public disclosure authorized tunisia l - report no. review ......1.6 the vith development plan...

Report No. 4137-TUN lnl}¢ Y

Tunisia L -Review of the VIth Development Plan (1982-86)(In Two Volumes) Volume 11: The Main Economic and Social Sectors

June 29, 1983

Country Programs Department IIEurope, Middle East and North Africa Region

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

SDR 1.00 = Dinars (TD) .6002 (as ol DecemLber 1981)

Otficial Exchange Rate : Dinar (ID) Per US Dollar

Period End of Period Period Average

1971 0.4607 U.51751972 0.4840 0.477Z1973 0.4451 U.42001974 0.4065 0.43651975 0.4253 0.40231976 0.4309 0.42881977 0.4121 0.42901978 0.4034 0.41621979 0.3959 0.40651980 0.4187 0.40501981 0.5157 0.493b

Source: IMF, International Financial Statistics, July 1982

FISCAL YEAR

January 1 to December 31

FOR OFfICAL USE ONLY

TUNISIA: REVIEW OF THE VITH DEVELOPIENT PLAN (1982-86)

Volumn II: The Main Economic and Social Sectors

Table of Contents

Page No.

CHAPTER I: THE AGRICULTURAL SECTOR 1

OBJECTIVES AND INVESTMENTS OF THE VITH DEVELOPMENI' PLAN 1

NECESSARY CHANGES IN POLICIES AM) INSTITUTIONS 5General Policy Issues 5Technical Issues 9Sectoral Policy Issues 10

CHAPTER II: THE ENERGY SECTOR 13

ENERGY RESOURCES 13

FUTURE SUPPLY AND DEMAND BALANCE 15

AN OPTIMAL ENERGY DEVELOPMENT POLICY 20

PAST AND FUTURE INVESTMENTS 24Investments during the V Plan 24Investments during the VIth Plan 25

CHAPTER III; THE PHOSPHATE SECTOR 29

THE PHOSPHATE ROCK INDUSTRY 29

THE PHOSPHATE PROCESSING INDUSTRY 31Present Situation and Outlook 31Investments during the VIth Plan 34

CHAPTER IV: MANUFACTURING INDUSTRY 37

OBJECTIVES AND INVESTMENTS OF TH& VITH DEVELOPMENT' PLAN 37The Plan Scenario 37The Report Scenario 39

TUNISIA'S INDUSTRIAL POTENTIAL 42Labor Force 43Import Substitution Potential 45Export Possibilities 46

This document has a restricted distribution and may be used by recipients only in the perforrnnance otheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

REALIZING TUNISIA'S POTENTIAL 49Adjusting the System of Protection 50The Project Approval and Incentive System 51Price Control 54

Encouraging Foreign Investment 55Improving Marketing Capabilities 56Otber Problems and Institutional Support to Industry 57

SUBSECTORAL PLANS 59Food Processing 60Construction Materials 61Metals and Engineering 62Chemicals 64Textiles, Clothing, Leather and Shoes 65Miscellaneous Industries 67

CHAPTER V: TRANSPORT AND COMMUNICATIONS 68

MAIN PROBLEM AREAS 68

PAST AND FUTURE INVESTMENTS 71Investments During the Vtb Plan 71Investments During the VIth Plan 72

CHAPTER VI: THE HOUSING SECTOR 77

PAST TRENDS AND PRESENT SITUATION 77

FUTURE HOUSING DEMAND 80

INVESTMENTS DURING THE VITH DEVELOPMENT PLAN 81QuantLitative Aspects of the Proposed Program 81The Quality of Public Housing Investments 83

CHAPTER VII; WATER SUPPLY AND SEWERAGE 86

WATER SUPPLY 8b

Past Trends and Present Situation 86Investments During the VIth Plan 88

THE SEWERAGE SECTOR 90Past Trends and Present Situation 91Investments During the VIth Plan 92

CHAPTER VIII: THE EDUCATION SECTOR 94

PAST TRENDS AND PRESENT SITUATION 94

OBJECTIVES AND INVESTMENTS OF THE VITH DEVELOPMENT PLAN 95

THE EDUCATIONAL REFORM 1u0

CR.APT'1'.R IX: THE HEALTH SECTOR 103

DEMOGRAPHIC PROSPECTS AND POLICIES 103

PAST AND FUTURE OBJECTIVES AND INVESTMENTS 105Achievements of the Vth Plan 105

The Objectives of the VIth Plan .105

The Investment Program Proposed by the VIth Plan 106

The Investment Program Proposed by this Report 108

The first volume of this report (Report No. 4137-TUN) was distributedto the Executive Directors on March 16, 1983. It provides an analysis andassessment of macro-economic trends and prospects as of early 1982, proposes anumber of policy changes, and includes a summary discussion of the investmentprogram as proposed in the various sector chapters of this second volume.

Recent macro-economic trends in 1982 were summarized in the lastPresident's Report (Report No. P-3573-TUN on the SOFOMECA Project of May 10,1983, para. 10,). The Tunisian government intends to carry out a mid-termreview of performance under the VIth Plan in the near future, taking intoaccount the implications of those trends. The analysis and evaluation ofsectoral issues contained in this report remains fully relevant Eor the designof an effective long-term development strategy.

FOREWORD

This report was prepared by members of an economic mission whovisited Tunis:La over a period spreading from September to November 1981. Thismission was composed of:

Heinz Bachmann Chief ot MissionRene Vaurs Deputy Chief, General EconomistRosalinda Dacumos Macro-economic ProjectionsWerner Scbelzig EmploymentKevin Cleaver AgricultureIbrahim Elwan EnergyJoelle Chassard-Manibog (Consultant) EnergyJohan Van Beuzekom WaterAnthony Edwards (Consultant) Manufacturing IndustriesWill:iam Sheldrick Phosphate and DerivatesChristian Duvigneau Construction MaterialsGeorge Guda (Consultant) Cement IndustriesRoy Knighton TransportationIan Christie Urban DevelopmentLouis Vassiliou HealthAnn McNamara EducationNorman McEvers (Consultant) EducationGerard Tenaille SewerageCeline Ng Secretary

A first draft was discussed in March 1982 with the Department ofPlanning in thne Ministry of Planning and Finance. The final Plan figures andobjectives as approved by Parliament in mid-1'182 were incorporated in the textafter discussions of the final draft in January 1983.

ABBREVIATlONS

AFH Agence Fonciere d'Habitation (Land Development Agency)AFI Agence Fonci6re Industrielle (Industrial Land Agency.)API Agence de Promotion des Investissements (Industrial I:nvestment

Promotion Agency)

APIA Agence de Promotion des Investissements Agricoles (AgriculturalInvestment Promotion Agency)

BDET Banque pour le Developpement Econoiique de la Tunisie (DevelopmentBank)

BTU British Thermal UnitsCEPEX Centre de Promotion des Exportations (Export Promnotion Center)CHU Centre Hospitalier Universitaire (University Hospital)CNEA Centre National des Etudes Agricoles (National Center for Rural

Studies)CNEI Centre National des Etudes Industrielles (National Center for

Inclustrial Studies)CNEL Cai.sse National de l'Epargne Logement (National Hous:Lng ana Savings

Fund)CNSS CaJLsse National de Securite Sociale (National Social Security

Service)CPO Cie des Phosphates de Gafsa (Gafsa Phosphate Company,)CTN Cle Tunisienne de NavigationDGR Direction du Genie Rural (Rural Engineering Division.)ENI Ecole Nationale d'Instituteurs (Teacher Training Center)ETAP Ent:erprise Tunisienne d'Activlt4s Petroli&res (National Petroleum

Company)FOPRCLOS Forids Social pour la Promotion du Logement des Salar:L4s (Workers

Hotlsing Fund)GWH GigawatthoursICF Industries Chimiques du Fluor (National Fluor Company)ICG Inclustries Chimiques de Gafsa (Gafsa Chemical Company)TCM Industries Chimiques Maghrebiennes (Maghriblan Chemical Company)INS Institut National de la Statistique (National Statiscical Institute)Kgoe Kilogram Oil EquivalentLPG Liquified Petroleum GazMOPH Ministry of Public HealthMW MegawattNPK Nitrogen, Pbosphate (P205), Potassium (K20)ONAS Office National de l'Assainissement (National Sewerage Authority)ONPFP Off-ice National du Planning Familial et de la Populaition (National

Family Planning Service)OPAT Office des Ports A6riens de Tunisle (National Airport Authority)OPNT Off'ice des Ports Nationaux Tunisiens (National Ports Authority)OTTEEFP Ofi ice des Travailleurs Tunisiens a l'Etranger, de l'Emploi et de

la Formation Professionnelle (Office of Emigration, ]3mployment anaVocational Training)

p.a. per annumPDR Programme de Developpement Rural (Rural Development Program)ppm part per million

SAEPA Societe Arabe d'Engrais Phosphates et Azotes (Arab FertilizerCompany)

SIAPE Socidt4 Industrielle d'Acide Phosphorique et d'Engrais (PhosphoricAcid and Fertilizer Company)

SIDA Swedish International Development AidSMIG Salaire Minimum Inter-professionnel Garanti (Minimum Wage)SNCFT Societe Nationale des Chemins de Fer Tunisiens (National Railway

Company)SNIT Societ4 Nationale Immobilire de Tunisie (National Real Estate

Company)SOGITEX Societe Generale des Industries Textiles (National Textile Company)SONEDE Societe Nationale d'Exploitation et de Distribution des Eaux

(National Water Distribution Company)STEC Societe Tunisienne d'Engrais Chimiques (Tunisia Fertilizer Company)STEG Societ6 Tunisienne d'Electricite et du Gaz (National Power Company)STIP Societe Tunisienne des Industries du Pneumatique (Tunisia Tire

Company)STM Societe des Transports des Marchandises (National Trucking Company)TD Tunisian Dinartoe tons of oil equivalenttpa tons per annumtpd tons per dayTPS Tripple super phosphateUNA Union Nationale des Agriculteurs (National Farmers Association)

CHAPTER I: THE AGRICULTURAL SECTOR

1.1 This chapter summarizes an agricultural sector survey undertaken

jointly by the Tunisian Ministry of Agriculture and the World hank in October/November 1981 (Report No. 3876-TUN). For reasons explained in para. 1.9below, it projects a roughly 12 percent lower overall rural investment pro-gram than proposed in the VIth Plan, while fully endorsing the Governtent'ssectoral policy objectives.

OBJECTIVES AND INVESTMENTS OF THE VITH DEVELOPMENT PLAN.

1.2 Objectives assigned by the VIth Plan to the agricultural sector

include the pursuit of food self-sufficiency to reduce dependence on foodimports, increased rural incomes, greater food availability, employmentgeneration, foreign exchange earnings and sav:Lngs, and economic growth.Through achievement of these objectives, the Government hopes also to lessenregional and rural/urban imbalances in the country. These objEctives aretaken as a given in this analysis, although the trade-oft betwen them shouldbe recognized. For example, the pursuit of food self-sufficiency is nottotally consistent with export promotion, nor with the maximization ofagricultural incomes.

1.3 Past Performance of Tunisia's agricultural sector was good in the1970s compared to that of other middle-income countries, with the value ofproduction growing at 4.4 percent p.a. in reaL terms. Nevertheless Tunisia'soverall rapid GDP growth (7.5 percent p.a. in the 1970s) and population growttL(2.4 percent p.a.) has caused demand for food to increase faster than supply,causing a rapid expansion in food imports (7 to 8 percent p.a. growth ofimports in constant prices during the 1970s). This was particularly trueduring the second half of the decade, when growth of domestic food productionslowed down considerably.

1.4 Employment has stagnated in agriculture with the impact of employmentgenerating investment such as irrigation, livestock, and fruit trees offset byemployment-replacing investment in farm mecbanization. This nas caused arapid rural-urban migration (Chapter VI on housing for details,,. Sixty-fourpercent of the population lived in rural areas in 1960, and forty-elghtpercent in 1980. The combination of growth of agricultural production,increased rural non-farm employment, and rural-urban migration has permitted aslow reduction in the percentage of the rural population living below theabsolute poverty level from 18 percent in 1975 to about 14 percent in 198U.In urban areas, however, this improvement was much stronger with the number ofabsolute poor decreasing by almost half from 25 percent to 12 percent of totalpopulation. It shows why reducing inequalities between rural zind urban livingconditions is becoming a major objective of the economic and social strategy.

-2-

1.5 Under the Vth Plan (1977-1981), total investment in agricultureamounted to TD 584 million in current prices or 17 percent more thanplanned. 1/ This was due particularly to higher than expected privateinvestments, while public administration Just about reacbed its investmenttargets. Investment productivity can be considered satisfactory. Noting thathalf of investments in agriculture are for long gestation projects using aone-year lag like in the other sectors but taking the estimated outputincrease obtained by using least square methods over the 1971-81 period, anICOR of about 6.3 for agriculture is obtained compared to 3.4 for the entireeconomy.

1.6 The VIth Development Plan considers agriculture as one of the fivetop priority sectors, where investments are planned to increase by as nuch asabsorptive capacity constraints will permit. It foresees an increase in tneallocation of total investment to agriculture, from 12.9 percent under thelast Plan to 18.9 percent, or from TD913 to TDI,55U million in average 1982-86prices; this represents a 70 percent increase in real terms. The agriculturalinvestment by category emphasizes directly productive projects (Table 1.1).

Table 1.1; INVESTMENT ALLOCATION BY CATEGORY, 1977-86

Actual Final Plan Figures1977-81 1982-86

Irrigation 39.4 32.3Village water supply 4.0 6.5Integrated rural development - 6.4Livestock 12.1 13.5Forestry and Soil Conservation 7.5 6.5Fruit Trees 5.1 7.4Farm Machinery and Equipment 17.5 10.5Fishing 7.0 8.4Greenhouses 3.3 1.9Cereal Storage - 2.3Research, Extension, Studies, Other 4.1 4.3

TOTAL lO0.0 100.0

AMOUNT (TD Million 1982-86 prices) 913.1 /1 1,550.(

/I See footnote 1/ in Volume I, page 28.

Source; Ministry of Planning and Finance

1/ Adjusted for differences in planned and actual inflatLon rates, investmentexceeded its objective by 10 percent.

-3-

1.7 Quantitative analysis of the producti.vity of each of these investmentcategories is complicated by the complementarity between them in generatingbenefits; for example, extension and researcb help irrigation investments tobe productive. Furthermore investments are introduced through differentmecbanisms including regional projects, privat:e farmers, and directadministration investments. The productivity of each investment category isdifficult to distinguish from the efficiency of each investor. However, theanalysis, which is possible (based on ICOR's and supported by rates otreturn), suggiests that the past order of productivity of these investmentcategories has been:

(a) livestock investments;(b) research, extension, farm machinery, and modern input supply;(c) fruit trees;(d) irrigation and greenhouses;(e) fishiLng;(f) forestry and soil conservation.

1.8 The marginal shifts in the distribution of investment proposed inthe VItb Plan are for the most part justified by this analysis. More emphasison livestock and fruit trees is appropriate. Even more investment might bedesirable in research, extension, and input supply, which are tbe instrumentsthrough which several viable new technologies can be introduced. Lessemphasis is placed on irrigation investment since poor managemelnt and sub-optimal use oif available water has lessened the productivity of past invest-ments. The reduced emphasis on farm machinery reflects in part its negativeemployment impact, which offsets its positive impact on production. Continuedinvestment in forestry and soil conservation despite the poor results of thepast is justified by the serious soil erosion, deforestation, and desertifica-tion problems of Tunisia, and because a more workable strategy has beendeveloped recently (para. 1.35). Fishery investments seem to receive too muchemphasis if the causes for the relatively poor performance in the past are notsolved before., Problems include the limited fishery resources in the Mediter-ranean, inadequate facilities, management problems, and poor recovery rates oncredit provided to fishermen.

1.9 This Report fully agrees with the overall policy considerations thatled Government: to propose such a large investment program, i.e. particularlywith the high priority given to rural development in the VIth Plan; however,it has major doubts about the country's capacity to actually achieve a nearly70 percent increase in rural investments within a period of only five years.The joint Ministry of Agriculture/World Bank sector survey, on which thischapter is based (para. 1.1) proposed total investments of TDI l.36 billion,already considered a very ambitious program at the time that would taxTunisia's absorptive capacity to the outmost. In consequence, while fullyacknowledging the need and justification for an even larger program, thisReport does not expect more than TD 1.36 billion of investments to be realizedin the rural sector, without wanting to project in detail, however where theshortfall is likely to occur. Even this somewhat more limited objective of a50 percent increase in real terms can only be achieved, if a number of impor-tant policy measures are taken witbout delay. For the approximately two-

-4-

thirds of total agricultural investments planned to be carried out by thepublic sector, limits in the project preparation/implementation capacLty arelikely to represent the main bottleneck; everything that can be done to expandthat capacity will bave a major impact on the future investment voluae (para.1.25). To achieve the private sector investment target of slightly more thanone third of the total, it is imperative to stimulate the interest andwillingness of private farmers to invest; this will require considerablechanges in a number of economic policy areas, particularly an increase inproducer prices (para. 1.13); improvements in the marketing system (para.1.17). and the credit system (para. 1.23). While a lot has already beenachieved in this respect, much remains to be done.

1.10 In addition, agriculture-related investments like marketing, proc:ess-ing, input supply, and intrastructure (roads, bealtb facilities, schools,water supply) are included in other sectoral programs, but are very importantto support agricultural development. While it would be difficult to quantifythe optimum allocation of investments for rural infrastructure, it is recom-mended that they keep pace with projected agricultural and other ruralbasedproduction. Greater assistance and promotion of rural community organizal:ionswould permit these organizations to take over some responsibilities formanagement of the facilities once they are constructed. This Report recom-mends that consideration be given to baving the Ministry of Agriculture andLocal Governments provide such assistance to promote community involvement.

