Tunisia - Railway Project

CIRCULATING COPY RESTRICTED TO BE RETURNED TO REPORTS DESK p Fl"LE C0Pr This report was prepared for use within the Bank and its afflliated 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 The report may not be published nor may it be quoted as representing their views.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 RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SOCIETE NATIONALE DES CHEMINS DE FER TUNISIENS WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA AND A PROPOSED CREDIT TO THE REPUBLIC OF TUNISIA FOR A RAILWAY PROJECT April 17, 1969  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SOCIETE NATIONALE DES CHERMINS DE FER TUNISIENS WITH THE GUARANTEE OF THE GOVERNMENT OF TUNISIA AND A PROPOSED CREDIT TO THE GOVEXNMENT OF TUNISIA, FOR A RAILWAY PROJECT 1. I submit the following report and recommendation on a proposed loan and a proposed credit both in an amount in various currencies equivalent to $8.5 million, making a total of $17 million. The loan would be made to Societe Nationale des Chemins de Fer Tunisiens (SNCFT) with the Guarantee of the Republic of Tunisia; the credit would be made to the Republic of Tunisia and its proceeds would be relent to SNCFT for the rehabilitation and modernization of the Tunisian railwzays. PART I - HISTORICAL 2. The Bank's operations in the transport sector started with a port loan made in 1964 in the amount of US $7.0 million, followed four years later by a second port loan armunting to US $8.5 million. In August 1967, the Government of Tunisia and SNCFT approached the Bank group for assistance in financing a railway rehabilitation and moderni- zation project which was then in preparation as part of the Government's Second Four-Year Plan, 1969-1972. The project conforms with the findings and recommendations of the Tunisian Transport Survey financed by UNDP and carried out by Italconsult in 1967/1968. The Bank was the Executing Agency. Appraisal of the project was completed in October 1968. 3. Negotiations for the IDA credit and the Bank loan took place in Washington on March 17-28, 1969. The Government of Tunisia was represented by Messrs. Moncef Belhadj Amor, Director of the Budget; Abdelhakim Slama, President-Director General of SNCFT; Tahar Ayadi, Financial Manager of SNCFT; and Taoufik Ladjimi of the Public Works Ministry. Bank, IDA and IFC Operations 4. The proposed credit, the fourth for Tunisia, would increase IDA's total lending to Tunisia to $32.4 million; the proposed loan, the seventh for Tunisia, would increase the Bank's total lending to Tunisia to $66 million. Following is a summary statement of Bank loans and IDA credits to Tunisia as of March 31, 1969.  -2_ Loan or US $ millions Credit Number Year Borrower Purpose Bank IDA Undisbursed 29 1962 Republic of Tunisia Education - 4.9 - 380 1964 Republic of Tunisia Port Develop- 7.0 - - ment 449 1966 Societ6 Nationale Development 5.0 - .8 d'Investissement Finance Co. 94 1966 Republic of Tunisia Education - 13.0 8.3 484 1967 Republic of Tunisia Cooperative 12.0 - 9.7 Farm 99 1967 Republic of Tunisia Cooperative - 6.o 4.8 Farm 512 1967 Soci6t6 Nationale Development 10.0 - 8.6 d'Investissement Finance Co. 573* 1968 Offices des Ports Transportation 8.5 - 8.5 Nationaux Tunisiens 581* 1969 Soci6te Nationale Water Supply 15.0 - 15.0 d'Exploitation et de Distribution des Eaux Total (less cancellations) 57.5 23.9 of which has been repaid to Bank and others .6 Total now outstanding 56.9 Amount sold 1.2*, of which has been repaid .3 .9 Total now held by Bank and IDA 56.0 23.9 55.7 Total undisbursed 42.6 13.1 55.7 *, Not yet effective. Amount sold includes $300,000 of Loan No. 581 which the Bank has entered into an agreement to sell. 5. The slow disbursement of the cooperative farm loan and credit reflects the organizational difficulties encountered in the execution of the project. The Bank and IDA are keeping close watch on the progress of the project and are working with the Government of Tunisia to accelerate the pace of execution.  - 3 - 6. In May 1966, IFC made an investment of D300,000 (about $575,ooo) in Societ6 Nationale d9Investissement. In addition to this, IFC has invested $1.5 million and lent $2.0 million to NPK-Engrais, a phosphate fertilizer company. 7. An $800,000 highway engineering project and a $150,000 tech- nical assistance grant for a 'Plater Master Plan Study are expected to be submitted to the Executive Directors shortly. PART II - DESCRIPTION OF THE PROPOSED LOAN AND CREDIT Bank Loan Borrower: Societe Nationale des Chemins de Fer Tunisiens (SNCFT) Guarantor: Republic of Tunisia Amount: The equivalent in various currencies of US$8.5 million Purpose: To help finance railway rehabilitation and modernization Amortization: Term of 25 years including a four-year grace period with semi-annual payments beginning October 15, 1973 and ending October 15, 1994 Interest Rate: Six and one-half percent (6-1/2%) Commitment Charge: Three-fourths of 1 percent per annum (3/4 of 1%) Economic Rate of Return: Slightly over 12% IDA Credit Borrower: Republic of Tunisia Subborrower: Societ6 Nationale des Chemins de Fer Tunisiens (SNCFT) Amount: The equivalent in various currencies of US$8.5 million Purpose: Same as for Bank loan  semi-annual payments beginning October 15, 1979 and ending April 15, 2019 Service Charge: Three-fourths of 1 percent (3/4 of 1 percent) per annum on the principal amount of the Credit withdrawn and outstanding from time to time Relending Terms: Same as the terms of the Bank loan. PART III - THE PROJECT 8. A report entitled "Appraisal of a Railway Project" dated April 11, 1969 (PTR-6) on the proposed project is attached hereto. 