Tunisia - Cooperative Farm Project

RESTRICTED Report No. P-525 This report wos prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED CREDIT TO THE REPUBLIC OF TUNISIA FOR A COOPERATIVE FARM PROJECT February 6, 1967  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDEIT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PRO- POSED CREDIT TO THE REPUBLIC OF TUNISIA FOR A COOPERATIVE FARM PROJECT 1. I submit herewith the following report and recommendations on a proposed loan and a proposed credit in various currencies equivalent to US$ 12 million and US$ 6 million respectively, to the Republic of Tunisia to help finance a Cooperative Farm project. PART I - HISTORICAL 2. The Government of Teunisia has requested assistance from the Bank group to help finance a cooperative farming project in Northern Tunisia as part of its program to reorganize agricultural and livestock production on more effective lines. The project was prepared with the assistance of an FAO mission which visited Tunisia in October-November 1964 and completed its work in April 1965. A Bank preappraisal mission examined the project in the field in October-November 1965 and made recommendations on steps to be taken to prepare the project for final appraisal, which took place in June 1966. Negotiations took place in December 1966 with a Tunisian dele- gation which was headed by lMr, Hedi Ghachem, General Counsel, Secretariat of State for Planning and the National Economy, 3. The proposed Bank/IDA operation, if approved, would be the third Bank loan and the third IDA credit to Tunisia. The Bank has so far lent Tunisia US$ 12 million, of which US$ 7 million was for the Tunis- La Goulette port project and US$ 5 million to the Societe Nationale d'Investissement (SNI). The Association has made available two credits amounting to US$ 5 million and US$ 13 million respectively, for two educa- tion projects. As of December 31, 1966, the status of the loans and the credits was as follows: Amount (US$ millions) Year Borrower Purpose Bank IDA Undisbursed 1962 Republic of Tunisia Education 5.0 .2 1964 Republic of Tunisia Port 7.0 2.7 1966 Societ6 Nationale Development d'Investissenment Finance Co. 5.0 4.8 1966 Republic of Tunisia Education 13.0 13.0 Total now outstanding 12.0 18.0 Amount sold .4 Total now held by Bank and IDA 11.6 18.0 Total undisbursed 7.5 13.2 20.7  -2- 4. In 1963 the Bank also made a technical assistance grant of US$ 375,000 to Tunisia to carry out studies directed toward improving She design of school buildings and reducing their costs. 5. The International Finance Corporation has so far made two in- vestments in Tunisia. The first was in NPK-Engrais, a producer of phos- phate fertilizers. Made in August 1962, it consisted of an equity investment of $1.5 million and a long-term loan of $2 million. A total of $339,573 of the investment and $817,600 of the loan has been sold. The second investment o' $570,000 was made in 1966, in shares of the SNI, to which the Bank simultaneously made a loan. PART II - DESCRIPTION OF THE PROPOSED LOAN AND CREDIT 6. Bank Loan Borrow1er: Republic of Tunisia Amount: The equivalent in various currencies of US$ 12 million Interest Rate: Six percent (6%) per annum Commitment CharZe: Three-eighths of one percent (3/8 of 1%) per annum Amortization: Term of 18 years, including 5-year grace period, with semi-annual pay- ments beginning April 15, 1972 and ending April 15, 1985 Purpose: To help finance a Cooperative Farm project as part of the Tunisian Government's program of organizing agricultural and livestock produc- tion RelendinA Terms: Six percent (6%) per annum for sub- loans to Cooperatives and Office des Terres Domaniales. Average term of 13 and not exceeding 17 years, includ- ing 4 to 5 years grace period, for Cooperatives; term of 5 years to Office des Terres Domaniales.  -3- IDA Credit Borrower: Republic of Tunisia Amount: The equivalent in various currencies of US$ 6 million Purpose As for Bank loan Amortiza-ion: Term of 50 years, by semi-annual pay- ments comrmiencing April 15, 1977 and ending October 15, 2016, each install- ment to and including the installment payable on October 15, 1986 to be one- half of one percent (1/2 of 1%) of the principal amount and each installment thereafter to be one and one-half per- cent (1-1/2%) of the principal amount Service Char-e: Three-quarters of one percent (3/4 of 1%) per annum for the principal amount of the credit disbursed and outstanding Relending Terrns: As for Bank loan. PART III - THE PROJECT 7. A report on the project, "Cooperative Farm Project - Tunisia" (TO 560-.b) is attached. 