1.11 Based on the above investment program, the Plan projects a 4.8 per-cent average annual growtb of rural production (4.4 percent of value added) inreal terms. Considering the past long term growth, the absorptive capacityconstraints, and the fact that many important policy changes, necessary tospeed up rural growtb, cannot be implemented overnight (and will take time toproduce tangible results, once they bave been implemented), this Reportretained a slightly lower growth rate of 4 percent p.a., for total agricul-tural production in real terms. Even this lower target can only be achievedthrough major efforts to change the present policy and institutional frameworkas discussed below. Serious delays in implementing these changes would almostnecessarily slow down overall growth of production even further.

1.12 Employment projections were not made, but the historical record islikely to be duplicated in the future, with stagnation of employment inagriculture. Employment-creating investment such as that in irrigation,forestry, soil conservation, and livestock is likely to be offset by labor.-saving mecbanical innovations. A reduction in the rate of rural-urban magra-tion will have to be sought from investment in non-farm rural industry ratlherthan in agriculture. The external deficit on agricultural food products wouldincrease from less than US$200 million in 1981 to about US$350 million in1986. The VIth Plan forecasts a net deficit of only US$140 million, but thiswould imply a decrease in imports in volume which seems unlikely in view ofthe difficulties in implementing all the structural measures recowLended bythe VIth Plan and this Report.

- 5 -

NECESSARY CHANGES IN POLICIES AND INSTITUTION',

General Policv Issues

1.13 Prices and Subsidies. 1/ Adequate rural producer price policies areprobably the single most important policy instrument to stimulate agriculturalproduction, and, thus, to achieve the Plan's ambitious production and invest-ment targets. Most agricultural prices and farm input prices are fixed byGovernment from the farm-gate to retail levels. Over time, this system hasseriously dist:orted and considerably discouraged agricultural output despiteinput subsidies. Farm-gate prices for cereals, industrial crops, olives, andwine grapes have been fixed artificially low, particularly relative to thehigh domestic prices for manufactured goods and services estimated in 1979(with data whbch are now relatively obsolete) to be about 20 percent aboveworld market prices. Agricultural production of import substitutes and exportcrops are discouraged as the terms of trade for agricultural productsdeteriorated cluring the seventies. Farm input subsidies benefit only aminority of farmers and have generally amounted to only a small percentage offarm input costs. The exceptions are irrigated crops (most fruLt and vege-tables) wbich profit from heavily subsidized water charges, while outputprices are not: fixed but set by the market except for industriaL crops.

1.14 The results of the system are that income from most non-irrigatedfarming is artificially low. The average sized cereal farm earned about 20percent of the average Tunisian family's expenditure in 1980. In a poor cropyear the farme!r will earn much less. Eighty percent of Tunislan farmers havefarms smaller than the average size, and therefore earn even less. Thiscontributes to rural-urban migration and low agricultural invest:ment. Sub-sidies tend to be provided for the most modern inputs (pure-bred cows ratherthan cross-bred, feed concentrate ratner than other types of lirestock feed,irrigation water, fertilizer, pesticides, etc.) and are used only Dy a smallnumber of large farmers; they cause waste, particularly of irrik,atlon waterwhose price is far inferior to the cost of its supply and excessive use ofcertain inputs.

1.15 Some agricultural producer prices have been increased recently morerapidly that input costs and average price inflation, to move the terms oftrade more in favor of agriculture. More, however, is urgently needed toachieve the ambitious Plan objectives. One way of addressing the issue wouldbe to set agricultural producer prices at world levels, plus an amount equalto the average tariff level on all Tunisian imports. Tariffs would beestablished on food imports (cereal, meat, milk, sugar, vegetable oil) equalto the degree of domestic price overvaluation to protect Tunisian producersfrom artificially cheapened imports. If producer prices were free in such a

1/ A first review of the issues of price controls and subsidiLes for cerealand meat products was included in a recent World Bank Economic Report (No.3399-TUN, dated September 15th, 1981).

- 6 -

situation, they would quickly approximate the world price plus the taritf and

could be negotiated freely between marketing/processing enterprises and farms(as is done for sugar beet and tobacco). Exported products (olive oil, wine

grapes, exported fruits and vegetables) could receive an export subsidy equalto the average tariff on Tunisian imports to offset the effect of over-valuation. This is relatively simple for olives and wine grapes since sub-sidies can be provided through public marketing agencies. For other fruitsand vegetables, subsidies might be provided through marketing cooperatives.Prices for fruits and vegetables sold on the local market should continue tobe free. As tariff levels on manufactured goods fall over the years asproposed elsewhere in this report and Tunisia's level of manufacturing pricescomes closer to international prices, export subsidies and import tariffscould be reduced gradually.

1.16 Because producer prices would generally increase if the above recom-

mendations are implemented, input subsidies could be progressively reduced.The impact of these policy changes would be to increase most farm incomesexcept those dependent on highly subsidized inputs such as irrigated fruit andvegetables, poultry production, or industrial milk production dependent on theuse of subsidized concentrate. For the latter, incomes would decline towardthe levels represented by the value of production in world prices. The neteffect would be greater equity within agriculture, and between agriculture andother sectors. Those kinds of crops and livestock previously discrimLnatedagainst would tend to occupy more of the land, and receive greater invest-ment. However, it must be recognized that either retail food prices orGovernment subsidies to consumers would have to increase in order to financehigher agricultural producer prices.

1.17 Agricultural Marketing and Input Supply are not well organized and,thus, hamper rural development. A major source of agricultural growth in arapidly growing middle-income country like Tunisia is increased domesticdemand for high-value and processed foodstuff. Growth in farm income occurswben production is expanded to meet this changing demand. For this to happen,marketing enterprises must be efficient in communicating changes in demand tofarmers. Similarly, input supply enterprises must seek out new inputs anlinvestment goods which farmers can use to respond to changing demand andincreased production opportunities.

1.18 Public marketing and input supply enterprises exist for cereals,pulses, olives, wine, meat, fertilizer, seed, and farm machinery, and severalpublic development authorities ("Offices") participate in the collectLon ofmilk, fruit and vegetables. They tend to be slow in responding to marketsignals and in distributing farm inputs, which are usually not available inthe quantities required at the time required. These problems are partlycaused by lack of efficiency, and partly by Government price policy which doesnot permit these enterprises to generate sufficient financial surpluses, tofinance their own investments; tthus, they must solicit Government budgettransfers which are often too slow to meet their infrastructure and main-tenance needs on time. Partly, they are caused by conflicting objectives

- 7 -

given to public marketing and input supply enl:erprises, such as Governmentpolicies to subsidize consumption of basic foodstuff and of farm inputs, ofassuring supply of food to consumers while promoting exports and of collectingcrops from farmers and supplying farm input wlthout an adequate budget. Thishas reduced the efficiency of most public enterprises.

1.19 Private enterprises cannot legally compete with public enterprisesfor certain commodities eventhough a paralle market is tolerated on a smallscale. For most other commodities, private marketing and input supply enter-

prises are closely regulated, and official pr3.ce margins have been kept sonarrow as to prevent private distributors froml entering this business. Theexception to this rule are private enterprises exporting fruits which arehighly profitable and not submitted to signiftcant Government control.

1.20 In order to improve this situation, t.he Government proposes a wholeseries of actions to be coordinated and promoted by a new AgrLculture Promo-tion Institute (APIA) to be modelled after the Industrial Promotion Agency(API). Its objectives are to increase efficiency of Government-ownedmarketing and processing enterprises, to promote investments by the privatesector, and develop marketing cooperatives. The major instruments whichshould be usecl in achieving these objectives are; (a) managemeot reform forpublic enterprises including plan-contracts between the Government and eachenterprise specifying the rights and obligations of each, (b) new publicinvestments in marketing and processing, a .large number of which have alreadybeen identified, (c) stimulation of private marketing and processingenterprises through deregulation of many prices, liberizations of marketLngactivities, promotion of investment ideas, provision of technical assistanceand credit, (d) assistance Ln the creation of cooperatives, and (e) promotionof contracts between growers and processors where output is mariketed inexchange! for input supply, credit, etc. Other specific measures which couldbe undertaken for each commodity include deregulation of the urban fruit andvegetable markets, introduction of standardized product-grading andquality-control systems and promotion of private competition in olive oLl,wine, and cereal marketing, including creation of price margins adequate toencourage private investment in cereal storage facilitLes.

1.21 Government is proposing measures to i.mprove the supply of ruralinputs including farm mechanization. Management reform of public enterpriseswould be part of the program. The private secltor would be encouraged to playan increased role by improving profit margins, stimulating private investmentsin farm input supply, providing assistance in start-up and credit. Thenational plan for farm mechanization includes reforming the existing subsidyand tax structure for farm machinery, facilitaring access to credit for farmmachinery, establishing extension services related to farm machinery, andimproving the services of the public farm mach:Lnery enterprise.

1.22 This Report strongly supports programs aimed at improving publicmanagement and stimulating private investment, and recommends that as effec-tive national, private and cooperative facLlit:Les develop, the marketingfunctions be progressively divested from regional project authorities and

- 8 -

irrigation "Offices" so that they can devote themselves fully to the functions

for which they are best suited, in particular supply of irrigation water.

1.23 Credit. The present agricultural credit system has some major draw-backs; (a) only about 15 percent of farmers receive crediLt; (b) credit isoften inefficiently used due to lack of credit discipline and low interestrates (6 to 7 percent on medium and long-term loans); (c) loan recoveries arelow (20 to 90 percent depending on the default risk borne by the creditinstitutions); (d) the cost of credit provision is high; (e) there are severalseparate lending programs with different appraisal criterLa, lending terms,and lending procedures creating confusion and discrimination. Lending rateslower than inflation and the lack of effective measures to enforce loan pay-ments make the acquisition of a loan profitable even if the borrower nas noinvestment to be financed and encourage the use of credit for non-productivepurposes, including consumption.

1.24 The Government has created a new agricultural development bank tc'provide medium and long-term credit for large scale projects, while smallerprojects will continue to be financed by the long established institutions.However, the problems currently found in Tunisia's agricultural credit systemare primarily the result of inappropriate policies. Therefore, they need tobe solved through policy changes more than through institutional rearrange-ments. In particular the following policy changes appear important: (a)increasing loan recovery by denying further credit to borrowers in arrears,imposing penalty charges on loan accounts in arrears, realizing security forloan default, and providing incentives to banks and their personnel to collectloan arrears; (b) raising interest rates from the present level of 6 percentto at least 9 percent (but not higher than those applying to other sectors) soas to provide financial incentive to lend and to induce farmers to use creditonly for profitable investments; (c) merging funds from the various publiclysupported credit schemes creating one standard credit system, with the sameinterest rate, the same subproject appraisal criteria, and decentralizedapproval procedures; (d) serving greater numbers of farmers, especially smallfarmers and accelerating the processing of credit applications. This could beachieved through a loosening of the minimum farm size criteria for distribut-ing credit, by increasing the number of credit appraisal staff, increasingcredit outlets and reducing the paper work required to obtain credit; (e)attempting innovative rural financial servLces, including contract-growingarrangements in which farmers contract with a marketing or processing enter-prise to produce a commodity, and receive inputs, credit, and technicalassistance; (f) introducing equipment-leasing to compete with the sale ofequipment on credit; and (g) provision of credit by distributors to financefarm inputs.

1.25 Project Preparation. Since less than 30 percent of the projectsidentified in the IVth Plan are already prepared, and the average preparaLionperiod from identification to execution of an agricultural project is two orthree years, many of the new projects included in the Plan will not beginuntil the end of the Plan period, unless measures are taken to acceleratepreparation. The Government has therefore asked that the World Bank finance a

- 9 -

technical assistance project whose objectives are to: (a) rapidly prepare thecritical policy reforms and projects identified for implementatLon under theVIth and VIIth Plans, (b) strengthen Tunisian project identification andpreparation capabilities through the provision of specialized staff and train-ing, ancl (c) clevelop several Tunisian institutions so that they are able toundertake feasibility and subsector studies of a high quality (p?articularlyTunisia's public institution responsible for agricultural studies and projectpreparation: CNEA), and to manage project preparation (Planning Department andother technicatl departments of the Ministry of Agriculture). Good progress onthis project area precondition achieving the macroeconomic goals for thesector noted in para. 1.11.

Technical Issues

1.26 Tunisia's land tenure system constrains the developmenl: of agricul-ture. Most farms are extremely small (b8 percent have less that} 10 ha), andfragmented (70 percent bave 2 or more separated parcels) while Eiuch of thefarm land is owned by absentee landlords and cooperatives both of which oftenexploit the land poorly and inefficiently. There are large tracts ofcollectively owned land which are poorly managed and overgrazed so that top-soil is eroding as a result. Few farmers have land titles, and there is nolegal protection for tenant farmers which discourages them from investing inthe land. In recognition of these problems, w3ich inhibit the i.ntroduction ofnew technologies, the Government has started taking measures to impose maximumand minimum farm sizes and to consolidate land in irrigation perLmeters, toissue land titles and certificates of possession, and to distribute collectiveland to private farmers. So far, however, most action has been confined tothe public irrigation perimeters where land consolidation has begun.

1.27 Programs to continue improving the land tenure system and to managestate and cooperative farms, are scattered throughout the various investmentcategories for the VIth Plan. A greater percentage of agricultural resourcescould be devoted to these activities, and the G,overnment plans to prepare anaction program in this regard. It ought to include development of a landconsolidation program for non-irrigated areas, better applicaticn of landreform legislation in the irrigated perimeters,, and increased security oftenure for tenant farmers. Measures should also be considered to eitherincrease the efficiency of production cooperati.ves, or to progressivelydistribute the:ir land to private farmers through sales and rentals. Un-employed agricultural technicians might be the beneficiaries of such a program.

1.28 Research and Extension. Agricultural research and extension haveintroduced several important, profitable technologies into Tunisian agricul-ture. However, there has been a tendency toward the creation of numerousindividual sysitems for individual crops or regi.ons. Most agriculturalprojects provide these services, wbich then tend to disappear at the end ofthe project period. Few projects have contributed to building viaole nationalinstitutions, which could accumulate lessons learned from each project. Theend result has been a system which lacks central coordination and directLon.

- 10

In addition, agricultural researcb has tended to be theoretical ratber than

directed to providing solutions to practical farm problems, has had littlecontact with extension services, and because it is undertaken by a largenumber of autonomous institutions, has been duplicative. Extension agents areoften trained inadequately and with no institution exercLsing real autnority

over extension in Tunisia, the system has not functioned well. Finally, the

budget provided for research and extension has generally been inadequate.

1.29 In order to remedy the above problems, Government plans to undertake

a national program for research and extension wbich would develop approprLateresearch themes and extension messages, organize research stations and exten-

sion centers, provide for staffing and management systems, and provide anadequate investment and operating budget. The proposed program could borrowextension techniques from successful projects undertaken in other countries,particularly the training and visit system successfully established in India.Authority for research and extension is planned to be consolidated by aspecialized national institution having a research department and an extensiondepartment. Research would be organized around "support" stations where

applied research would be undertaken, and contact with extension agents main-

tained. Work centers would house extension agents who would be supported bymore specialized subject matter specialists operating out of the "support"'stations and providing the linkage between research and extension. Such a

program would be better oriented than past ones toward attacking the problemswhich have been identified in the research and extension system. This Reportconcurs witb these plans but, as noted earlier, would prefer that even more ofthe agricultural investment budget be allocated for this purpose.

Sectoral Policy Issues

1.30. Irrigation has contributed significantly to rapid growth of Tunisianagriculture. However, existing irrigation systems are often not fully ex-ploited. In many large-scale irrLgation perimeters water is under-utilized,

due, inter alia, to poor management, lack of knowledge and experience byfarmers, land ownership disputes, absenteeism, difficulty in finding labor,and frequent problems with irrigation equipment and water availability. Watercharges cover only 50 to 75 percent of operation and maintenance costs of the

irrigation perimeters, which must rely on Government subsidies. The irriga-tion offices are therefore, not submitted to financial discipline to induceefficiency. Because financial and staff resources are also used for otheractivities (distribution of credit and inputs, marketing, research, exten-sion), operation and maintenance do not receive adequate attention.

1.31 In view of the above, the Government is considering a number ofmeasures: improve management of the "Offices", introduce systematic main-tenance, reorient production towards higher value crops, impose a land tax toinduce full cultivation of irrigable areas, improve applied research andextension in irrigated areas, increase water charges so as to give the"Offices" greater financial independence, and have them provide supervisedcredit, input supply and marketing services as long as these services remazininadequately provided (para. 1.17).

- 11 -

1.32. Irrigation under the VIth Plan sees its sbare of total agriculturalinvestment somewhat reduced, but still accounts for well over one-third oftotal agricultural investment, including completion of irrigation projectsalready underway. The most important investments are in surface wells toexploit groundLwater, maintenance equipment, rehabilitation of existing irriga-tion perimeters, and rural water supply. Some of the proposed projects do notseem to be economically justified; more stringent economic criteria ought tobe used to exclude those and greater attention ought to be given to fulldevelopment of existing irrigation perimeters. In addition, a project toprepare a national program of well rehabilitation, creation and equipmentshould be implemented.

1.33 Constraints to livestock investments include (a) inadequate feedquality and quantity; (b) a frequent lack of water; (c) local breeds ot live-stock which, though hardy and able to survive under harsh conditions, are poormeat and milk producers; (d) poor livestock shelters, poor sanit:ary condi-tions, and inadequate livestock health facilities; and (e) a general lack ofmilk marketing outlets. To address these issues, the Administration has (a)provided subsidized feed concentrate which is largely imported and promotedforage production in irrigated and in high rainfall dry-farming areas; (b)financed water points (wells, reservoirs, etc.); (c) distributed credit forlivestock shelters; (d) provided animal health facilities and aadvice onsanitation through extension services; (e) established milk collectioncenters; and (f) based on the above improvemenits, imported higher-yieldinglivestock from Europe and North America. This strategy bas succeeded inincreasing milk and meat yields per head of caittle and has also stimulated anincrease in the number of cattle. The package has worked best in irrigatea orhigh rainfall areas where forage is available, on farms which are able toimplement relatively modern livestock management techniques, and in areaswhere Administration support services are concentrated. Little has been done,however, for t'he drier areas with their more traditional extensive cattleherding.

