Tunisia - National Water Supply Project

RESTRICTED FILE C0PY Report No. P-654 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The- report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED WATER SUPPLY LOAN TO THE SOCIETE NATIONALE D'EXPLOITATION ET DE DISTRIBUTION DES EAUX WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA November 20, 1968  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVEIDPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN FOR WATER SUPPIY TO THE SOCIETE NATIONALE DIEXPIDITATION. ET DE DISTRIBUTION DES EAUX (SONEDE) WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$15 million to the Societe Nationale d'Exploitation et de Distribution des Eaux (SONEDE), to assist in financing the expan- sion and improvement of water supply and distribution systems in Tunisia. PART I - HISTORICAL 2. On March 29, 1966 the Government requested the Bank's help to identify and prepare a project in the water supply sector. With the assistance of consultants and of several Bank missions, the Government prepared a long-term water supply development plan and created a new independent agency, which has taken over the existing government water supply services. The proposed project represents the major portion of the investment to be carried out in the water sector in 1968-1973. This is the first Bank loan to Tunisia for water supply and the first Bank loan in any country for a national water supply development program rather than indi- vidual water systems. 3. The project attracted the early interest of the Swedish Government, which sent representatives to Tunisia with the appraisal mission, participated in the negotiations for the loan, and negotiated simultaneously a $5 million credit for the project, on IDA terms. 4. The negotiations took place in Washington on August 19-30, 1968. The Government of Tunisia was represented by Mr. Moncef Belhadj Amor, Director of the Budget, and the Borrower, by Mr. Taoufik Ben Ghanem, Director General of SONEDE; the Swedish Government was represented by Messrs. Bengt Sandberg, Karl Willen end Jan Orrenius of SIDA, and Mr. John Wingstrand, of the Swedish Embassy in Washington.  -2- Bank, IDA and IFC Operations 5. The proposed loan would be the fifth Bank loan and would increase the combined Bank and IDA lending to Tunisia to $72.9 million. Following is the summary statement of Bank loans and IDA credits to Tunisia as of October 31, 1968: Loan or Credit Amount (US$ million) Number Year Borrower Purpose Bank IDA Undisbursed 29 1962 Republic of Tunisia Education - 4.9 - 380 1964 Republic of Tunisia Port Devel- 7.0 - - opment 4d9 1966 St6 Nat. d'Investis- Dev. Finance 5.0 - 1.5 sement Co. 94 1966 Republic of Tunisia Education - 13.0 8.9 484 1967 Republic of Tunisia Cooperative 12.0 - 10.2 Farms 99 1967 Republic of Tunisia Cooperative - 6.0 5.1 Farms 512 1967 St6 Nat. d'Invest. Dev. Finance 10.0 - 9.4 Co. Total (less cancellations) 34.0 23.9 of which has been repaid to Bank and others .4 Total now outstanding 33.6 Amount sold .9 of which has been repaid .2 .7 Total now held by Bank and IDA 32.9 23.9 35.1 Total undisbursed 21.1 14.0 35.1 6. None of the loans and credits made to Tunisia poses un- usual problems of execution. The fairly large amounts still undis- bursed for education and cooperative farms reflect the nature of the projects which require long design and organization lead times before expenditure reaches its full pace.  7. In May 1966, IFC made an investment of D 300,000 (about $571,500) in Soci6t6 Natioinale dlInvestissement. In addition to this, IFC has invested $1.5 million and lent $2.0 million to NPK- Engrais, a phosphate fertilizer company. 8. My report and recommendation on a $8.5 million Bank loan for a Port project was distributed to the Executive Directors on November 14, 1968. The Bank is considering a $15-16 million loan for railway rehabilitation and modernization that is expected to be submitted to the Executive Directors early in 1969. The Bank is executing agency for a current UNDP Transport Survey, which might lead to further lending in the transport sector. The Bank also chairs the Consultative Group for Tunisia. PART II - DESCRIPTION OF THE PROPOSED IDAN 9. Borrower: Societe Nationale d'Exploitation et de Distribution des Eaux Guarantor: Republic of Tunisia Amount: The equivalent of $15 million in various currencies Purpose: Expansion and improvement of the main water supply and distribution systems in Tunisia, and improve- ment of the Borroweris organization and operations Amortization: In 25 years including 5-1/2 years period of grace, through semi- annual installments beginning March 1, 1974, and ending September 1, 1993 Interest rate: Six and one half (6-1/2%) per cent per annum Commitment charge: 3/4 of 1 percent per annum Estimated return on the proiect: 11 percent (see paragraph 13).  