9. The railway network consists of 478 Km. of standard gauge and 1,500 Km. of meter gauge track. Railroad traffic in 1966 was 1.3 billion ton/Km. *and 0.5 billion pass./Km. while road traffic was 0.9 billion ton/Km. and 1.0 billion pass./Km. Rail traffic has been growing steadily over the last decade and is expected to continue to increase at 8 percent per annum on the average. Freight traffic is largely in bulk (phosphate and iron ore) and suited for rail transport. 10. The proposed project consists of track renewal for the northern- center network and branch lines in the mining district, the replacement of diesel locomotives, railcars, trailers and freight cars, track main- tenance equipment, workshop equipment and consulting services. These items are urgently needed to meet present traffic levels efficiently. The consulting studies are expected to lead to the identification of a second railway project. 11. TThile the project is being executed, consultants will assist SNCFT (a) to set up a traffic cost accounting system and to work out a schedule of tariffs related to the cost of providing services (b) to review the conditions of rolling stock and maintenance and repair facilities (c) to improve its overall efficiency and (d) to study the modernization of main stations. It is proposed that related expenses incurred since April 1, 1969, with a maximum of $100,000 be reimbursed from the Credit Account. 12. The cost of the project includes $25.8 million for purchase of equipment and track works, $0.7 million for consulting services and $1.3 million for contingencies. The foreign component of this cost is $15.6 million to which has been added interest on the Bank loan during construction of $1.4 million making a total foreign exchange requirement of $17 million. cNCFT will finance the local currency  cost of the project out of its own cash generation except for an amount equivalent to the customs duties on the items included in the projectf. This amount will be invested in the project through a government contri- bution to SNCFT's capital. 13. SNCFT would be required to reach a financial rate of return of at least 4 percent in 1971 and 7 percent in 1973 and thereafter on net fixed assets in use. Furthermore, the existing imbalance between the rates of return on the northern-center and southern networks is expected to decrease with the progressive implementation of the proposed cost- based tariffs. The economic rate of return of the project is about 12 percent. 14. Procurement for the project will be made in accordance with Bank and IDA international bidding procedure except for about $300,000 of special fastenings for concrete sleepers which would be bought directly from the patentholder for reasons of standardization of the track mainte- nance. As in previous loans domestic suppliers would be accorded a preference of 15 percent or the import duty, whichever is lower. However, this provision is likely to be inoperative since there is little dormestir production of items included in the project. 15. The proposed loan and credit would be signed only after (i) the agreed new statutes of SNCFT have been submitted to the Tunisian National Assembly, and (ii) agreed financial measures have been completed. Fulfillment of these conditions of signing is expected shortly. PART IV - LEGAL INSTRUENTS AND AUTHORITY 16. The draft Loan Agreement between the Bank and Societe Nationale des Chemins de Fer Tunisiens, the draft Guarantee Agreement between the Republic of Tunisia and the Bank, the draft Development Credit Agreement between the Republic of Tunisia and the Association, the Report of the Committee provided for in Article III, Section L (iii) of the Bank's Articles of Agreement, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Asso- ciation, the text of a Resolution approving the proposed Loan and the text of a Resolution approving the proposed Development Credit are being distributed to the Executive Directors separately. 17. The draft Loan, Guarantee and Development Credit Agreements conform substantially to the pattern of agreements for railway projects. I would call your attention to the following features: (i) Both the Loan and Development Credit Agreements have identical provisions with respect to the allocation of the proceeds of the total financing to be provided by the Bank and the Association for the Project (Schedule 1 of both Agreements);  - 6 - (ii) Except for that portion of the Loan which will finance a part of the interest and other charges on the Loan, the proceeds of the Loan uill not be disbursed until the amount of the Development Credit has been fully withdrawfn or conmmitted (Section 2.03 of the Loan Agree- ment and above-m,(.nticned Schedule 1). IL8. The Loan, Guarantee and Credit Agreements will be subject to ratification by Tunisia's Nat4onal Assembly. PA'PT V - THE ECONOJVY 19. The last economic report, "Curre~nt Economic Position and Prospects ot Tunisia" (VII.-3a), dated Mlarch 19, 1968, was circulated to the Executive Directcrs on April ], 1963. A "Memorandum on Current Economic Developments" (EN@-8) is being distributed separately. No change in the Bank's earlier conclusion as to Tunisials creditworthiness is suggested at this time. In view of the continuing high ratio of debt service charges to current foreign exchange earnings, amounting to about 25 percent in 1968, and in the light of Tunisia's undertakings to the Bank on economic policy and its overall record of groiwth, Tunisia is considered as remaining eligible for a blend of IDA credits and Bank loans. This is in conformity with the consensus reached at the May 1968 meeting of the Consultative Group for Tunisia. PART VI - COMPLIAJC?E WITH THE ARTICLES OF AGREEiMENT 20O. I am satisfied that the proposed loan and credit would comply with the Articles of the Bank and the Association respectively. Robert S. NIcNamara President