1.34 The VIth Plan objective is to continue the above strategy. Specificprojects have been identified for meat storage and development of livestockproduction and silage technologies in the high rainfall areas of NorthernTunisia. Livestock components are also included in many other projects tobe undertaken during the VIth Plan such as agricultural credit, research andextension (extension services need to be expandLed and oriented toward live-stock investment and maintenance), soil conservation, and regional develop-ment. Tbis strategy would allow continued good growth of livestock produc-tion. However, it is an expensive strategy, relying on specialized dairyunits, heavy imnports of feed concentrates and cattle, mechanized installa-tions, skilled personnel and substantial Government subsidies. In order toreduce costs, more emphasis sbould be given to provLsion of adequate priceincentives for livestock production;. phasing out of subsidies on manufacturedanimal feed (mostly based on imported inputs) as it discourages the use ofnatural pasture and cultivated forage; increaseed investment in cross-bredcows, wbich are more adapted to Tunisian conditions than pure-bred cows;

- 12 -

establishment of animal bealtb facilities wbich emphasize preventive healthcare and avoid heavy administrative expenses; more investment in mnarketing(milk collection, meat distribution) and input supply facilities; improvedmanagement of pasture-land to increase productive permanent pasture and reduceovergrazing; strengthening of the management system of national institutions,and better coordination to avoid duplicative services; contracts between

livestock producers and the milk and meat industry under which the producersreceive technical assistance and credit and sell specified amounts of milik andmeat to the industries; and greater attention to sheep and goat production.

1.35 Problems of soil erosion, deforestation and desertification arecausing a reduction of arable and grazing land, accelerating the sedimentationof reservoirs, and reducing forestry and livestock production. The majorcause is overgrazing and abusive cultivation tecbniques, such as cultivationof semi-arid areas and plowing of billsides from top to bottom rather than incontours, in areas susceptible to soil erosion and desertification. Destruc-tion of forests for use as fuel wood by the rural population is also aproblem. Past soil conservation and reforestation efforts were not partic-ularly successful since they relied too heavily on policing local populationsrather than on collaborating with them and offering them other means of live-lihood.

1.36 The VIth Plan includes a program to invest in soil conservation andreforestation throughout Tunisia. More specifically, an anti-desertification/range management program has been identified for Southern Tunisia and soilconservation and reforestation programs for Northern and Central Tunisia arepresently under preparation. These programs will focus on a new strategy inwbich incentives are provided to affected populations to modify their grazing,land use and tree-cutting practices. Livestock and agricultural productionwould be increased by using agricultural techniques which conserve the soil,reduce water run-off and reduce erosion. This can be done by introducingcropping patterns which assure permanent vegetative cover, by making betteruse of agricultural machinery (plowing in contours), by better range manage-ment practices, etc., and would be combined with soil conservation works,reforestation, introduction of permanent pasture, etc. This strategy involvesactions by the forestry service, extension service, credit bank, and institu-tions responsible for rural infrastructure.

13 -

CHAPTER II: THE ENERGY SECTOR

2.1 This Report proposes a one third higher overall investment programfor power and energy than presented in the Plan (Table 2.9), much more for oiland gas exploration as well as for electric power, somewhat less for oilproduction ancl refining. The underlying reasons are spelled ouit in the secondlast paragrapth (para. 2.34) of this chapter whicb summarizes the detaileddiscussions of the different subsectors presented in the followLng pages.

ENERGY RESOURCES

2.2 Tunisia's presently known indigenous energy resources consist mainlyof oil, associated and natural gas, and a small hydropower potential.Recently, lignite deposits were discovered, but their potential has not yetbeen determined. Its renewable energy resources are fairly limLted except forsolar energy wrhich will be exploited in the near future to meet some of theresidential arid commercial demand for low temperature water heal:ing.

2.3 Proven recoverable reserves of oil were estimated at about 64 milliontons in 1981, located mainly onshore in the southern region, and offsbore inthe Gulf of Gatbes (Ashtart, Didon and Isis) and the Gulf of Hatmaamet (Tazarka,Halk El Menzel., Birsa). Production of oil from the presently proven reserveswas about 5.4 million tons.

Table 2.1; PROVEN RESERVES OF OIL(million tons as of December 1981)

Remaining 1981Field Location Recoverable Production

Al ready producing:El Borma Onshore 31 3.3Ashtart Offshore 20 1.9Others Onshore 2.8 0.2

To be developed:Tazarka Offshore 2.UIsis Offshore 3.9Halk El Menzel Offshore 1.3Others Onshore/Offshore 3.1.

Total 64.1 5.4

Source: Ministry of National Economy.

2.4 Proven recoverable reserves of associated and natural gas are esti-mated at about 41 billion m3 (35.4 million tons of oil e uivaleent, toe).Reserves of associated gas amount to about 6.2 billion m (5.3 million toe)and are mostly located at the El Borma oil field near the Algerlan border.

- 14 -

Plans are currently underway to connect satellite fields 1/ recentlydiscovered near El borma to the pipeline transporting the associated gas tothe demand centers. This would allow the supply from El Borma to remain atits present level for another 2 to 3 years. The presently proven reserves ofnatural gas are located mainly in the Gulf of Gabes, at and around theundeveloped field of Miskar (Table 2.2). These are estimated to be at least35 billion m 3 (30.1 million toe).

Table 2.2: PROVEN RESERVES OF GAS(million toe as of December 1981)

Remaining 1981Fields Location Recoverable Production

El Borma Onshore (South) 3.9 u.4Chouech Essaida Onshore (South) 0.3 -Miskar Gulf of Gabes 30.1 -Sidi El Itayem Onshore (Sfax) 1.0 -Sidi Agareb Onshore (Sfax) 0.1 -

Total 35.4 0 .4

Source: Ministry of National Economy

2.5 Two discoveries, made recently, could increase Tunisia's provenreserves of hydrocarbons: (a) oil reserves have been found near Stax and arecurrently being evaluated; (b) gas reserves have been discovered onshore inthe vicinity of El Franig in the South. Initial estimates of the reserves atEl Franig are believed to be at least b million tons of gas and associatedcondensates. Additional test drilling during 1982, was disappointing andfurther exploration work is needed to determine the extend of the reserves.

2.6 During 1981-82, exploration was concentrated onshore as the El Franigand Sfax discoveries gave indications of possible substantial hydrocarbonreserves in a geological structure which was not considered as promisingbefore. Meanwhile, exploration in the Gulf of Gabes and arouna Miskar hasbeen modest and, while the geological investigation is adequate to delineateMiskar, the current plan to develop the offshore gas is basea on an inadequategeological knowledge of the remainder of the Gulf. The Gulf of Gabesrepresents one of the most promising areas for further offsnore exploration.Several small gas fields are already known to exist and there are indicationsthat a more intensified exploration program would probably discover new ones.As a matter of fact, important reserves are believed to exist at Jugurtha,northwest of Miskar. Exploration at and around this field began in 1981 andpromising preliminary results were declared during 1982, indicating a gasfield which might be developed in association with Miskar.

1/ In addition to an old one, which was linked to the pipeline five years ago.

- 15 -

2.7. Since the discovery of Miskar, Tunis:La and forelgn firms have donevery little exploration work in the Gulf with the exception of the recent workat Jugurtha. Government is reluctant to allocate any of its resources forfuture exploration, because all past explorat:Lon has been undertaken byforeign firms at their own expense. Foreign oil companies may also bereluctant to intensify their exploration for gas in the Gulf because: (a) thesmall probability given to discovering a relatively large reserve; (b) theperception that the laws presently governing production-sharing provideinadequate in,centives; and (c) the past experience that once oil and gas arediscovered, agreement with the Government on a compensetion package for theforeign partner is often delayed, although such delays are common with gasdevelopments in other countries also. In addxtion to these uncertaintiesoffshore, there is still uncertainty about the extent of the recentdiscoveries onishore (El Franig and Sfax), where the oil and gas finds shouldbe followed up by more exploratory work.

2.8 The G3overnment should develop a comprehensive strategy for thedevelopment and use of domestic oil and gas resources. This strategy shouldbe dictated, to a large extent, by the future balance of energy for thecountry and the projected foreign exchange needs, particularly after thecurrently foreseen decline in the net revenues from oil exports. The strategycould involve the following elements, among ot:ners.

(a) a review of available geological data and an inventory of past oiland gas finds;

(b) the formulation of a comprehensive plan for onshore and offshoreexploration;

(c) the design of an appropriate compensation package for existing andpotential partners;

(d) the completion of the minimum geological and engineering work neededto establish a more concrete estimate of the investmenc required torthe overall development of the Gulf c,f Gabes;

(e) update of the market study (domestic and international) for Tunisiangas; and

(f) the formulation of a plan for the optimal use of energy.

FUTURE SUPPLY AND DEMAND BALANCE

2.9 Overall Consumption of Energy. Per capita consumption of energyincreased at an average annual rate of about b.1 percent for the period1976-1981, from 337 Kgoe in 1976 to 497 Kgoe in 1981. The growth of energyconsumption during this period averaged about 10.8 percent a year, compared toan average annual rate of growtb for the GDP cif 6 percent; resulting in anenergy elasticity of 1.8. This relatively high rate is primarily due to thegrowth of the industrial sector which averaged. about 9.8 percent p.a.; andmore specifically, to the rapid growth of energy-intensive industries such asbuilding materials (24.6 percent p.a.), chemicals (31.9 percent p.a.), andhydrocarbon production (12.9 percent p.a.).

- lb -

2.10 Consumption of petroleum products increased at an even faster rate(11.4 percent p.a.), particulary for LPG and fuel oil (around 15 percenteach), mainly because of the substitution of LPG for kerosene in householdiuse, and of increased use of fuel oil for electricity generation and cementproduction. Relatively bigh prices of gasoline limited its consumption growthto under 4 percent p.a. Although no detailed data is available on thesectorial consumption of petroleum products, 20-25 percent each seems to beused by manufacturing industries, electric power and transport, about 16percent by households (for heating and cooking), and about 13 percent byagriculture and miscellaneous sectors.

2.11 Electricity consumption rose very rapidly during the Vth Plan: peakdemand increased at an annual rate of 13.4 percent (to 510 MW in 1981),electricity sales at 15.4 percent (to 2,310 GWh), and the number of consumersat 11.4 percent (to 762,000). In 1980 high-voltage consumers accounted for 23percent of STEG's 1/ total sales; medium-voltage consumers, 46 percent; andlow-voltage consumers the remaining 31 percent. Mainly because of the lowtariffs applied to the industrial sector (para. 2.24), sales to bigh-voltageconsumers have increased most rapidly with an average annual growth rate of 24percent between 1977-1981 as compared to 15 percent for medium- andlow-voltage consumers.

2.12 Based on the VIth Plan forecast for growth of the main economicsectors, the annual growth of total demand for energy is expected to averageabout 10.5 percent until 1986. Preliminary forecasts for the VIIth Planproject a slowdown of the growtb of energy demand to about 9 percent between1986 and 1991. This would imply a slight reduction in the energy elasticityto GDP from 1.8 to 1.7, indicating an improvement in the efficiency of energyconsumption. Concurrently, the intensity by which energy is consumed wouldincrease less rapidly at about 3.8 percent p.a. between 1982 and 198b, ascompared to 4.5 percent between 1976 and 1981.

Table 2.3: FORECAST DEMAND FOR PETROLEUM PRODUCTS, 1981-1991

1981 198b 1991Products '000 toe % Share '000 toe % Share 'U00 toe X Share

Light distillates /1 285 10.6 365 9.2 480 7.4Middle distillates72 1,280 47.6 1,880 47.2 2,810 43.5Heavy ends /3 1 125 41.8 1,735 43.b 3,175 49.1

Total 2,690 100.0 3,980 IUO.U 6,465 UO.U

/ Light distillates: LPG and gasoline./2 Middle distillates; kerosene, aviation fuel and gas oil/diesel./3 Heavy ends: fuel oil and lubricants.

Source: Mission projections

1/ Socidt6 Tunisienne d'Electricitd et du Gaz (the natLonal power company).

id

- 17 -

2.13 Demaind for petroleum products is expected to increase at an annualaverage rate of 8 percent during the VIth Plan, a significant clowdown incomparison to the Vth Plan. This reflects the increasing substitution of fueloil and gas oil in industry and power by domestically produced and Algeriannatural gas. Consumption of electricity is expected to grow at: an annualaverage rate of about 12.5 percent between 19B1 and 198b, to reach about4,160 GWb in 1986. Peak demand would increase at 14.4 percent a year, from510 MW in 1981 to 1,000 MW in 1986. Demand by the manufacturing sector,transportation and water pumping would account for most of the increase whilegrowth in consumption by households and commerce would slow down. Increasedsupply of natural gas is expected to become a7vailable during tbe VItn Plan(Table 2.6) and would amount to about 1,110 tl3ousand tons of toe by 1986.Demand for coal is expected to remain stable at 100 thousandtons, unless the decision is made to substitute coal for fuel oil or gas inpower generation and industry (para. 2.21).

2.14 Trends in Energy Supply. Tunisia has been totally dependent onhydrocarbons for meeting its demand for commercial energy. Oil and gascontribute about 97 percent to the country's energy supply; the rest iscovered by hydropower (0.3 percent) and imported coal and coke (2.3 percent)which are used for metallurgical purposes. Domestic production of petroleumincreased at an average annual rate of about 7.8 percent during the Vth Plan(from 3.7 million tons in 1976 to 5.4 million tons in 1981). T'unisia exportsvirtually all of its crude oil for sale at a premium price because of its

superior quality and imports a lower quality crude and petroleum products forits domestic use. This leaves a net external trade surplus of nearly US$b00million. In 1981, Tunisia exported 4.7 million tons and imported 2.2 milliontons of crude and petroleum products. About half of Tunisia's needs forpetroleum products in 1981 were supplied by the local refinery. The rest(48 percent) was imported because of the refinery's limited capacity (1.5million tons per year). Generation of electrLcity increased at an averageannual rate of about 15 percent per year since 1976 to reacb about 2,b8& GWhin 1981; 96.8 percent is produced tbermally. The maLn feature of the periodhas been the increasing reliance by STEG on low-effxciency combustion turbineswhicb now represent 36 percent of total installed capacity and contributed 27percent to total electricity supply in 1981. This was a means to meet thefast-growing demand.

2.15 Crude Oil Forecast. In 1981, petroleum production amounted to about5.4 million tons. According to the Plan forecast for 1982-1991, future oilproduction is expected to increase gradually until 1986 when it would reach apeak of about 6 million tons, and decline thereafter to about 4 million tonsby 1991 (Table 2.4). The forecast is based on the assumption that three majornew fields whLch are currently being appraised would be developed starting in1984; namely Gremda, Sabria, and El Franig.

- 18

Table 2.4: FORECAST OF PETROLEUM PRODUCTION(million tons)

1982 L986 1991

Plan Forecast

Already producing /I 5.3 4.2 2.7Being developed /2 - .3 .1Being appraised /3 _ 1.5 1.2

Total 5e3 b.0 4.0

Report ForecastAlready producing L 5.5 4.2 3.2Being developed /2 - .3 .2To be developed 13 1.2 2.2

Total 5.5 5.7 5.b

/1 Include El Borma, Ashtart, and other smaller fields./2 Include Tazarka and Laarich to be developed in 1983./3 Include Gremda which would be developed in 1984, and Salria and El Franig

which would start producing in 1985.


2.16 Subject to any contractual constraints and the need to avoid dis--couraging exploration interest, production of crude oil could, however, bemaintained at about its present level (5.5 million tons) until 1991 by:(a) avoiding, within technical constraints, the acceleration to peak outptltcurrently projected for 1986 and keeping the production of oil at a constanltlevel for an additional 3 or 4 years; (b) postponing the development of someof the new fields presently being appraised and bringing them on stream topick up the slack in the production of the fields whose output is expectecd tostart declining between 1986 and 1991; and (c) employing secondary recoverytechniques at the fields whose output is expected to decline; at present itis planned for only two fields, while there is potential in six other smal.lfields.

2.17 Tunisia would continue exporting the bulk of its output of crude oil;however, the Government plans to retain an increasing portion of the domesticproduction for use in the new refinery expected to come on stream in 1986b.,Since Tunisian crude is of prime quality, it would seem advisable to maintainthe current policy of exporting most of the domestically produced oil andimporting lower grade crude for refining. This strategy is reflected in thebalance of supply and demand for petroleum products adopted in this report:(Table 2.5). Based on this strategy, Tunisia would become a net oil importerby 1990, when imports of crude oil and petroleum products (6.9 million tons)would outstrip exports of liquid hydrocarbons (b.5 million tons). Imports ofpetroleum products are expected to decrease sharply after the new refinerycomes on stream in 1986.

- 19 -

Table 2.5: FORECAST SUPPLY AND DEMAND FOR CRUDE PETROLEUMAND PETROLEUM PRODUCTS

(Thousands of tons)

1982 1980 1991

DEMAND

Final Consumption I,910 3,98( 6,4b5Refinery's Own Consumption 60 150 150

Total Demtand 2j970 4,130 6b,15

SUPPLY

Crude Petroleum 1570 5,220 6,200Domestic production 5,450 5,650 5,500Exports (-) 4,380 5,100 4,95UImports 1,000 4,b7C 5,650

Petroleum Products 50 -1,135 445Imports 1,580 335 1,805Exports (-) 130 1,470 1,3b0

Changes in Stock /1 45 -30

Total Sup 1 _2 70 4,130 6,615

/1 A - sign indicates a build-up of stocks.

Source: Miss:ion projections

2.18 Natural Gas is expected to make a significant contribution to thesupply of energy during the VItb Plan. Although production from El Borma andits satellite fields is forecast to gradually decline from its current levelof 415,000 toe to about 100,000 toe in 198b, increased supplies would be madeavailabLe frora:

(a) the Transcontinental pipeline in the form of royalty gas; the actualstarting date for the flow of royalties I/ is expected to be in early1983;, and

(b) the clevelopment of indigenous gas fields. PrelimLnary estimatesindicate that production could start as early as 198b at a level ofabout: 400,000 toe, increase to 900,000 toe by 1987, ana remainunchanged at least until 1991.

Even excluding, potential production from MLskar and Jugurtha , I:otal supplyof

1/ Royalties can be taken as gas or casb at Tunisia's option.