PART III - THE PROJECT 10. A report entitled "Appraisal of National Water Supply Project" (TO-666a) on the proposed project is attached. 11. Water is very scarce throughout Tunisia. Rainfall is meager in most areas and the situation is made worse by the salin- ization of surface waters as they flow towards the sea. The salt- content of most groundwater resources makes them unfit for human use and difficult to use even for irrigation. Most freshwater sources are found more than one hundred kilometers inlnid, in the mountains, requiring expensive dams and long conduits tc 3erve the population centers, which are mostly along the coast. SONEDE, succeeding the Regie des Eaux, supplies water to 246 centers with a total population of 2.2 million (48% of the total population of Tunisia). The remaining 2.4 million live in scattered small villages and farms, where their needs are met by shallow wells, irrigation systems or public taps in the nearest town. The three largest systems which supply 119 centers with a total population of 1.4 million, are Tunis (population 850,000), Sahel (population 335,000) and Sfax (pop- ulation 195,000). 12. In 1966 the R6gie des Eaux, with the assistance of SOGETHA (Soci6t6 Gdnerale d'Etudes et des Travaux Hydrauliques et Agricoles) began studies designed to produce a comprehensive plan for improve- ment of systems throughout the country. This plan was discussed with the Bank, revised, and developed into a program for 1968-73. It has three elements: A. High priority works where preliminary studies have been made and which generally have long construction periods. These are included in the Bank-Swedish project. B. A group of works called the "Second Project", which includes works not yet ready for appraisal and some smaller projects. These works are scheduled to be started in 1971, and SONEDE will seek a foreign exchange loan in 1970 to finance them. C. Minor works already in progress, renewals, and major repairs covering the 1968-73 period, which are being financed by SONEDE.  13. The 1968-1973 program would meet the most important needs of the sector during this period. Considering only the financial benefits, the internal rate of return on the investments included in this program would be about 11%. The next major expansion phase of SONEDE is expected to be needed in the late 1970's in order to be completed around 1982. 14. As agreed with the Bank, the Tunisian Government set up on August 1, 1968 an independent public agency, the Societ6 Nationale d'Exploitation et de Distribution des Eaux (SONEDE). SONEDE has a large degree of financial and administrative autonomy, and it has agreed to follow sound public utility policies. Its organization and accounting system have been agreed with the Bank and the Swedish Government. Substantial management and technical assistance, in the form of consultants, will be available to SONEDE during the con- struction period. 15. The project is expected to be completed within 5 years. It consists of two parts: A. Engineering and construction of projects for the expansion and improvement of sources of supply and distribution systems of: (a) the Tunis region (b) the Sahel region (c) the cities of Nabeul and Hammamet B. Improvement of the Borrower's organization and operations. 16. The total cost of the project is estimated at $33 million including $17 million foreign exchange. It would be financed to the extent of $15 million by the Bank loan, of $5 million by the Swedish credit, and of $13 million equivalent by the Government of Tunisia and SONEDE's own cash generation. In order to provide the necessary revenues, SONEDE has agreed to immediately increase the water rate from an average of 32 millimes/m3 to an average of 60 millimes/m3 (US i 43/1000 gal.) and maintain this level until 1971. Rates would then be set at whatever level is necessary to produce a rate of return on net fixed assets of at least 5% until 1973 and 6% there- after. 17. Contracts for construction and procurement of equipment will be let in accordance with the Bank's procedures for inter- national competitive bidding. Tunisian firms bidding in competition with foreign firms would be entitled to a maximum of 15% price protection..  - 6 - PART IV - LEGAL INSTRUITIENTS AND AUTHORITY 18. The draft Loan Agreement between the Bank and the Soci6te' Nationale d'Exploitation et de Distribution des Eaux, the draft Guarantee Agreement between the Republic of Tunisia and the Bank, the draft Administration Letter between the Kingdom of Sweden and the Bank and the Report of the Committee, provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank, are being distributed to the Executive Directors separately. 