3. Agricultural production represents about 25% OI Tunisia's gross national product and agricultural products about 60-65% o0f total exports. Over 50% of the labor force is employed in agriculture, many of them living on subsistance level smalliholdings. The Tunisian Government, since the accession of the country to independence in 1956, and in particular under its present 1965-1953 development plan, has laid special emphasis upon increasirg and reorganizing agricultural and livestock production. The area which offers the m,ost promising conditions for such improvement is the nort'her n part of the country. Climate and soils, and hence the production po-ential, are good. The project is located in this region. 9. The prooosed project would establish new production cooperatives over a two-year period on 160,000 ha in Northern Tunisia, each on about 1,000 ha; it would also consolidate development of the 213 cooperatives established prior to 1066 on 135,000 ha and provide additional capital in- puts to State farms, now under the Office des Terres Domaniales (OTD), intended for eventual absorption into the cooperative movement. Invest- ments financed under the project would include farm buildings, livestock buildings, farm machinery, small irrigation equipment, tree crop establishment, range pasture improvement, soil and water conservation, livestock, managerial and technical assistance and feasibility studies. The project is geared to the production of hard and soft wheat as the major  -4- cash crop supplemented by forage crops and livestock. It would be implemented substantially over a four-year period and would cost a total of about US$ 32.6 million with a foreign exchange component of US$ 12.4 rm,illion (about 38%). 10. The project would be run under a new system of management super- vision worked out in discussions between the Tunisian authorities and the Bank group. Overall policy control for the cooperatives would be vested in a new National Commission for Agricultural Cooperation (the Commission) representing at a high level all major interested ministries and organ- izations. The execution of the policy would be the responsibility of a new management unit (Bureau of Control). In view of the present shortage of qualified Tunisian personnel, it is expected that the unit would initially be partly staffed by expatriate specialists with local counter- parts. There would be a direct chain of command from the unit to the field level. The Banque Nationale Agricole (DNA) would act as financial agent of the Commission and Government, and all government loans and grants to the cooperatives and the State farms (including the proceeds of the proposed loan/credit) would be channeled through it. 11. If this project is approved, the Bank group would be entering a new field - that of production cooperatives. Under this approach to agrarian reform, to which the Tunisian Government is firmly committed, large land holdings are not split up into small individual lots of un- economic size; instead, traditional subsistence smallholdings which offer little or no scope for effective development are eliminated by joining them into production cooperatives centered on nuclei of good quality former "colon" lands (taken over by the Government from former French or Italian settlers). This system is capable of raising the low production of traditional land to a much higher level, of expanding export earnings and of increasing the per capita income of the Tunisian farmer. However, the weak incentives which characterize the functioning of production cooperatives must be recognized, and the successful performance of such enterprises is highly dependent on organization, management and super- vision. In this case there appears to be a good chance that these elements will be forthcoming. 12. In order to ease Tunisia's balance of payments and external debt position, there was general agreement among members of the Consul- tative Group at its December 1965 meeting that they should, whenever possible, provide a significant portion of their financial assistance on more lenient terms and also through program grants or loans or through project assistance which would cover part of the local currency requirements. Consistently with this approach, it is proposed that the Bank and IDA:  -5- (a) provide about 55%, i.e. US$ 18 million, of the project's total investment cost covering the foreign exchange com- ponent (38%) and part of the local expenditure component; (b) finance the operation with a blend of Bank and IDA re- sources, the loan amounting to US$ 12 million and the credit to US$ 6 million. 