- 20 -

Table 2.6: FORECAST SUPPLY OF GAS(Thousands of toe)

1982 1986 1991

Domestic ProductionAssociated gas (El Borma) 360 100Natural gas (El Franig) - 400 900

Total 360 500 9U0

Royalty Gas - 610 61U

Total Supply 360 1,110 1,510


gas could increase from 360 thousand toe in 1982 (or 11 percent of totalenergy supply) to 1,110 thousand toe in 1986 (21 percent of total energy) andover 1,500 thousand toe by 1991.

2.19 Electricity generation is projected to increase at an average annualrate of 12.4 percent to 4,800 GWb in 1986 and 9.2 percent to 7,450 GWh in1991. To meet this demand, STEG will bave to install nearly 500 MW of adldi-tional generating capacity by 1986, and anotber 700 MW by 1991. The VItb Planproposes the installation of 5x34 MW combustion turbines, and Zx150 MW steamunits. While the installation of five combustion turbines during 1983-84prima facie does not seem a very economic proposition, it is supported by thefollowing arguments: (i) if a tbird steam unit of 150 MW were planted at theexisting power station at Sousse situated 130 km away from the maain demandcenter, the tbree units installed at that plant would represent 45 percentof STEG's total installed capacity, which from the point of view of systemstability and security is not recommended; (ii) the cost of installation ofone additional unit at Sousse would be proportionately greater than installingfour units at a new plant situated closer to the demand center; (iii) to main-tain a balanced mix of generating units, the peaking units (60 MW combust:Lonturbines) at Ghannouch power station would have to be replaced by new units(after reaching 15 years of operation) starting in 1986; and (iv) construction

of a second steam power plant almost concurrently witb the construction of theplant at Sousse is not financially feasible. Given that STEG's reserve marginwould drop to 26% in 1986, a level usually considered too low for securityreasons, it migbt be necessary to bring foreward by one year each the ins:tal-lation of the two 150 MW units planned presently for Rades in 1987 and 19d8and, thus, not included in the VItb Plan.

AN OPTIMAL ENERGY DEVELOPMENT POLICY

2.20 As indicated in the forecast supply and demand for petroleum, Tunisiacould become a net oil importer as soon as 1990. To reduce the future quanti-ties of imported bydrocarbons that would be needed after 1990, the Plan hasset as a main objective for the development of domestic energy resources to

- 21 -

primarily meet the domestic demand. The potential development of Miskar fallsinto this global objective and would be essenitial to ensuring increased futuredomestic supply of energy, especially if El Firanig and the other recent dis-coveries prove to be insignificant. NegotiatLons between the lunisian Govern-ment and its potential partners on Miskar are currently in progress. Accord-ingly, an evaluation on the basis of the terms of such a partnership cannotyet be made. While the preparation of Miskar should continue without delay, afinal Government decision has to await the outcome of the negotiations withthe pot,ential partners. In the meantime, the project is considered a reserveproject for planning purposes. Preparatory work should take into accountthose elements of the long-term development strategy of the energy sector(para. 2.8) whiich may affect the configuratioa of the Miskar project.

2.21 The main elements of a long-term strategy for the development ofenergy resources should involve the evaluation of the potential gains to theeconomy of substituting, where possLble, cheaper imported fuels for domesticgas or petroleum products and either exporting them directly or using themas a feed stock for the manufacturing of products that in turn would beexported. In particular, the possibility of introducing coal as a source ofenergy for power generation or in industries such as cement or steel mightconstitute a viable alternative strategy for lunisia by minimizing the netforeign exchange outflow for energy.

2.22 Power generation represents one of the sectors where coal could

readily substitute for fuel oil or natural gas. At present, the Governmentplans to use the future supply of gas from royalties and from domestic produc-tion for generating electricity. The 2x150 MW steam power planir at Soussecurrently burning fuel oil would be partly converted to gas once it is imadeavailable from the transcontinental pipeline, and domestic outpuit of naturalgas would almost totally be absorbed by the 600-MW plant to be built atRades. These plans represent a rather expensive way to use a hi.gh qualitysource of energy such as natural gas which could instead be exported andsubstituted by coal. The steam power plant at Rades is planned to be equippedso as tc' operate on either fuel oil, natural gas, or coal; however, STEG'splan to use coal is still very preliminary and has not yet been accompanied bya comprehensive study related to its possible implementation, e.g. cost ofbuilding the necessary infrastructure to import coal, source of supply, etc.

2.23 The building material industry is another sector which offersopportunities for the substitution of solid fuels for hydrocarbons; it Lstypically energy-intensive and accounts for about 28 percent of totalindustrial fuel use and 15 percent of total electricity consumption. Importedcoal, or even local lignite if the recently discovered reserves prove to beeconomically exploitable, could potentially be used in that sector. Anassessment of the feasibility of such an alternative would therefore be highlydesirable (Chapter IV, Manufacturing. Industry :?ara. 4.51). The steel industryrepresents another area where substantial savings on fuel oil use could beachieved by switching to coal. In view of the fact that electricity inTunisia is essentially generated by gas or oil-fired plants, any, substitutionof coal for electricity would contribute to reducing the need for importedfuel oil or to releasing natural gas for export:. All this points to the

- 22 -

number of opportunities for interfuel substitution presently available toTunisia; the Government should pay close attention to the potential use ofalternate fuels in various sectors of the economy.

Table 2.7: ENERGY PRICES AND SUBSIDIES

Economic Domestic Domestic Price asProduct Price Price Z of Economic Price

Petroleum Products (US$/ton)/lLPG 390 /2 362 93Premium gasoline 365 796 218Regular gasoline 355 756 213Kerosene 315 172 55Gas oil/diesel 300 290 97Fuel oil 168 130 77

Weighted Average /3 252 254 101

Electricity Tariffs (millimes/kWh)High voltage 25.631 21.915 85Medium voltage 29.282 26.940 92Low voltage 35.282 49.861 141

Weighted Average /3 30.320 32.930 109

/1 Source: Petroleum products: average spot prices - Petroleum Economist,June 1982.

/2 Estimate./3 Weighted by the percentage share of each product in total 1981 consumption.

2.24 To achieve an optimal level of energy consumption and of energysubstitution towards more economic sources, appropriate pricing policies areessential. While considerable progress has been made in this respect, muchremains to be done. Starting in 1976 petroleum prices have been raisedregularly and substantially so that by mid-1982, the weighted average of allpetroleum products prices (fuel oil, LPG, gas oil, etc.) had virtually caughtup with prevailing world market prices. Similarly, the average electriciltytariffs (high, medium, low voltage) exceeded economic costs by a substantialmargin. Thus, in the overall, energy prices were no longer subsidized. Theseaverages, however, hide substantial differences within each group. In bothcases private consumers are charged well above world market prices whileindustry purchases its energy at highly subsidized prices. While gasoline issold at over twice the world market price, fuel oil can be purcbased at onlythree-quarters of that price; and while low voltage electricity is sold at

- 23 -

over 40 percent above it economic cost, high voltage is subsidized by about15 percent. Obviously, this price policy dampens private energy consumptionbut artificially stimulates energy use in industry; this not only runs counterto any energy conservatLon strategy but also l:o the Plan's employment creationstrategy, as it unduly stimulates the creation of energy and capital-intensiveindustries to the detriment of labor-intensive ones.

2.25 Industry accounts for about 45 percenit of all hydrocarbons consumedin Tunisia, and over 60 percent of the electrLcIty generated by STEG. Prelim-inary audits indicate that the potential for energy savings in industrialplants would range from 10 percent to 30 percent of present consumption. Upto now, Government has relied on pricing to induce conservation by raising theprices of energy (petroleum products, gas and electricity). However, thispolicy has had two main shortcomings: (a) as the prices of industrial prod-ucts (cement, paper, steel, etc.) were not allowed to increase in line withhigher energy costs the profits and cash flow of these companies decreased,eroding their ability for undertaking major investments to improve or updatetheir technology; and (b) since most of the evergy-intensive Industries arepublicly owned, there is little incentives to conserve or reduce energyconsumption. Energy price increases were absorbed tbrough lower profits oreven deficits which the Government seemed willing to accept. Although theVIth Plan calls for a reductLon in overall energy consumption, :t includes fewspecific provisions for improving the energy efficiency of the ;Lndustrialsector. The energy component of the World Bank's FY83 technicaL assistanceproject would partly address this issue through a detailed audii: of a numberof large energy-consuming industries to be undertaken with the view toproviding training of local staff in the methodology of engineering design andbidding documents for energy conservation.

2.26 Last but not least, improved energy planning is a precondition forthe elaboration of a comprehensive long-terni energy strategy. In energy taskforce was created recently in the Ministry of National Economy ior thispurpose. The ability to carry out its responsibilities is, however, limitedby the shortage of experienced staff and the limited information availableon the energy sector, particularly on the use of energy. These gaps arecurrently being addressed in a program aimed at strengtbening the energyplanning capabilities in Tunisia. It comprises three components:

(a) Energy Planning: Involves the training of local staff in planningtechniques, pricing, conservation and project selection;

(b) Renewable Energy: Covers the assessment of the potential uses ofrenewable energy, the selection of coimmercially available tech-nologies and evaluation of domestic capabilities for local manu-facturing of the required equipment. The studies dealing with solarwater beaters and wind electric conversion systems have already beencompleted; and

(c) Data Bank: Involves the collection o:. data pertaining to the con-sumption of energy by sector.

- 24 -

In addition, a number of interrelated pre-investment studies are needed toreview in more detail the main issues identified above in connection with theimplementation of the VIth Plan, i.e.: (a) outline the broad objectives forthe sector; (b) carry out the studies needed to identify investment prioritiesin each subsector; and (c) specify the steps required to ensure the movementtowards a comprehensive long-term plan for energy.

PAST AND FUTURE IWVESTMENTS

Investments during the Vth Plan

2.27 Total investments in the energy sector were planned to reach aboutTD 744 million (US$1,860 million) between 1977 and 1981. In the petroleumsector, the Plan included a program of secondary recovery at El Borma andAshtart, the development of the small Isis offshore oil field, and the expan-sion of the refinery at Bizerte. In the natural gas sector, the largestinvestment in the Plan was the development of Miskar together with an onshoredistribution system accounting for one-third of total planned energy invest-ments. Development of the power sector accounted for nearly as much. Actualimplementation turned out to be very different even though in the overall,total energy investments (in current prices) came close to the Plan total(Table 2.8).

Table 2.8: ENERGY INVESTMENTS DURING TIHE VTH PLAN (1977-1981)(TD million, current prices)

Actual% Snare of

Sector Planned Amount Total

Oil and gas exploration 103 307 44.4Oil production 115 160 23.1Refining 65 8 1.2Gas production and distribution 249 15 2.ZPower 212 201 29.1

TOTAL 744 691 lOU.U

Source: Ministry of Planning and Finance.

2.28 In the petroleum sector, actual investments reached more than twicethe Vth Plan estimates. Investments in exploration particularly tripledwhile investments in production were nearly 50 percent higher than planned.The latter mainly reflects the significant cost overruns experienced in thewater injection program for the El Borma and Ashtart fields, while the formershows the substantial increase in exploration activities following the twodiscoveries in 1979 and 1980. On the other hand, the expansion program ofthe state refinery was sharply reduced. More importantly, development of

- 25 -

the Miskar gas field was postponed when the Government decided to purchaseAlgerian gas from the transcontinental pipeline in addition to transitroyalties. Thus, only some TD 15 million were spent for the construction ofthe onshore gas distribution system to transpcrt the Algerian gas to the majordemand centers. I/

2.29 The only subsector where actual investments came anywhere close toPlan proposals was power. Investment expenditures for the development of thegeneratiLng capacity exceeded budget allocations by 8 percent in currentprices, mainly as a result of cost overruns incurred in the construction ofthe power plant at Sousse and of the necessity' of converting to fuel oil thegas-fired plant at Ghannoucb, a project which had not been included originallyin the Vth Plan. 2/ Investment outlays for transmission were lower thanplanned,, as they had been significantly overestimated in the Plan while out-lays for distribution suffered setbacks in the rural electrification program,due essentially to the fact that public funds were not disbursed on time.

Investments during the VIth Plan

2.30 Planned energy sector investments for 1982-1986 amount to TD 1,165million (US$2.3 billion) (Table 2.9). This accounts for nearly 15 percent oftotal projectetd investment for the five-year period or marginalLy less thanduring the Vthi Plan. The program foresees a real increase of less than eightpercent relative to actual investments for 1977-1981. The distribution ofinvestment between the various subsectors, however, is expected to changesignificantly. Oil and gas exploration outlays which accounted for 44 percentof the investment in the previous five-year plan are planned to decreasesharply while outlays for. oil production would increase significantly; sowould investments in the refining and the gas subsectors. For electric powera more modest (16 percent) increase is planned. As a result, thie programbecomes much more production-oriented with the share of exploration droppingfrom 44 to 16 percent and that of production jumping from 56 to 84 percent ofthe total.

2.31 Planned investments for hydrocarbons Lnclude:

(a) TD 185 million to cover the cost of the seismic and drilling program;

(b) TD 340 million to cover the cost of the programa for enhanced recoveryto be undertaken at El Borma and Ashtart, and the appraisal anddevelopment of new fields, of which Tazarka and El Franig would bethe most important. Among others, this will contribute to asignificant increase in the output of associated (Ashtart and ElBorma) and natural gas (El Franig);

1/ Construction of the Algerian-Itallan transcontinental gas pipeline isconsidered a transport project for planning purposes and recorded in thatsector's inivestment program.

2/ The necessity to convert the Ghannouch plant to fuel oil stems from anunforeseen drop in gas supply from El Borma.

- 26 -

Table 2.9: ENERGY INVESTMENTS BY SUBSECTOR DURING THE VITH PLAN(TD million in average 1982-86 prices) /1

Vth Plan VIth Plan ProjectionsActuals Plan Scenario Report Scenario

HydrocarbonsOil and gas exploration 480 185 48UOil production 250 340 310Gas production and distribution 12 90 90Refinery 24 185 140

Subtotal 766 80U 1,020

Electric Power 314 365 530

Grand Total 1,080 1,165 1,55U

Pro memoria: energy conservation (-) (-) (60)

/1 see footnote 1/ in Volume I, page 28.

Source: Ministry of Planning and Finance; mission estimates.

(c) TD 90 million to complete the first stage of the natural gas pipelineand to execute the second stage. Development of the Miskar gas fieldhas so far been considered an optional investment (TD 295 million)and is excluded from the Plan total;

(d) TD185 million to construct an additional refinery at Bizerte with anominal capacity of 5 million tons a year (TD 125 million) to beequipped with a cracking unit so that larger quantities of lighterdistillates could be derived in case surplus fuel oil is produced forexports. The rest of the refinery program consists of expanding thestorage capacity at the refineries.

2.32 According to the plan, investment for the development of the electricpower subsector is expected to increase as a percentage of total investmentsin the energy sector. The allocation within the subsector would not changesignificantly as compared to the Vth Plan; it is summarized below:

- 27 -

Amount Percentage(TD million) Share in Total

Generation 175.0 48.UTransmission 62.5 17.0Distribution 112.0 31.0

- Urban (40.0) 1:11.0)- Rural (41.5) (11.5)- Other /1 (30.5) (8.5)

Logistics /2 15.5 4.0

Total 365.0 WO.0

/1 Includes rehabilitation (TD 20.5 million) and connection of largeindustries to the national grid (TD 10 million).

/2 Includes purchase of office equipment and miscellaneous services.

The share of generation will continue to be hig3h because of the constructionof a new steam power plant at Rades (TD 157 miLlion); expansion of thenational transmission network includes connectLon of the new combustionturbines and the Rades plant to Tunis, as well as the construction of adispatch center.

2.33 On average, the energy sector is expected to contribute about 29percent of the cost of the investment program Erom internal cash generationand customers' contributions; about 19 percent would be covered by the foreignoil companies; the remaining 52 percent would be financed through foreignloans and contributions.

Amount 1' PercentageSources (TD million) Share in Total

Internal cash generation 355 24.0Customers' conitributions 72 4.5Government 187 12.)Loans 595 40.0Foreign direct investment /2 282 19.U

Total 1,491 100.0

/1 Includes debt service payments.7 Corresponds to the contributions made by foreign oil companies operating

in Tunisia.

- 28 -

Investments in the power and gas subsectors would be financed mainly by STEG'sinternal cash generation and by customers' contributions (74 percent). Localand foreign loans (57 percent of total funds required) and a substantial Gov-ernment contribution (37 percent) would be the major sources of finance forthe planned investment in refining. Financing of the investment program foroil production would rely heavily on external borrowings and foreign partic-ipations (60 percent) while ETAP 1/ would contribute most of the remainingthrough internal cash generation. The Government plans to pursue its policyof having the totality of the program for oil and gas exploration financed byforeign oil companies.

2.34 This Report recommends a substantially higher investment program thanproposed in the Plan (+33 percent) in order to accommodate the various recom-mendations previously made (Table 2.9). In particular, it suggests to:

(a) more than double the allocation for oil and gas exploration (para.2.8) in order to establish a more accurate estimate of hydrocarbonreserves. This is likely to happen spontaneously, on the initiativeof and fully financed by the foreign oil compan:Les;

(b) reduce investment outlays in oil production by some 10 percent, inline with the proposal to postpone development of some of the smallerfields (para. 2.16);

(c) decrease investments in oil refining by nearly 25 percent since theforecasted supply and demand for petroleum products indicates alikely deficit in fuel oil availability, reducLig thereby the needfor a cracking unit; and finally

(d) raise significantly the allocation of funds to the power subsector asit is likely that STEG will have to bring forward the installation oftwo 150 MW units, at Rades (para. 2.19).

In accordance with the Government investment program, this alternative plandoes not include any allocation of funds for the development of gas reservesin the Gulf of Gabes (Miskar, Jugurtha). If developed, these projects wouldbe implemented and financed outside the framework of the VIth Plan.

