an example of this situation, and of some original approaches to remedying the problem, as well. In the London bus case, the strategy was to replace a monopoly by a multiple-choice service, by letting concessions to operate individual lines for a fixed period (generally for a maximum of five years). By introducing an element of competition for market share, while maintaining control over service standards, the government was able to cut back its subsidies and improve service coverage at the same time (see Box 2). This principle can be applied just as effectively with long-distance bus services, as has been proved in Chile, Sri Lanka, and again in the United Kingdom. In a country like Tunisia, it seems reasonable to continue subsidizing urban transit, not only on grounds of social equity, but also for the contribution such services can make to alleviating the diseconomies associated with rapid and congested urbanization. But government financial constraints make it advisable to look for ways to off-load part of this burden to other sources than general revenue. For example, the indirect beneficiaries of cheap transit - the owners of buildings and businesses in highly serviced areas, or even their employers - could quite fairly be taxed to help cover such subsidies. 23 In France, it is the local taxpayers who cover the largest portion (75%) of public transit costs outside the major cities. This contribution is split evenly (37%) between local taxes and a "versement transport" (transit transfer). The Government provides only 2%, while the modest remainder is covered by transit fares.  - 16 - Box 2. Promoting social 2oals through privatization: the London buses Although the government's White Paper on bus services declared that the cost of subsidizing public transport had become "unacceptable", and called for their outright deregulation and privatization, the London bus system has instead gone through a gradual transformation, beginning with the 1984 Transport Act that created the LRT (London Regional Transport). LRT is a public agency mandated to plan and provide bus services, and to determine service standards and fares. London Buses Ltd. (LB), is a fully-owned subsidiary of LRT that initially ran services on the core network with 12 subsidiaries. The innovation involved setting up new routes (not all of which could be profitable), and inviting private companies to bid for them in competition with LB. By the late 1980s, some 30 per cent of bus services were operating under contracts, and half of these were run by private firms. The contracts were good for three years, and covered the gross cost of services quoted in the bid; revenues were turned over to LRT. (At the beginning , LRT had invited bidders to quote the subsidy they would need to operate the service, but this system was found to be administratively cumbersome, and required cross-route subsidies, and it was eventually discarded). London bus services were fully privatized by the end of 1994. Several lessons can be drawn from this 10-year experiment: a) bus service in terms of vehicles per kilometer increased by about 25%; b) operating costs per vehicle fell by close to 50%; c) the demand rose slightly (+5%) and the bus occupancy rates fell only marginally; d) there was an innovative surge of small buses (up to 35 riders); e) fears that privatization would lead to more pollution, traffic congestion and accidents proved unfounded; f) most importantly, more routes became profitable, and government was able to reduce its subsidies by 70%. Overall, financial assistance amounted to