13. The Government has an official tender system which provides for competitive bidding, Foreign as well as domestic suppliers may submit proposals. A number of international firms nandling farm machinery and equipment are represented in Tunisia and are required to provide after- sales service. A Decree of July 1965 imposed restrictions on the import of tractors in order to protect a new assembly plant in Tunisia. The Bank has obtained assurances, however, that these restrictions would be elimin- ated for all tractor imports required for the project. All bids would be evaluated on sound economic criteria with a preferential margin of up to 15% being allowed to the Local producers. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 14. The draft Loan and Credit Agreements between the Republic of Tunisia and, respectively, the Bank and the Association, the report of the Committee provided for in Article 3, Section 4 (iii) of the Bank's Articles of Agreement, the report of the Comimit..ee provided for in Article 5, Section 1 (d) of the Articles of Agreement of the Association, and the draft Supplementary Letter on Procurement are being distributed to the Executive Directors separately. 15. The Loan and Credit Agreements will be subject to ratification by Tunisia's National Assembly. 16, The Bank and Association shall have, respectively, the right to suspend the Loan and the Credit if the Borrower shall have cancelled any part of the Loan without cancelling a corresponding proportionate amount of the Credit, or the other way around, or if the Decree establishing the Co.nmission, the Decree establishing the OTD, or the circular establishing the Bureau shall have been abrogated, suspended or materially modified without the agreement of the Bank and the Association. PART V: THE ECONOMY 17. A Bank report entitled "Tunisia - Review of 1965-1968 Develop- ment Plan" (AF-39) was distributed to the Executive Directors on January 19, 1966 (R66-12). A Bank mission visited Tunisia in October-November 1966 at the same time as an IXF mission which was there to negotiate the renewal of a standby agreement and the two missions collaborated closely. The IMF mission's report was issued on November 23 and the renewal of the INF standby was approved on December 2. The report of the Bank mission is in preparation and will be submitted to the Consultative Group on Tunisia for its March meeting. The fiF report and tihe basic facts  -6- and preliruinary tables which will be part of the Bank's report are being dis- -.-ibu;ed '-o the Executive Directors 'as background information. 18. During the period 1960-66, Tunisia achieved an average growth in its gross domestic production of 5% in spite of a serious drought which depressed output in the year 1966. This rise in output was accom- panied by a large public development program ilich brought gross invest- .aent to an average of 26% o_ ;he GDP in 1964-66 as compared to 14% in 1960. Domestic savings and foreign capital inflow both went up substan- ;:ially during this period, but not sufficiently to avoid pressure on donestic prices and on external reserves. 19. At the end of 1964 a number of steps, including a 25% devalua- tion (from Dinars .42 to the dollar to Dinars .52), were taken in order to reduce these pressures. Increases in long-term foreign capital inflow, together with an IMF drawing and a considerable increase in supplier credits, also helped to relieve the domestic financial situation in 1965. However, during 1966 this exceptionally high level of external capital inflow could not be mainLained and pressures on external reserves again began to mount. Late in 1966 the Government therefore adopted new measures designed to limit gross domestic investment in 1967 to a level that could be financed from domestic savings and the amount of foreign capital already reasonably well assured from existing commitments and fromn loans under negotiation. The investment level planned for 1967 cor- responds to around 22% of GDP and includes a specific allowance for a build-up of inventories that will be needed to permit the smooth func- tioning of several important plants just starting production. It should also permit a moderate improvement in the net foreign reserve position - which has been negative for the past few years. 20. In 1965 and 1966 Tunisia achieved a marked shift in the compos- itiOll of its investwent program towards a greater emphasis on directly productive investments than was the case in the 1962-64 period. The pat- tern of investment for 1967, which was finalized after discussions with the recent Bank mission, represents further progress in this direction, since the major cuts by comparison with earlier years will be in housing, primary education and administrative building. Action is also under way ,o improve the productivity of investments in agriculture, including a nu,nber o