2.35 In addition to the above program, this Report proposes a program ofenergy conservation, as discussed in para. 2.25 above and mentioned infootnote /I to para. 4.8. The Plan documents include energy conservationinvestments implicitly among investments in the different manufacturingsubsectors. To be consLstent with that presentation the proposed energyconservation investments (estimated approximately at TD bO million) arementioned only pro memoria in this chapter on energy (Table 2.9), but areincluded as part of manufacturLng sector investments in the overallpresentation of this Report' s investment program in Volume I (Table 8).

1/ Entreprise Tunisienne d' Activit4s Petroli6res, a public enterprise.

- 29 -

CHAPTER III: THE PHOSPHATE SECTOR

3.1 In the VIth Plan presentation, phosphates appear in two differentsectors, phosphate mining as part of the mining sector, phosphal:e processingas part of the chemical sub-sector witbin the manufacturing sect:or. Becauseof the close links between phosphate mining and processing and the highimportance of these sectors for the Tunisian economy, they are assessed heretogether in a special chapter. For the overall analysis of the manufacturingsector, however, phosphate processing (i.e. fertilLzer production) is includeaalso in the chapter on manufacturing (Chapter IV, paras 4.5b-4.60).

3.2 This Report does not question the Plan proposal of a TD) 200 millioninvestment program for phosphate mining (para 3.9). It proposes, however, aslight reduction in the Plan's program for phosphate processing from TD 23bmillion to about TD 200 million (para. 3.18).

THE PHOSPHATE ROCK INDUSTRY

3.3 Phosphate rock has been mined in Tunisia since 1899. At present,there are eight operational mines, all but one underground, and all but onelocated in the Gafsa basin. There has been a considerable restructuring andconsolidation of the Tunisian phosphate mining industry in the last few years,and by now the Government-controlled Cie des Pnaosphates de Gafsa (CPG) is theonly operating company.

3.4 Tunisia is one of the highest cost producers of pbosphate rock in theworld even though it only produces a low grade rock of relatively low marketvalue. The major reason for this high cost is that mining is mainly under-ground, which is labor-intensive and expensive and also both mines and bene-ficiation plants work at low utilization rates. The mining industry facesa major dilemma that on the one hand it has been asked by Governiment tomaximize the employment of people while on the other it has to rminimizecosts. Although efforts have been made to increase the mechanization ofunderground mining, for example by using mechanized long walls, the resultsbave not been very successful. The World Bank had granted Tunisia a loan forthis purpose in 1974.

3.5 In order to ensure an adequate supply of rock to meet future pro-jected domestic and export sales a number of new developments are proposed.One set of developments looks mainly at meeting the short and medium-termrequirements and the other is directed more to the longer-term needs in thesecond half of the decade and through the 1990's. To some extent the shortand medium-term plans seem to lack form and to be more of an expedient tomake up for some of the production capacity that was not realized within theVth Plan. They foresee a variety of relatively small projects, some of whichwill result in high cost production and are not sufficiently well definedtechnically; such as the type of treatment required in the new beneficlationplants still to be resolved. However, engineering companies were asked to

- 30 -

study this problem, and this action should be extended to a more comprehensivestudy on the rationalization of the existing facilities and proposedmediumrterm developments.

3.6 The studies that have already been carried out Lndicate clearly that

in the longer-term, to reduce production costs it will be necessary to movetowards large mines based on opencast mining. Although such changes must bemade with full regard to social implications, the long-term prospects for theindustry could be jeopardized unless the efficiency of mining can be improvedand the cost of production reduced. The most promising long-term prospectwould appear to be the large deposit at Sra Ouertane in the Center-North ofthe country and it seems that this development offers good prospects forachieving the twin objectives of reduced cost and improved quality. Althoughopencast mining will not provide the same number of jobs per unit of invest-ment as underground mining, the development of this industry will provideanother focal point for both social and industrial development in the Center-North.

3.7 Prospects for phosphate rock exports are unfortunately not very good,as the worldwide move towards vertical integration of phosphate based fertil-izer production will naturally see an increasing phosphate trade at theexpense of rock trade. This is likely to affect Tunisia seriously for in itstraditional rock markets of South Europe importers of rock will increasinglyturn to higher grade rock to optimLze their existing phosphoric acid plantsrather than build new capacity. This trend is likely to increase as thepbosphate market begins to tighten again over the next few years. In the faceof increasing competition, Tunisia will only be able to maintain its presentlevel of sales if it can improve the quality and reduce the cost of produc-tion. Even so, the long-term prospects for the export of phosphate rock arenot too promising.

3.8 In consequence, combining export possibilities and the long-termdomestic demand to derive the actual long-term production needs of the coun-try, the original plan to increase capacity to about 10 million tons of marketgrade rock by the year 1990 and to 20 million tons by the year 2000 was overlyambitious. This would imply an average growth rate in rock consumption ofabout 7 percent per annum wbereas most analysts forecast an average growthrate of consumption of 3-4 percent or less over this period. If exports ofTunisian rock level off or decline below 1.8 million tons per annum whicbseems likely, and if one furtber phosphoric acid plant is added in the VlIthPlan which would be an optimistic assumption, then the total demand for phos-phate rock could increase to about 8 million tons by 199U. Tnis xs in linewith the VIth Plan target of 6.8 million tons by 1986. Between the years 1990and 2000 the growth rate for processed phosphate trade will have slowed downconsiderably, perhaps on average to 4 percent or less; on this basis, thedemand for phosphate rock in Tunisia is likely to increase to 12.0 milliontons per annum in 2000.

- 31 -

3.9 To achieve these reduced growth targets, the VIth Plan, realisticallyforesees investments of about TD200 million (excluding another TD40U millionfor miscellaneous mining projects, otber than phosphates). This is about 10percent less, in real terms than what was actually lnvested during the VthPlan. About half of the total is needed to maintain present capacities atexisting production sites; another TD 60 million of investments will serve toexpand producl:ion by CPG in the Gafsa area frcm the present less than 5 mil-lion tons to the projected 6.8 million tons by enlarging the Sehib M'dbhlamine and developing the Kef Eddour opencast mine; finally TD 40 million areearmarked to start implementation of the Sra Ouertane project scheduled toenter into production by 1987. The Djellabia project in the Gafsa region (TD70-80 million) is considered an optimal project only, not includled formally inthe Plan.

3.10 The economic comparison of new projects shows that there is no easyway to reduce production costs. Even with the proposals for large opencastmines, TunLsia will remain a relatively expensive producer due to the need forflotation treatment. However, some of the new deposits such as Sra Ouertaneseem comparable to the new deposits that will be exploited in South Florida inthe future both with regard to grade and mining characteristics. The miningcosts for these American deposits are likely to be on the order of about120-25 so that: the costs calculated by the Tunisian planners of between TD9-13 per ton seem reasonably competitive. Although production costs at SraQuertane are calculated to be higher than at Djellabia, this is partly due tothe much great:er initial capacity projected for Djellabia. ObvLously, one ofthe main problems facing the sector will be to decide which of the twoprojects should receive priority. To this avail a more crLticaL review ofboth the long--term export possibilities and long-term investmeni: requirementsof the Tunisian phosphate rock industry is an urgent priority. Among others,it ought to consider the possibility that the reserves of Jellabia could bemuch more limited than those of Sra Ouertane. Much will depend on thelong-term target; if the reduced target of 8 million tons by 1990 and 12million tons by 2000 remains accepted rather than the 10 and 20 millIon tonsoriginally suggested; it may be preferable to reduce the scope of the VIthPlan mining program.

THE PHOSPHATE PROCESSING INDUSTRY

Present Situation and Outlook

3.11 The phosphate fertilizer industry is well established 3.n Tunlsla andhas earned a well-deserved international reputation as one of the mostefficient in the world. Although in the early days of the industry manytechnical problems were encountered, these were eventually overcome and theindustry has cleveloped its own knowhow for the processing of lou qualityTunisian rock into high quality phosphoric acid and triple superphosphate.These are known internationally as the '8SIAPE1I processes and several plantshave now been built overseas under license using this knowhow.

- 32 -

3.12 The Tunisian phosphate fertilizer industry includes the followingseven para-public companies:

The Societe Tunisienne d'Engrais Chimigues (STEC), formed in 1967,specializes in the production of ground phosphate rock at Sfax, and nowproduces superphosphate at Tunis; the production capacity of the company iLs

65,000 tons of SSP and 10,000 tons of mixed fertilizers.

Granuphos Company, formed in 1973, owns the facilities for grind:Lngphosphate rock at Sfax; the production capacity is 8U,000 tons of granulal:edhyperphosphate and 20,000 tons of pulverized hyperphosphate.

SIAPE and NPK merged in early 1980. The former (Societe IndustrLelled'Acide Phosphorique et d'Engrais) who commenced production in 1952, was thepioneer in the phosphate industry and acted as a training ground for managersin the sector. The overall capacity of SIAPE/NPK is about 530,000 tpagranular T.SP.

The ICM (Industries Chimigues Maghrebiennes) complex startedproduction in 1972 at Gabes and ICM 2, two years later. The overall capacityis 260,000 tpa pbosphoric acid, 60,000 tpa triple superphosphate and 60,00Utpa of dicalcium phosphate. Kuwait owns 49 percent of the capital of ICM.

SAEPA I (Societe Arabe d' Engrais Phosphates et Azotes) producesphosphoric acid and diammonium phosphate, since 1979. SAEPA II will produceammonium nitrate which can be used both for fertilizers and explosives. Oncompletion in 1983 the plant will have a capacity of 110,000 tpa N. Initiallyimported ammonia will be used, but it is hoped that in time an ammonia plantcan be built at Gabes based on natural gas.

La Soci4te des Engrais de Gabes, started in 1976, was designed toproduce 100,000 tpa of powder ammonium phosphate; the process uses phosphoricacid from the ICM complex and imported ammonia.

ICF (Industries Chimigues du Fluor) project produces aluminumfluoride which is not a fertilizer material, but is sponsored by IGM and usessulphuric acid made in the Gabes site. The capacity of the plant initiallyinstalled is about 20,000 tpa aluminum fluoride.

3.13 The decade 1971-1981 saw a dynamic development of the TunisLanchemical industry and it is anticipated that the period 1982-86 will see moremoderate growth with a period of consolidation. It is forecast that produc-tion volume will increase at about 6-7 percent per annum and with an increas-ing value of 8.6 percent per annum. Employment will tend to stabilize withthe new developments utilizing existing personnel.

3.14 In view of the major changes taking place in phosphate trade withprocessed phosphates replacing increasigly phosphate rock, the objectives ofthe VIth Plan to increase even further the quantity and percentage ofphosphate rock processed in Tunisia appears to be in the correct direction.The degree to which the objectives can be fulfilled, taking into account the

- 33 -

international market for phosphates and other major factors sucn as thequality and price of Tunisian rock, bowever, remains a major issue. Theindustry is very sensitive to the international situation, particularly withregard to raw material and product prices. Atout 80 percent of the totalproduction costs of fertilizers are for raw mauterials such as sulphur, rockand ammnia and the VIth Plan recommends that special consideration should begiven to domestic production of ammonia and sulphuric acid. The main problemto be faced by the industry will oe whether or not the relatively smallfreight rates and high quality of the products will be able to offset therelatively high cost of locally produced raw materials, particularly rock.

3.15 Phosphate Fertilizer Production Costs: Taking into account thequality and transfer price of Tunisian rock, the final cost of merchant gradephosphoric acid is considerably higher in Tunisia than in Florida or Morocco.Unless the production costs of phosphate rock can be significantly reduced,this production cost disadvantage will continue. It becomes increasinglyimportant, therefore, for Tunisia, as it expands it mining capacity, todevelop new mines which will reduce the cost of producing rock. In thisrespect, the potential of Sra Ouertane looks extremely interesting, as itought to be able to produce a higher grade rock at lower costs than the oneproducedl from existing mines.

3.16 Tunisian Phosphate Fertilizer Exports: As a result of its consider-able disadvant:age in production costs, Tunisia will depend in the future as inthe past: on it:s success in the relatively nearby markets of Soulthern Europe.To a lesser extent it may also be able to increase markets in South Asia butwill be at a major disadvantage compared with Jordan botb on productLon costsand freight. In 1980/81 Tunisia exported 668,000 tons of P205 mainly tocountries in the Mediterranean area. This represented about 10 percent of theinternational market.

Table 3.1: WORLD PHOSPHATE FERTILIZER SUPPLY, DEMAND AND BALANCES(million tons P205)

1980/81 81/82 82/83 83/84 84/85 85/86 86/87 87/88

Available Supply 33.26 34.28 35.89 37.70 38.85 39.81 40.77 41.76

Consumption 31.46 30.92 31.80 33.60 35.15 36.57 37.90 39.29

Surplus 1.80 3.36 4.09 4.10 3.70 3.24 2.87 2.47

Source; mission projections

3.17 World, phosphate consumption is forecast to grow at an average of justunder 4 percent between 1981/82 and 1987/88 and about 3.0 perceot on averagebetween 1987/88 and 1992/93. The supply and demand balance given in Table 3.1indicates a substantial over-production past the mid 1980s, reflecting lower

h

- 34 -

than expected world demand. This is mainly due to the adverse economic condi-tions prevailing worldwide during 1980-1983 and also the strength of the USdollar which has adversely affected the imports of many countries (fertilizermaterials are normally quoted in US dollars). Although there are signs thatthe phosphate market should now improve, it looks as if phosphate balanceswill be more than adequate to maintain a high availability ot phosphatefertilizers at relatively low prices througb 1986/87. After that time, how-ever, increasing demand could start to outstrip new capacity and several newplants will be needed to come on-stream each year. In addition to increaseddemand, new capacity will be required to replace worn-out plants at anincreasing rate as many of the small plants based on imported rock in regLonssuch as Western Europe and Japan are phased out. If this is taken intoaccount a balanced situation should be reached by about 1987/88. After1987/88 world pbosphate demand is expected to increase at about 1.5 milliontons per year equivalent to 4-5 new large pbosphate fertilizer plants. Mostof these plants will be built near phosphate rock mines.

Investments During the VItb Plan

3.18 Considering that Tunisian's price disadvantage will be a particularhandicap during a period of considerable over-production, this Report proposesa slightly lower investment program for fertilizer than the one proposed inthe Plan, not by abandoning any of the projects under consideration, but bypostponing some by a few years, towards the end of the VIth Plan/beginning ofthe VIIth. By that time export possibilities sbould have improved again, andin any event should bave become mucb clearer. In this way, the investmentlevel of nearly TD236 million proposed by the VIth Plan could be reduced toabout TD200 million. During the Vtb Plan, actual investments reached nearlyTD 140 million in current prices, or some TD 218 million in average 1982-86prices.

3.19 The seven large projects, included in the Plan appear all wellfounded and a priori justified. ICM3 (pbospboric acid production in Gabes) andSAEPA II (ammonium nitrate production) are projects started during the VtiLPlan and to be completed during the early years of the VItb; together theyaccount for close to 20 percent of the total fertilizer program. The five newprojects are;

SIAPE II: With the new center of production for solid TSPfertilizers planned at Gafsa, it is planned to expand the SIAPE plant at Sfaxfor the production of 1,000 tons per day of either mercbant grade 54 percentP205 acid or super-phospboric acid. Since superpbosphoric acid is tradedmainly between USA and USSR, there is no well developed international marketfor this product. There are also several major problems associated with theproduction and transport of the acid because of the nigh magnesLum content otTunsian rock. This project would require very careful appraisal. Its totalcost is estimated at TD 73 million, but it will only be producing eitherfertilizer or acid after 1987 at the earliest.

- 35 -

SOCIETE DES ENGRAIS DE GABES. The plant will be expanded andmodified to produce NPK fertilizers using potash from the new Zarzis project(see below). The project will cost TD 15.5 million and will employ 150people; it could become operational at the end of 1984.

ZARZIS - PRODUCTION OF PUTASSIUM CHLDRIDE; This project, in thefirst stage, will recover potash from the brine lake at Zarzis (70,000 tpapotassium chloride); later there are plans to produce potassium sulphate andhydrochloric acid as well as magnesium. StudLes are currently being carriedout for an investment estimated at about TD 13 million in its first phase.Undoubtedly if this project could be implemented at reasonable cost, it wouldform a useful addition to the Tunisian fertilizer industry. Before proceedingwith it, however, it is important to consider the alternative deposits ofChott Djerid as this could form the basis of a larger and more economicproject. Normally brines have unique characteristics and before going to thefull-scale plant it is recommended that pilot plant work be carried out todetermine optimum design of plant. Similar techniques are tested elsewhere,as in Jordan. International technical assistance could help solve the firsttechnological problems.

I.C.G. (INDUSTRIES CHIMIQUES DE GAFSA): The project will produce400,000 tpa granular TSP at M'dilla in the Gai.-sa region. The location of theplant will enable the process to use wet rock and effect savings. The SIAPEproce,ss will Ibe used which requires a minimum of water. The project will beimplemented almost entirely by Tunisian engineers and although this may takelonger than a turnkey arrangement, it is projected that there will be signif-icant savings in investment costs. The estimated cost of the project is TD 55million. It is planned that construction of t:he plant should begin in early1983. About 660 new jobs will be created.

CEMENT ACID PROJECT to produce sulphuric acid from the by-productphospho-gypsum so as to reduce the dependence of the phosphate Lndustry onimported sulphiur. In 1979 it was proposed to reassess a pilot plant projectto produce 100 tpd of acid and cement. The project would be financed byTunisia and Morocco and possibly Arab partnerEi. A study of a full scaleproject indicated that it would be viable if a price of 23 TD/tDn could beobtained for the cement and if sulphur prices rose to $180-190/ton. Inmid-1981 sulphur prices had reached $16U/ton tut declined substantiallythereafter. T7he pilot plant would be situated at Maknassy. The unit couldcost TD 12 million and employ 150 people. This project iS proposed mainly toensure a domestic source of sulphuric acid in the event that imported sulphurbecomes scarce or very expensive. A reliable source of sulphur is extremelyimportant to large phosphate producers and several countries, includingMorocco, lost phosphoric acid production in 1980 because of the tight sulphurmarket. Although the production of sulphuric acid from phospho-gypsum looksinteresting, miany major studies on this subject have indicated that sulphurprices will hatve to rise very significantly before the process becomeseconomically feasible. Before deciding to invest in this development, it will

& I~~~~~~~~~

- 36 -

be necessary to carry out an updated study of the sulphur market as well asupdating the investment and operating costs for the project.