19. These draft Agreements contain covenants normally included in agreements for water supply projects and provisions reflecting the fact that there is a co-lender with the Bank. The Loan Agreement and Administration Letter provide, as in previous joint financing operations with the Kingdom of Sweden, for concurrent but separate disbursements by the Bank and the Kingdom of Sweden in the proportion Bank 3: Sweden 1. 20. Particular attention is drawn to the provisions of the Guarantee Agreement requiring the Guarantor: (i) to ensure that the Borrower receives full payment, within 120 days of billing, of all water charges incurred by all public authorities or agencies whether national, regional or municipal (Section 3.06); (ii) to take all necessary steps to acquire or enable the Borrower to acquire all land required by the Borrower for the prompt construction of the facilities included in the Project (Section 3.08); (iii) to ensure that import licenses are issued for items to be financed in part or in whole from the proceeds of the Loan within thirty days of application by the Borrower or suppliers (Section 3.09); and (iv) to complete the con- struction of facilities related to the Project and to transfer owner- ship and responsibility for them to the Borrower (Section 3.10). The Borrower would undertake not to incur, without the consent of the Bank, debt with a maturity of a year or more, in excess of funds required for the Project, unless its net revenues for the 12 months prior to the incurrence of such debt cover at least 1.5 times its maximum debt service for any succeeding fiscal year (Section 5.08 of the Loan Agreement). Finally, the Borrower and the Guarantor would agree to take the appropriate action required to ensure that the Borrower's revenues are maintained at a level sufficient to cover all the Borrower's operating and administrative expenses, including pro- visions for maintenance and depreciation, and to produce a reasonable rate of return on the Borrower's net fixed assets in operation (Section 5.09 of the Loan Agreement and Section 3.05 of the Guarantee Agreement).  -7 - PART V - THE ECONOMY 21. An economic report entitled "The Current Economic Position and Prospects of Tunisia" (14A-3a) dated lMarch 19, 1968 was distri- buted to the Executive Directors on April 1, 1968. In recent dis- cussions with the Tunisian Government, broad agreement has been reached on the following economic policies: (1) curbing the growth of current expenditures; (2) restricting the use of external medium- term credit; (3) emphasizing productive projects in the investment program; (4) improving the profitability of the public enterprises; (5) encouraging private investment; (6) promoting exports and export- oriented investments. The Government has expressed its intention to act along these lines and in general has already taken appropriate steps. 22. In view of the fact that the ratio of debt service charges to 1967 export earnings was 23% and that this ratio is likely to remain o-.f the order of 20% over the coming few years, and in the light of Tunisia's undertakings with respect to the above and its past record of economic growth, Tunisia is considered as eligible for a blend of IDA credits and Bank loans, subject to replenishment of IDA's resources. This would also be in conformity with the con- sensus reached in the May meeting of the Consultative Group for Tunisia. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 23. I am satisfied that the proposed Bank loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 2h. I recommend that the Executive Directors of the Bank adopt the following resolution: RESOLUTION NO. Approval of Loan to the Societ6 Nationale d'Exploitation et de Distribution des Eaux in an amount equivalent to $15 000,000  -8- RESOLVED: THAT the Bank shall grant a loan to the Socift6 Nationale d'Exploitation et de Distribution des Eaux, to be guaranteed by the Republic of Tunisia, in an amount in various currencies equivalent to fifteen million United States dollars (Us$ 15,000,000), to mature on or prior to September 1, 1993, to bear interest at the rate of six and one-half percent (6-1/2%) per annum, and to be on such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Tunisia Water Supply Project) between the Bank and the Societe Nationale dtExploitation et de Distribution des Eaux, s?ld the form of Guarantee Agreement (Tunisia Water Supply Project) between the Republic of Tunisia and the Bank, which have been presented to this meeting. Robert S. McNamara President by S.R. Cope Attachment Washington, D.C. November 20, 1968