3.20 In addition, a small amount (TD 4 million) has been earmarked in thePlan to prepare the ammonia sulphate plant at Gabes by SAEPA to satisfy thedomestic demand. Some of this project will depend on the availability ofnatural gas at the site at low cost (about US$4 per million BTU) either fromMiskar or the Algerian pipeline. This question has to be addressed in theframework of the country-wide optimalization of energy resources. Last butnot least, the Plan includes TD16 million for renewal and rehabilitation citexisting fertilizer plants.

3.21 Outside the TD236 million fertilizer program, tne investment programfor the chemical industries includes a TD 21 million uranium recoveryproject. Tunisian phosphate rock contains about 50 ppm uranium and it isproposed to recover this at Gabes. The uranium would be further purLfied touranium oxide U308 and eventually used to produce uranium metal for use ina local nuclear power station, or for export. The uranium extraction plant

would be based at Gabes using the established infrastructure and would recover120 tons per annum of uranium as yellow cake from the combined phosphoric acidproduction. Taking into account that this concentration is only about onethird of the level of uranium in Florida phosphate and also the depressedstate of the market for "yellow cake," this project at best looks margina]L,and ought not be undertaken during the VIth Plan.

- 37 -

CHAPTER IV: 14ANUFACTURING INDUSTRY

4.1 This Report proposes a slightly lower overall mnvestment program formanufacturing industries than presented in the Plan, substantially more fortextiles and clothing, considerably less for chemicals as well as for metalsand engineering, as discussed in the first section of thbs chapter (Table4.2) .Tbe proposal is based on an analysis of 'runisia's growth potential formanufacturing as presented in the second sectLon; its successfuil implementa-tion, however, requires substantial changes in economic policies as discussedin the third section. Subsectoral investment issues and policy problems areassessed in the last section of this chapter.

4.2 In principle, bandicrafts and artisanal activities are not consideredin this chapter even thougb most general data (on employment, value added, anaso on) include estimates for artisans, while other data series and nmuch of thework on preparing the VIth Plan cover only enl:erprises with ten or moreworkers. Sucln definitional differences make the task of planning moredifficult and possibly exacerbate a tendency 1:o give rather less attention tosmall-scale industry and artisanal/handicraft activities than their importancewarrants. Phosphate processing is included in this chapter but discussed inmore detail in Chapter II on the phosphate sector.

OBJECTIVES AND INVESTMENTS OF THE VITH DEVELOPIENT PLAN

The Plan Scenario

4.3 The new Five Year Plan gives increased importance to the manufactur-ing sector. Et ought to absorb 19.5 percent of all investment (against 17percent achieved during the Vth Plan), and create some 109,U00 jobs (includingsmall industry and artisans), no less than 40 percent of all new jobs to becreated during the Plan period outside the rural sector; 87,400 additionaljobs were created in manufacturing in the Vth Plan. Priority sub-sectors areto be metals and electrical and mechanical prcducts as well as textiles. Onlyslightly increbased emphasis is placed on exporting (particularly textiles andelectrical andi mechanical products); import substitution, notably In electricaland mechanical. products, is considered of major importance, especially throughimproved intersectoral linkages.

4.4 The VIth Plan projects a 10.5 percent, annual real growth inmanufacturing value-added against the 9.7 percent achieved in the Vth Planperiod. Notable accelerations in past growth rates are hoped for in foodprocessing (from 1.5 percent to 6.5 percent per annum) and in textiles andshoes (from 3.6 percent to 8.7 percent per annum). Some acceleration is alsoenvisaged in the metals and engineering sector, in which a 15.2 percent annualexpansion is planned the fastest of any subsector. These targeits are not

- 38 -

unduly ambitious. It could even be possible to exceed them; but to do sowould require a considerably greater export orientation than appears to beenvisaged (para. 4.21). Textiles and leather, metals and engineering, andsome of the miscellaneous manufacturing industries are three of the toppriority sectors of the VItb Plan (Volume I, para. 63).

4.5 Even though employment creation is one of the top priorities of theVIth Plan, average investment costs per job created are not expected todecline from their high level, by international standards, of TD 9,340achieved in the Vth Plan. Particularly, in metals and engineerLng realinvestment per additional job is expected to be 50 percent higher than in theVth Plan period, and almost as sharp a rise is anticipated in textiles. Value-added per worker is expected to go up by 5.3 percent annually, well above thepace achieved in the Vtb Plan period (3.7 percent). Dramatic improvements areexpected in metals and engineering, textiles, and possibly food processing;this could be somewhat optimistic. The ICOR was particularly high in realterms in the Vth Plan period (5.2); a improvement to 3.6 is envisaged duringthe VIth Plan, notably by achieving substantial output increases from onlymodest investments in textiles and miscellaneous industries.

4.6 Import substitution is a key element of the Government's industrialstrategy. In fact, apart from the existing main exporting sectors (heavycbemicals, textiles, garments, and shoes) the contribution of exports toindustrial growth anticipated is modest. According to Plan data, overallexports are likely to represent about 29.5 percent of the manufacturing outputin 1986, against 28.7 percent in 1981 -- a contrast to the sharp rise fromabout 19 percent in 1976. The Plan strategy is to give increased emphasis tolabor-intensive activities, and therefore mostly to the private sector. Tlheintention is that the Government should participate directly in new industrialprojects only when they are very large, although it may indirectly partic:Lpatevia financial intermediaries. Furthermore, the Plan emphasizes the need tioachieve a better regional spread of industry, and some changes in the incen-tive law bave recently been introduced to encourage this (para. 4.30).

4.7 The VIth Plan projects total manufacturing investment of TD I,b0()million in current prices. This represents an increase in real terms of over25 percent on the manufacturing investments actually achieved in the Vth Planperiod. The Vth Plan achieved about 60 percent of planned investment in realterms. The shortfall was almost entirely in public sector investment; thetotal of private investment was close to the amount envisaged.

- 39 -

Table 4.1: COMPARISON OF Vth PLAN ACHIEVEMENTSFOR MANUFACTURING SECIOR WITH VIth PLAN FORECASTS

Vth Plan VIth PLanActuals Plan forecasts Report Projections

A B

Investments made (TD Million) 1,275.1 /1 1,600.0 1,2!36.0 1,450.0Jobs created ('000) 87.4 109.0 74.7 121.6Average annual growth atconstant: prices:Value Added 9.7 10.5 7.5 10.9Value Added per worker 3.7 5.3 3.9 5.1Manufacturing exports 10.5 10.7 7.1 13.0

/1 At average 1982-86 prices; in current prices actual investments reached TD816.1 million during the Vth Plan. For the definition of average 19b2-8bprices, see footnote I in Volume I, page 28.


The Report Scenario I/

4.8 This Report fully agrees witb the high priority given to three ofthe manufacturing subsectors in the VIth Plan. Based on an analysis of thecountry's potential (para. 4.13) and on the discussion of general economicpolicies (para. 4.26), however, this Report proposes a slightly different setof investment figures and of macroeconomic growqth targets. Its projectionshave been based on two different sets of assumptions concerning overalleconomic growtih, policy changes, and the pace of project implementation.Assumption A takes a cautious view about the number of projects, that willactually be completed by the end of 1986. Improvements In marketing,especially abroad, and in the promotion of Tun:Lsia as a venue for foreigninvestment will be limited. No significant policy changes are assumed(affecting for instance the relative profitabil.ity of production for export asopposed to that for the domestic market), though the thrust of policies asthey now exist would of course be continued. Akssumption B takes a moreoptimistic view on the pace of project implementation. A signIficant improve-ment is assumed in the efficiency of Tunisia's export marketing and much moreforeign investment will be attracted - primari]y for export-oriented concerns.Important policy changes (as recommended in the third sectLon of this chapter)are presumed, iLn particular those encouraging local firms to orient thelrproduction more to export. This Report assumes that most of these importantpolicy changes will in fact take place during the VIth Plan, and, thus, hasused the more optimistic Assumption B to prepare the overall macro-economIcscenario outlinmed in Volume I.

- 40 -

Table 4.2: INVESTMENTS IN THE MANUFACTURING SECTOR(TD million in average 1982-86 prices)

VIth PlanVth Plan Plan ReportActuals Forecast ProjectLon

A B

Food processing 250 240 193 222Construction materials 421 300 274 300Metals and engineering 168 385 281 339Chemicals 244 360 256 280Textile, clothing, leather, shoes 114 165 120 181Misc. manufactures 78 150 112 128Total 1,275 1,600 1,236 1,450

Source: Ministry of Planning and Finance; mission estimaites.

1/ Throughout this chapter, the discussion of the "Report` investment programdoes not include TD 60 million of energy conservation projects proposed bythis Report (Chapter II Energy, para 2.35). In consequence, the Reportinvestment projections (table 4.1 and 4.2) add up to only TD 1.45 billionfor the entire manufacturing sector (assumption B) as compared to TD 1.51billion indicated in volume I, table 8.

4.9 The Report's investment figurea, as detailed in Table 4.2 are amixture of investment proposals and investment projections and have to beinterpreted accordingly. For construction materials and cbemicals which arelargely under the direct control of public entities the figures indicate thisReport's proposals for an optimal public investment program to be undertakenduring the VIth Plan given such constraints as absorptive capacity, domesticdemand (for cement, for instance), and export possibilit:ies (for phosphate

products). For all other subsectors wbich show a preponderance of privatefirms, the investment figures represent this Report's best projections of whatcan realistically be expected to be invested by the private sector (plus somepublic or para-public companies) given the overall economic framework andlikely policy changes (including such factors as improved export promotion,improved project preparation capabilities, etc); considering the less thanoptimal overall economic policy environinent this might not necessarily be thebest investment program one would like, but the most likely one to happen..

4.10 Overall, the Report's more optimistic investment scenario comes closeto the Plan allocation (TD 1450 million versus TD 16U0 million, or 91 per-cent). The sub-sectoral figures, bowever, show some signiticant differenices.

- 41 -

First, this Report does not believe it possible that investments in the metalsand engineering sub-sector can be doubled between the Vth and the VIth Plan,and, thus, foresees, substantial shortfalls even under the most optimisticassumptions; tlhis does not represent a judgemetit on how useful and desirableit might be to invest more in this subsector, but represents its best assess-ment of what is possible and likely. Furthermore, considering the very lowemployment creation in heavy chemicals (i.e. mauinly phosphate processing) andthe uncertain would market outlook for fertila2;ers in the short and mediumterm (Chapter [II Phosphate Sector, para. 3.172' a substantial reduction ininvestment is proposed through postponing some projects by a number of years.On the other hand, the Report considers it possible and worthwhlle to plan forhigher investments in the textile/clothing/leather/shoe subsector where

Tunisia has substantial competitive advantages for exports.

4.11 The most important underlying difference between the Plan scenario

and the two Report scenarios concerns a different assessment of the country'sfuture potential for export and import substitution of manufactured goods.The Report is substantially more optimistLc about export possibilities thanthe Plan, but much less so about the possibilities of sizable further importsubstitution al: acceptable costs. Thus, in the Report scenario (assumption B)44 percent of the additional industrial output during the VItb Plan period isin export industries, even assuming continuing difficult marketing conditionsabroad; in contrast the Plan projections imply that over 69 percent of theincrease in output would be for the local market and that manufacturingproduction for the home market would rise by around 14 percent p.a. in realterms against a planned national consumption growtb rate of 6-7 percentannually (in tthe Vth Plan the two rose at almost precisely the same annualrate of 8.5 percent). These potentials are analyzed is some detail in thesecond section of this chapter.

4.12 The most important difference between Report scenarios A and B are:firstly, how effective Tunisia's export promotion and foreign investmentpromotion efforts prove; secondly, the implementation of effective policLes toencourage economically viable industrialization and especially export-orientedindustry; and tbirdly, the overall rate of economic growth and hence theexpansion in domestic demand for manufactures. Without major changes in pastpolicies, it iEs unlikely that manufacturing investments during the VItb Plancould exceed thiose achieved during the Vth Plan; these vital issues areanalyzed in the third section of this chapter. It makes relatively littledifference to total output, employment and export growth in the VIth Planperiod, (thoughi it will make substantially more in the VIIth), whether invest-ments in manufacturing total around TD 1240 million (about the same in realterms as was achieved in the Vth Plan period), or around TD 1450 million.This is because the most doubtful projects (in terns of likelihood of beingfully operational by 1986) are relatively capital intensive ones, which, evenif they are comipleted before the end of the Plan, will not produce many extrajobs or output; their impact has to be seen in a longer-term context.

- 42 -

TUNISIA' S INDUSTRIAL POTENTIAL

4.13 For a developing country with a population of only 6.5 million,Tunisia already has an impressive industrial structure with a good sectoralspread. It is neither dominated by a few big industries processing local rawmaterials, nor by simple labor-intensive operations. Relatively high wagecosts and low interest rates have encouraged fairly capital-intensive tech-nologies that are typically quite advanced. The standard equipment and highinvestment per worker reflects the tact that by developing country standards,Tunisia is comparatively well endowed with qualified engineers and skilledworkers. I/ But the country's generally successful experience in industriali-zation does not of course imply that the route so far followed, essentiallyone of import substitution (altbough exports of phosphate derivates, textilesand clothing are important), is the one to continue along during the forlth-coming Plan period. To consider these issues it is necessary to examine inbroad economic terms the relative advantages and dLsadvantages which Tunisiaenjoys in industrialization.

4.14 Four important factors limit the economic potential for manufactur-ing. First, the local market is not large, restricting the range of viableimport substitution industries. Second, apart from phosphates and a fewagricultural products there is a lack of local raw materials on which largeprocessing industries could be based. Third, Tunisia bas, by normal develop-ing country standards, fairly high labor costs, especially for unskilled andsemi-skilled workers; this makes it difficult to compete on export markets insimple labor-intensive products. Fourth, there have been European imporcrestrictions imposed on Tunisian textile products since 1978. Against thaesehandicaps must be set two big comparative advantages. F'irst, although laborcosts are relatively high, they are still well below West European levels andare allied to an ample supply of workers with good general and technicaleducational standards. Second, Tunisia's proximity to Western Europe, anid thelink to the European road system through the roll-on, roll-off service, givesit a distinct edge over nearly all other developing countries in terms oftransport speed, reliability, convenience and cost. A third positive factoris the range of existing industry and the general technical competence of manyfirms. This reinforces skill levels, creates potential for enterprisessupplying inputs to existing firms, boosts Tunisia's industrial "image" asperceived by potential foreign investors, and could lead to increased exportsby existing firms.

1/ A significantly higher proportion of the prime movers in establishingmanufacturing concerns in Tunisia appear to be engineers or other tech-nically qualified people than is normal elsewhere; one reason may be thatthe prime mover does not have to put up a large proportion of the capitalas the banking system's role in providing initial industrial finance isunusually important.

- 43 -

Labor Force

4.15 Tunisia's labor force being its main economic potential, the questionof labor costs and capabilities warrants particular attention. In March 1982,the minimum industrial wage, established by the SMIG was increased by about34 percent to 436 millimes per hour for workers under the 40-bour per weekscheme, equivalent to around TD 76 or $150 a mionth. Though a significantminority of workers, especially in small and medium firms and in textiles,clothing and shoe manufacturing, get less than this legal minimum, averagewages are a good deal higher. Including productivity bonuses, attendance pay-ments, public holidays, and annual leave, averaging around 24 days a year intotal, and the high social charges (the legal requirement is 25 percent), theaverage wage cost for the firms visited by the mission were more than doublethe SMIG. One! of the reasons is that by agreement between employers, unionsand the Government, pay in any one grade increases sharply according to lengthof service in a given company, rather than according to grade or skill level.This increase is not related to training periods or skills achieved, for whichmost fair-sized companies at least have a system of grading. While a paystructure which discourages a rapid turnover of workers is obviously sensible,the service-related increases are so sharp as to put long estab'Lished firms ata significant competitive disadvantage vis-a-vis newcomers.

4.16 As a result, while basic starting rates of pay in Tunisia appearcompetitive with those in other developing countries at a similar stage in theindustrialization process (but of course far higher than in some Asian coun-tries), the very substantial additional charges make it appreciable less so.It is not that Tunisia is unusually generous in any one respect; the problemis that it is near the top of the league table in all of them. The variousadditions made to basic pay, the lengtb of the working week, and so on aremore typical of European standards than of those in other developing coun-tries. Consequently as Table 4.3 shows, hourly wage costs in Tunisia mayreach twice those in India (and at least three times those in Sri Lanka), andappear substantially higher than in several other Asian countries. Thoughbroadly comparable to those in Hong Kong, and 'well below Korea and Taiwan,these all have far more developed industrial structures, and probably betterproductivity than Tunisia. It also seems that the differential in wage costsbetween skilled and unskilled workers is greater in other countries than inTunisia putting the country at a disadvantage in labor-intensive operations.

4.17 Labor costs are affected not only by actual pay, social. charges andfringe benefits, but by labor productivity. This appears fairly adequate, forproductive works, in the private sector at least, reflecting the! high propor-tion of workers wno have undergone secondary technical education. Indeed thesupply of young workers with 2 or 3 years of technical educatLoni substantiallyexceeds demand, and many are probably overtrained for the work they do. Onthe other hand, there is a clear lack of experienced people for lower manage-ment posts (cadres moyens and maitrises). Foremen are normally recruited fromamong the more long-standing skilled workers, and in time the supply shouldimprove. The need for technicians may be more difficult to solve, as so manyof those emerging from the full period of secondary technical eclucation tendto go on to get professional qualifications as engineers. As a result manage-ment is reasonably good on the technical side and in the physical operation of

- 44 -

Table 4.3: ESTIhATED AVERAGE 1981 HOURLYWAGE COSTS IN TUNISIA AND SELECTED OTHER COUi1TRIES

(in US Dollars) /a

Averge payment Total wage Typical Number ofto workers /b cost /c paid days off a year /d

Tunisia /e 0.85 1.15 25Hong Kong 1.15 1.30 22India 0.40 0.55 18S. Korea 1.55 1.90 18Mexico 2.75 4.00 29Philippines 0.45 0.65 27Taiwan 1.35 1.85 21Thailand 0.70 0.80 19Greece 2.25 3.35 25Portugal 1.60 2.20 25

Note: These data are generally representative of larger firms only andreflect any legally obligatory payments; shall operations after pay'less, and sometimes below legal minimum.

/a Converted to common 44 hour week basis./b Includes in the bourly average, paid leave, annual bonuses, overtime pay

and incentive pay./c Includes compulsory and additional social charges, and fringe benefits of

all types./d Public holidays and annual leave; these are included in payment and wage

cost estimates./e In the absence of official data readily available in Tunisia, the report

used typical wages observed in the sample of factories visited. They donot take into account the March 1982 increase in the mainimula wage.

Source: Updated from Business International data (except for Tunisia)

plants. It is very weak, however, on the commercial side. Little attentionis given to good accounting systems. But probably the greatest weakness Ls inmarketing, in the broad sense, i.e. gearing production to market needs,presentation, and pricing policies; knowledge of and selling to foreignmarkets appear particularly poor. The bulk of export sales of manufacturesare either on a commodity basis (e.g. pbosphate products and olive oil, thoughbetter marketing might benefit some of these too), or are marketed by foreign

concerns (e.g. denim cloth and all exports by foreign owned firms). Tunisiawould be exporting considerably more than it now does if marketing capabill-ties were stronger.

- 45 -

Import Substitution Potential

4.18 After many years of successful developmaent, the import substitutionprocess has advanced so far that future growth in such industries is unlikelyto be any faster than that in total Tunisian consumer demand for manutac-tures. In the Vth Plan period a 7.5 percent annual rise in total nationalconsumption was accompanied by an increase of about 5.5-6.U percent p.a. in

the output of import substitution industry. The VIth Plan implies howeverthat a b.9 percent annual rise in total national consumption would be accom-panied by an 8.0-8.5 percent annual growth in import substitution industry.This would seem very difficult to achieve. Moreover the bulk of opportunitieslie in subsectors in which there is already local production, often creatingrelatively few new jobs . The scope for wholly new import substitution actL-vities is quiite modest and lies mainly in medium-sized operations providingcomponents andi semi-finished inputs (currently imported) to existing indus-tries. The possibililties for introducing wholly new types of capital equip-ment production exist because most of it is imported. Even by adjusting thelow eff(ective protection given to this type oi production, however, potentialfor supplying the domestic market will remain limited. Thls situation arisesin part because of the limited size of the local market, 1/ and the wideindustrial sp read already achieved. It is also because the main growth areasin consumer demand are in items for which there is either no prospect of localproduction, or where local value added represe!nts only a small proportion ofthe product's value.

4.19 The process of exhausting import substitution possibilities has alreadybecome evident in the Vth Plan period, as some of the sub-sectoral investmentshortfalls have shown. Among others it is reflected in the emphasis onincreasing the project identification effort necessary to realize the limitedpotential for new import substitution industries. FLnding opportunities whereothers cannot see them is at the heart of the entrepreneurial activity.However, the ILmportance of these opportunitieE will remain modest; they liemainly in expanding production in subsectors that are already appreciabledeveloped. In some of these, existing local producers are reasonablyefficient and new opportunities are limited tc the replacement of importswhich existing producers cannot supply and/or to anticipated expansion indemand.

4.20 A far rnore common situation is in sub-sectors in which existlngproducers are not particularly efficient, in which appreciable local over-capacity already exists, and where competing imports are either banned orheavily restricted; characteristically there are a large number of medium-sized producers who have been allowed to proliferate by approving and givingincentives to nearly all who apply. But while normally one would expectcompetitive pressures to force down prices and encourage the exlpansion of themore efficient: firms, squeezing out the inefficient, this has not beenthe _

1/ Recognizecd by the "Note d'Orientation pour la IIIeie DecennLe deD4velopperient et le VIT_me Plan" issued by the Ministry of PLanning andFinance in November 1980 as the main reascn for the limited contributionto date of the mechanical sector to the economy."

- 46 -

Tunisian experience. Reasons probably include the tendency for controlledmaximum prices to be taken as usual prices, a wide-spread feeling thatGovernment will not allow even the most ineffLcient firms to be forced out ofbusiness (so why try price competition?), and the bias of the incentive andpay systems in favor of new operations. Tunisian entrepreneurs may also lackmotivation to expand their operations through aggressive competition that theyhave never faced before. In such a situation one ought to encourage expansionof economically efficient concerns, reducing the number of firms in the sectorand forcing down profit margins. In the medium-term this could well lead toan actual reduction of employment in the sector, but in the long-term woulLdbenefit the consumer and lead to a widening of the range of economicallyviable industries (both import substitution and export). The transition nasof course to be carefully effected. The implication for the VIth Plan is thatGovernment should only provide incentives for new operations in subsectorsthat are already fully supplied by a sufficient number of domestic producerswhen they offer some distinct advance on what exists already. Few new jobsshould be anticipated.

Export Possibilities

4.21 In strong contrast to the increasingly limited possibilities for importsubstitution are the substantial prospects for exports of manufactures. It istowards these that the direction of the industrialisation process should bereoriented, as is recognized by the importance given to export development: bythe Ministry of Planning's November 1980 "Note d'Orientation". So far, inspite of encouraging achievements in phosphate processing, and on a morelimited scale in textiles, clotbing and shoes, the potential remains largelyuntouched. Export possibilities arise essentLally from the combination oflabor supply and cost factors, already analysed, with Tunisia's locational.advantages from the point of view of transport speed, reliability and cost.The Plan too often ignores this potential and gives insuffLcient considerationof how to tap it. Probably the biggest single deficiency relative toTunisia's potential is in the limited exports of electrical products that areanticipated . One of the reasons for this neglect may be that knowledge ofexport markets and their needs and of the international investment scene :ISlimited. Tunisia's traditional inward-looking stance in its industrialisationefforts needs to be transferred into an outward-looking one. Tbougb thepossibilities in neighbouring North African and Middle Eastern markets sho;uldcertainly not be ignored (especially in the mechanical, engineering andconstruction materials sectors), the main opportunities would still lie inEurope for the immediate future.

4.22 Considerations of comparative advantage give Tunisia a distinct edlgeover existing suppliers to European markets (European firms as well as otherdeveloping countries) in products wbich require a combination of as many as

possible of the following characteristics for maximum efficiency in produc-tion:

(a) a labor force with technical skill levels not far short of Europeanlevels, but with relatLvely lower labor costs;

- 47 -

(b) prodluction processes which need to be more closely integrated thanis practical between European and Far Eastern manufacturers (forexample), but in which transport delays of a few days areacceptable; fairly close supervision of local producl:ion may alsobe desirable (whether a subsidiary or a sub-contractor);

(c) tranlsport speed which makes it possible to take advanltage of suddenshifts in market needs (as with fashion products);

(d) transport of raw materials is comparatively cheap (and preferablyalready flows to Europe via the Suez Canal), but the semi-finishedor finished products are relatively expensive to transport oftenbecause they are bulky or difficult to handle;

(e) a reasonably developed local industrial structure relJLably able tosupply inputs to required quality specifications into the productionprocess;

(f) moderately high capital needs per unit of output, as well as quitehigh labor needs. The political stability of Tunisia compared withmany otber developing countries makes the country less risky thanmany' others for the foreign investor in a project with longer thanaverage pay back periods;

(g) use of some raw material of which Tunisia has Lmportant supplies.

Some of these factors, especially the first, are also important in seeking toexploit non-European export markets, notably in North Africa and the Gulf.

4.23 What products match these characteristics best? Clearly thephosphate industry is based primarily on factors (a) and (g), tbese alonebeing sufficient to make it competitive. Basic textiles and garments, theother big existing export industries, are less promising, because Tunisianlabour costs are far above those in the Far Fas;t, let alone those in SouthAsia; there is also of course the problem of ]3EC quantitative importrestraints. Both problems can, however, be miLigated and factor (c) takenadvantage of by concentrating on high value products seeking to replace thatpart of the European textile and clothing indus3try which has so far been ableto fight off developing country competition by concentrating on qualLty and onfashion. Tunisia is far better placed than Aslan producers to cater tounexpected swings in demand and to be able to promise delivery in say 2 or 3weeks; but this requires an intensive marketin, effort keeping in day-to-daycontact with buyers for big stores, getting fast copies out of productsappearing in fashion sbows, and so on. Much the same applies to the shoeindustry, another sector in which there are im,port restrictions applying tomany developing country suppliers. There, conaentration should be on quality,fashion, and marketing in the price/quality slot between Italian producers,whose labor costs in South Italy are only litt'Le higher than those in

- 48 -

Tunisia, and Far Eastern or Brazilian ones. Both local and foreign (off-

shore) producers have major roles to play in the development of Tunisiantextiles, clothing, shoes and leather product exports.

4.24 Export potential in the engineering products sector, especially, forelectrical and electronic machinery, equipment, etc., is best pointed to byanalogy. Current exports by Tunisia of metals, metal products and mechanicaland electrical engineering products are worth under $70 million a year. Theyare only a sixth of those of textiles, clothing, shoes, etc., with only about15 percent of output being exports. However:

(a) Mexico exports over $1500 snillion worth of electrical products alonejust to the USA, including for example $550 million worth of 'TV sub-assemblies and TV parts, $80 million worth of wired-up ignitionsystems for vehicles, $80 million worth of fixed capacitors, $30million worth of electrical circuit breakers, and so on. Most aremanufactured by US firms part of the big in-bond industrial sectorworking near the US border. In total this employs about 125,000people and contributes $1.3 billion a year to Mexico's GDP.

(b) Portugal's exports of metals, engineering products etc. to the EECare worth about $500 million a year, i.e. seven times Tunisia'sworld-wide exports by a country witb about three times Tunisia'sGDP. They include important quantities of trucks ($50 million), TVsets, electronic micro-circuits, and electrical switchgear; adumit-tedly these benefit from EFTA treatment.

(c) Spain's exports of such products to the EEC exceeded $4.b billion in1980, including major exports of motor vehicles and parts, internalcombustion engines, and iron and steel.

Similar examples could be drawn from exports of some Asian developing coUnJ-tries to Japan. And there are appreciable opportunities for Tunisian exportsto neighbouring North African and Middle Eastern markets. A detailed examina-tion of the trade statistics of countries competing with Tunisia in exportingmanufactures to industrialized countries would reveal a great many trade flowsin which Tunisia ought to be competitive. For instance, the lower labor costsand similar transport convenience and costs ought to make Tunisia a bettermanufacturing base than Portugal (let alone Spain) for many types of electronicassembly and electrical switchgear and for non-electrical equipment assemblyoperations. And, if household food processors can be exported to Europe bycountries as diverse and as distant as Canada and Hong Kong, it ought to bepossible for a Tunisian operation to do the same.

4.25 Whether the export plans for fertilisers can be realised, dependsessentially on success in keeping to schedule in implementatLon of proposednew projects, in reducing raw material prices and on the speed at whicb thedepressed world market will turn around. In themselves these appearreasonably realistic, reflecting the good technical competence in this

- 49 -

sector. A large increase is also envisaged lin the hitherto moclest exportearnings of other heavy chemicals. As most of these projects are still at afairly early stage in the study process and even when this is complete cannotbe brought into operation rapidly, the risk of production and exports Deingpostponed beyond the VIth Plan period is very real. In the remiaining sectors(food processing, construction maaterials, liglit chemicals and miscellaneousindustries), there could be quite important export possibilities Lnneighboring North African countries and in the Middle East, providedsufficient encouragement can be given to them.

REALIZING TUNISIA'S POTENTIAL

4.26 Sound planning for manufacturing growth is, of course, one elementin realising the potential. For the private sector, however, creation of aconducive policy environment is at least as lmportant. This section considersthese problems, against the background of Tunisia's potential as discussedabove. It proposes some major changes in the direction of past: Lndustrializa-tion policies. Most of these are touched upolJ in general terms in theMinistry of Planning's "Note d'Orientation" mentioned above (footnote to para.4.18). This section seeks to give a more concrete expression to such ideas.The underlying strategy needed to fully utilize the potential bas four mainelements:

(a) At present it is usually more profitable, and certaimly a loteasier, to produce for the local market than for expcort. Thebalance should be redressed, and more encouragement needs to begiven to exporting at the margin by firms whLch are currentlyoriented only to the Tunisian market;

(b) The combination of import tariffs and other taxes, of incentives toindustrialisation, and of the price control system need to be gearedmore closely to encouraging those types of industry, whetber importsubstitution or export, for which tbere is viable pot:ential inTunisia, if necessary at the expense of those types which makelittle real contribution to the economy. This implies some changesin price structures, including the cost of imports, to ensure thatthe cost to the firm of imports and the prices it gets for itsoutput correspond more closely to real economic prices;

(c) Industrial efficiency needs to be enahanced by encouraging morecompetition, and when possible lifting price and otber controls.There is particular scope for this in those import sutbstitutionactivities where there are more than, say, 5 or 6 producers. Thisimplies using competitive pressures to force down prices andallowing bankruptcies among the inefficient;

(d) The more export-oriented industrial strategy which is needed(particularly to create more jobs) is unlikely to succeed unlesstechnological transfer can be improved. This implies that foreignindustrialists should be encouraged to set up more export

- 50 -

operations, in particular joint ventures. On both the technologicallevel and the access to foreign markets (marketing final productsand using themselves intermediates or parts which they have producedin Tunisia) their contribution could be important.

4.27 It might also be pointed out that a cheaper dinar could have a majorinfluence in stimulating the development of both export industries and ofthose import substitution processes in which local value added forms animportant part of the price of the finished product. It would also encouragemanufacturers to seek local suppliers instead of imports for semi-finished andcomponent inputs, while discouraging capital-intensive import substitutionindustry. Last but not least, priority needs to be given to project prepara-tion and implementation, if necessary at the expense of further identificationefforts. Obviously no major project will be able to contribute to output andjobs during the VIth Plan period unless it is ready for implementation byabout end-1983. Steps have already been taken to improve project preparationcapability within the Ministry of Planning and Finance, but more is urgentlyneeded. As part of a technical assistance project, the World Bank assistsTunisia in this endeavor.

Adjusting the System of Protection

4.28 Tunisian manufacturing has always been well protected even thoughi ithas long ceased to be an infant industry; a key feature is the virtual ban onimports of many items where local production is deemed sufficient to meetdemand such as plastic products and clothing. Economically worthwhile growth,however, requires greater export orientation, and this demands greaterefficiency; fortunately the adjustment process implied should be a good dealless painful than in many other developing countries because the adverseeffects on industrial efficiency of high protective barriers have been lessmarked in Tunisia, perhaps partly because of the importance given to achievingtechnical efficiency. A case can be made for a selective relaxing of importlicensing, with Tunisian producers competing directly with imports within theframework of a reformed tariff system. Forcing prices down would also be cfmajor benefit to consumers and could be linked to relaxing the price contrcolsystem. Selective relaxation of import controls could start with two maingroups of products, overlapping in somae cases. First it could affect thosein whicb Tunisia is already fairly efficient, including those in which itachieves, or is judged capable of achieving, a significant volume of exports,certain plastic products and clothing items; lifting of controls is unlikelyin itself to stimulate substantial import flows, hopefully just enough to pushprices down. Second, there might be gradual relaxations affecting a few itemswhose local production confers little if any real benefit on the economybecause of a very low local value added, or because prices charged are wellabove those which would apply to imports; domestic producers would be given afixed time to improve efficiency before being faced with import competitiorn,protected only by (possibly reinforced) tariffs, to insure a reasonable ancLconsistent level of effective protection.

- 51 -

4.29 In addition a major reform of the tariff system seems needed. Therecent reintroduction of tariffs on capital goods represents a major firststep in this; it should discourage unduly capital-intensive operations andsupport local capital goods producers. Furthermore, there are mnstances ofhigher tariffi; on raw materials and semi-finished products than on the finalproducts they are used in; this means of course that it is the foreign produ-cer, not the Tunisian one, who is getting protection. At the other extreme(and probably far more typically) some of the tariff rates give extremely highprotection to Tunisian manufactures, particularly for products with a verysmall domestic value added. The tariff system should be simplified, with theaim of giving a reasonable and consistent level of effective protection tolocal producers.

The Project Approval and Incentive System

4.30 In June 1981 Law 81-56 replaced the previous incentive Law (74-74)applicable to firms producing for the domestic market. The main changes are:the period for which partial exemption from company income tax Li granted isnow greater than the standard five years for investments in areas away fromTunis; other iLncentives to decentralise were also improved; a permanent reduc-tion in companiy income tax is extended to all exporters (a 20 percent tax rateis applied to the same proportion of profits as exports form of output); and,better incentiLves are granted for expansion schemes, related to the number ofjobs created. Though representing a significant improvement on the previouslaw, the system of project approval and of investment incentives is fundamen-tally unchanged. It does not do enough to encourage small and medium opera-tions which may be able to create more jobs in aggregate than cian largeones. 1/ Simple assembly operations get the same incentives as those with ahigh local value added. Existing firms are given insufficient encouragementto expand, by comparison with the incentives given to new operations and thesystem still cloes not do enough to encourage exports. The bias against domes-tic capital goods industries has been reduced through the recent introductionof tariffs on capital goods imports.

4.31 A complete reshaping of the system is needed if TunisLa's industrialpotential is to be realised in full. To appreciate this, it is necessary toconsider not -just the details of the incentives but the overall framework.Four important: characteristics should be noted:

(a) Virtually every investment Lrrespective of size or character, needssome! form of approval and benefits from incentives. This not onlyslows the whole process but is unnecessary, leading to a loss ofgovernment revenue on Lnvestments which would take place anyway; It

makes it difficult to give relatively greater incentives to invest-ment:s it is particularly important to encourage;

1/ The new "Fonds National de Promotion de l'Artisanat et des Petits Metiers"could, however, do a good deal to encourage investment in small projects,if its procedures can be kept simple.

- 52 -

(b) Altbough incentives are largely codified, leaving nothing toadministrative discretion, licensing is not so that an investor cannever be sure whether his application is likely to be granted. Thisdeters some investments by smaller Tunisian entrepreneurs and by

foreign concerns unaccustomed to such licensing requirements;

(c) While the incentives given to pure exporters compare favorably withthose available in other countries, those applied to production forthe home market are probably overall still rather less generous thanis typical elsewhere. Furthermore, essentially home market indus-tries get less incentive to export than do pure export operations;the logic for this is not clear;

(d) Incentives for purely home market-oriented firms remain geared toencouraging large firms, rather than small labor-intensive ones.Incentives to locate away from the Tunis area have now been graftedonto the system, but tax exemptions still remain bigger, the largerthe number of jobs created. It is often very difficult to set uplarge operations in remote areas, and arguably what they need mostis firms employing up to about 5U workers.

The study on the Institutional Environment for Industrial Investments under-taken by CNEI as part of the World Bank financed Technical Assistance Projectought to come up with some new ideas on how to improve the system.

4.32 In the Tunisian context, there is a certain logic for universalinvestment licensing. 1/ It is necessary, however, to consider whether theseadvantages may not be outweighed by potential investments not being realisedor being delayed. Numerous international studies have demonstrated that aprime determinant of the rate of investment in a country (by local business aswell as by "footloose" foreign concerns) is the investment "climate". Tunisiahas many of the characteristics of an excellent "climate", such as a record ofpolitical stability, generally favorable attitudes towards the private sectorand to foreign business, etc. But the slowness of bureaucratic procedures,many of which do not even exist in other countries, spoils its image.

4.33 There is a strong case for splitting the processes of investment.approval (agreement or licensing) and of granting incentives, as is the casein many other countries. Incentives should be granted only to projects tc,which the country wishes to give particular encouragement. For a large numberof investments, Tunisia has now reached sufficient industrial maturity to

1/ The "Note d' Orientation" mentioned in the footnote to para. 4.18suggests, however, that current licensing procedures could be greatlyreduced.

- 53 -

allow automatic licensing. All investments under, say, TD 50U,000 and allreplacemEent investments might fall in this category, as migbt those based onsecond-hand machinery, where the existing discrimination is difficult tojustify; so might all wholly foreign projects purely oriented towards export

1/ and all except very large (over, say, TD 5 million) investments byTunisians from which more than say, 75 percent, of output is to be exported.Consequently, only those investments for which a relatively strong case can bemade for continuing control would still be subjected to licensing. Suchrelaxations should encourage investment, speed the pace of its implementation,and allow API 2/ to concentrate on what should be its main task the promotionof investment. It would also mean that more careful consideratLon could begiven tco the few number of investments which continue to be subject tolicensing.

4.34 Certain types of new investment might be excluded from incentivesaltogether, unless a minimum proportion of output is exported. Examples mightbe the footwear and plastic industries, or those in which local value addedforms less than, say, 25 percent of sales price. On the other hand, inTunisia's current economic circumstances, four types of operations should be

given particular encouragement: (a) those creating a lot of jobs relative toinvestment costs, and also perhaps to output; (b) those with a high proportionof local value added, both within the firm and in the form of purchases fromlocal suppliers; (c) those oriented wholly or partly to export; (d) thoselocated away from the Tunis area. These correspond to the four generalpriorities emphasized in the "Note d'Orientation". A case could also be madefor giving some special encouragement to projects involving some advance inthe technology employed in Tunisia, particularly if partly or whiolly export-oriented, and to energy and water use savings. Identical treatment should beaccorded to new and to expansion investments. Accelerated depreciationprovisions should give sufficient encouragement to replacement Lnvestments.Few if any projects can qualify for favourable treatment on all these grounds;it is possible to conceive of a selective incentive system, perhaps thesimplest might be points based. Points could be allocated according to, forinstance:

- how many jobs are created per million Dinars invested;

- the percentage of local value added in the fLrm's OUtptlt, includingthe Tunisian value added in locally purchased supplies;

- the proportion of output exported;

- location.

1/ Based on the argument that any misconceived investments of this type willnot lead to much waste of national resources.

2/ Agence de promotion des investissements.

- 54 -

Those scoring a large total number of points would get the most substantialtax exemptions and other benefits. Selectivity can be reinforced by grantingno special incentives to firms scoring less than a fixed number of points.Though such a revised system may appear much more complicated than the exist-ing one, if codified and well organized, it could actually be simpler toadminister than are current procedures; by putting the responsibility oncompanies to justify their claims, the process of checking these could be madequite straightforward, not involving bigher management at all, even if thecriteria used are appreciably more complex than at present.

Price Control

4.35 The prices of most industrial products in Tunisia are subject to someform of control. The trend is, however, to progressively liberalize thesystem, and in January 1982 the Government abandoned price controls on asignificant range of industrial products (notably some food products and someplastic and chemical products). Some other products were subjected to lessrigid control. This is a step in the right direction. While in the past thesystem undoubtedly did contribute to keeping prices of industrial productsdown (especially in view of the virtual ban on imports of many items), asTunisia's industry has grown, and the danger of monopolistic price fixing hasreceded, it is doubtful wbetber it still does restrain the prices of severalimportant categories of goods. Certainly some manufacturers do make very highprofits under the current system, indeed, since the gross margin permittec isvery generous for many products (15-24 percent) and the range of allowablecosts is wide. Although the prices fixed are maxima and many firms areoperating below capacity there is a general reluctance to build up sales bycharging less than the amounts permitted. Reasons include: a fear that onewill subsequently be subjected to control at the reduced price level; a feel-ing that one can never reap the full benefits of price cutting, as the Govern-ment will take steps to keep inefficient competitors in business; and thegeneral ambiance of no price competition which the price control systemencourages. In spite of recent improvements the system continues to:

(a) favor low quality production; a quality product cannot usually besold for any more than a very basic one. This obviously has ImplIca-tions for meeting quality requirements of export markets; a majorproblem for shoe exports;

(b) make it impossible to give quantity discounts to wholesalers or otberlarge buyers; it is consequently difficult to build up a good market-ing system. Because dealers' margins are often bigger on importedgoods, sometimes the Tunisian product is actually put at a dis-advantage;

(c) be insufficiently flexible to respond rapidly to changes in the costof raw materials and intermediates, and in consumer demand; a newproduct line cannot simply be introduced and sold, the prLce for ithas to be approved first.

- 55 -

4.36 Many of these problems stem, at leasl: in part, from the difficulty infinding sufficient qualified staff for the pr:Lce control authorities. Thisalso means that many manufacturers get away w:Lth misleading information andmake far larger real profits than they appear to. For this reason alone,there is a case for trying to limit price controls to what it is possible tocontrol efficiently. Even the most advanced :Lndustrial countries, where thereis an ample supply of trained accountants, have found it impracticable to tryand control more than a small minority of key product prices. By keeping atight check on key items, particularly wbere l:here are no imports and localsuppliers are in a monopolistic position, the most serious abuses could belimited. Probably all other items should be allowed total liberty; partic-ularly most products currently subjected to l:Lberte controlee and to auto-homologation should be gradually freed. In tbe competitive environment whichwould exist for the bulk of these, prices miglht well end up lower than manu-facturers now find it possible to get away with. Where price controls areretained, in sectors with a reasonable number of suppliers, the system shouldbe used more positively, pushing down permitted prices to squeeze out theinefficient and to allow consumers at least some of the benefits which nowaccrue in profits.

Encouraging Foreign Investment

4.37 Aparit from the export operations estaLblished under the 1972 Law,industrialisaition to date has been based almost wbolly on Tunisian initiativesand capital, and to a major extent also on Tunisian technological know-how.This has been a considerable achievement, cont:rasting favorably with theindustrialization experience of many other countries. Why then should therebe a need to increase the.role of foreign investment? There are three mainreasons.. First and foremost, Tunisia's export: potential in the years aheadlies increasingly in the types of products for which close collaboration withforeign businesses is essential, partly because of the nature of thetechnologies, and partly because they in pract:ice dominate marketing channelsabroad. This is the case for most electrical and electronLc assemblyoperations, much of the potential in the mechbLnical engineering field, andeven a large part of the quality and fashion-ariented clothing and shoeindustries. Second, as production for the local market becomes moresophisticated, it is necessary to rely increasingly on foreign technologiesand designs, often of course protected by patents. And the cost of developingnew models is often such that only extremely big companies can support them(vehicles and tires are obvious examples). Third, in spite of the establish-ment of new banks enabling Tunisia to get increased access to investment fundsfrom Middle Eastern oil-producing countries e:tra investment funds are needed.

4.38 More needs to be aone to attract foreign investment, particularlyinto export industries, to encourage production under foreign lLcenses andother technical cooperation until sufficient national skills are available.Increased promotional efforts and a better investment "climate" have to gohand in hand if this is to be achieved. It has already been commented thatTunisia has many of the attributes of an excellent investment "climate", butthat its image has been somewhat affected by the slowness of bureaucratic

- 56 -

procedures, notably in project licensing and in import ancl even exportformalities. It is probably partly because of this, that the bulk of foreigninvestment in Tunisia comes from European countries which are tbemselvesaccustomed to a bureaucratic approach. 1/ Hardly any comeIs from the USA,Great Britain, the Scandinavian countries, or Japan, which worldwide are farmore important investors in developing countries, but partially for historical

reasons, have concentrated theirs in countries where the formalities aresimplest.

4.39 It is simply not true to say, as seems to be beliLeved in Tunisia,that these countries are interested only in investing in resource exploitationin developing countries. All invest also on a major scale in export process-ing and import substitution operations. But their approach is often ratherdifferent from that of, say, France or Germany. They tend to make largerinvestments, related to their global operations. Rather than put up a small,and inevitably bigh-cost, plant to produce a finished product primariLy for asmall market like Tunisia's, they manufacture different components indifferent countries in an internationally integrated operation. And, espe-cially in simple operations like clothing and electronic assembly, theyoperate mainly through placing contracts with local manufacturers, to whorathey give technical assistance, but make no investments. Active promotionalso in itself forms part of the investment "climate". It not only makespotential investors aware of a country as a base for foreign investment, butsuggests that the Government is serious in its desire to attract it. Quite anumber of countries offer on paper quite attractive incentives to the foreigninvestor, but in practice adopt a rather more negative attitude. In spite otAPI's promotional efforts, awareness of Tunisia as a base for export indus-tries is limited except in France, belgium and Germany, and fairly limitedeven in these countries. Many other countries comparable with Tunisia interms of potential for foreign investment have promoted themselves maoreeffectively. Whether this is due to insufficient resources being availablefor foreign promotion, wbether some of the effort has been misdirected,whether staffing needs strengtbening 2/, and so on needs to be investigateid;possibly a foreign consultancy with experience in this field could be retaixnedto recommend how API's promotional efforts should be strengthened.

Improving Marketing Capabilities

4.40 Foreign-owned or foreign-linked export industries bypass the problemof Tunisia's inadequate expertise in export marketing, by putting this in thehands of foreign partners. But it is essential, too, to improve exportmarketing by purely Tunisian operations. Weaknesses stem in part from therather unimportant role of marketing in selling to Tunisian consumers becauseof the price control system, because the Tunisian market is still relatively

1/ Language and geographical proximity are also factors.2/ Only 5 of API's 210 staff are based abroad.

- 57 -

unsophisticated, and because of the lack of competition in some products. TheGovernment recognises the deficiencLes, and twD important measures are underconsideration to help rectify them:

(a) Establishment of one or several export corporations is under way.They would have a permanent presence Ln main market countries, seek-ing orders and chanelling these to individual TunisLan inanutactur-ers. Several other developing countries have established organiza-tions of this kind that should be ana'Lysed. To be successful, theseorganizations will need a core of staff allying knowledge of the sub-sector concerned with proven sales records in Europe. Another keyfunction is that of imposing rigorous quality control on themanufacturers with which the orders are placed and ensuring thatdelivery schedules are adhered to. Foreign consultants could be ofassistance in helping to establish the right kind of organization, orcooperation with a well established iiternational trading companycould be sought;

(b) The regulations which prevent individual Tunisian firms fromestabLishing permanent sales operations abroad should be abolished.

4.41 Such [neasures would do much to solve the export marketLng problems ofsmall potential exporters, and of the few large operations which can affordto set up their own permanent presence abroad. But more needs to be done,particularly for medium-sized firms, to develop knowledge of export markets,their needs and how to exploit them. Possibly some management training inexport marketing is needed because in the final analysis there is no sub-stitute for just getting out and trying to sell. Motivation ought to bestimulated by making production for the local market rather less profitablerelatively to what it is now, by easing all bureaucratic problems whicbobstruct the path of the exporter, and by creating pressures on firms withinTunisia to become successful exporters. Inter alia preference could be gLvento successful exporters in granting government contracts. The Export Promo-tion Stucly undertaken by CEPEX in the framework of the World Bankc financedTechnical Assistance Project provides a welcome opportunity to analyse andassess these problems in a comprehensive way.

Other Problems and Institutional Support to Industry

4.42 In spite of recent improvements, procedures for both import andexport remain insufficiently flexible and slow. It is often dLfiicult inpractice to get rebates of customs duties paid on imports when goods aresubsequently exported.The procedures do not facilitate exporting from stock asprior clearance is needed. There have been problems with country of origincertificates for the assembly in Tunisia of semi-finished products of EECorigin, prior to export to EFTA countries. Some manufacturers making a widerange of products, particularly complex ones requiring a large number ofcomponents find the annual budgeting system for imports difficult: and very

- 58 -

time-consuming. It would be helpful if controls a priori as at present wereto be replaced by controls a posteriori. Procedures need to be simplified andaccelerated for relatively small consignments as much of the potential foradditional exports comes from smaller firms whose production LS currentlyoriented wbolly towards the Tunisian market. The Customs and otber autbor-ities need to consider how they can facilitate exports; often the problems

seem to lie with individual officials who regard their role as essentially oneof control, rather than of easing the path of the exporter.

4.43 Other problems includet

(a) The wage escalation system according to length of service(para. 4.15) wbich is so marked as to penalize existing firmsparticularly in labour-intensive sectors; this has contributed to tneexcessive fragmentation of sectors such as clothing, textiles, shoemanufacture and plastic products. In future wage negotiationsefforts should be made to reduce this bias;

(b) Sea transport links to other North African and Riddle Eastern coun-tries need improving to facilitate exports;

(c) Exporters need to give particular attention to the quality of localpackaging materials. Presentation is important; a greater freedom ofimport of such products could perhaps be permitted if local indulstrycannot match these requirements;

(d) Absence of an export credit insurance system, though one is planned.This is particularly so, since some of the most obvious markets forTunisian exports are not very good risks so that some Tunisianexporters bave shown reluctance in seeking such exports. Exportcredit facilities also need considerable strengthening;

(e) It is also important to resolve AFI's (Agence Fonciere Industrielle)financial problems so as to enable it to offer land and buildlngs ona rental basis. This is particularly important for foreign ownedexporting firms, usually reluctant to tie up much money in imaovableinvestment, and puts Tunisia at a competitive disadvantage comparedwith other locations for such industries. At Tunisia's stage ofindustrial development a well-run government industrial estate opera-tion need not represent any net drain on budgetary resources.

4.44 Possible needs for special studies witb technical assistance havebeen mentioned or implied at several points xn this chapter notably in rela-tion to: project appraisal and project identification (para. 4.27); reformingthe tariff system to give reasonable levels of effective protection (para.4.29); recommending improvements in API's foreign promotional efforts (para.4.39); (d) help in setting up the planned export corporations (para. 4.44));improving export market knowledge and giving appropriate management tralning(para. 4.41); putting land operations onto a sounder basis (para. 4.43). Such

- 59 -

efforts, stretching across the wbole range of manufacturing would complement

the substantial existing international technical assistance efforts which aremainly oriented to the needs of individual sub-sectors. In addition there isa special need for technical assistance and training programmes related to themetals and engineering sub-sector, and to text:iles, leather and. shoes.

4.45 The Government's own support to'the manufacturing sector should alsobe strengthened. Management training in export marketing and in financialplanning warrant particular attention. So do efforts to increase the numberof trained accountants and bookkeepers. The shortage of cadres moyens (mainlytechnicians and maftrises) is a key issue which requires special trainingefforts. Finally, though some subsectors benefit from considerable institu-tional support in the form of training facilil:Les at different levels, centralworksbops and laboratories 1/, others do not. Deficiencies appear most markedin the food processing and wood products industries. Last, but certainly notleast, special support is needed to build up the artisanal sector. All theseefforts have as a final goal to delineate, define, strengthen and coordinatethe roles and means given to the four main public agencies assisting theGovernment in implementing its strategy, CNEI, Centre National des EtudesIndustrielles (for studies), API (for investments), AFI (for land) and CEPEX,Centre de Promotion des Exportations (for exports). At the same time,development banks, both the experienced BDET and the ones recently erectedwith foreign participation, will have to be involved. Specific subsectoralpolicy issues are discussed in the section below.

SUB SECTORAL PLANS

4.46 This section does not attempt to analyse any single major investmentproject in sufficient detail to give a firm v3.ew on its viability or other-wise. Specia'l attention was, however, given at the Government's request tothe fertiliser and cement industries and the plans for these were examined bysubsectoral specialists. Including nine projects in these two subsectors, thePlan proposes 26 important projects in the manufacturing sector, each involv-ing an investrment in excess of TD 10 million. None are obviously nonviable,and few are s0 straightforward and clearly needed that their viability isbeyond doubt. In many cases full economic feasibility studies 'have not yetbeen carried out while for most, assumptions such as product prices or energycosts need to be critically examined. For mosit lesser projects and an alarm-ingly high proportion of the larger ones too, the details available to theplanning authorities are insufficient to allowr the project documents (fichesde projets) to be completed in full and at most these give only a fInancialinterna]L rate of return. Worse, there are sonme significant public sectorprojects supposedly at a fairly advanced stage for which even t1is does notappear to be possible. The high concentration of estimated internal rates ofreturn around 12-13 percent gives rise to doubts as to whether price assump-tions have nol: been adjusted to ensure profits at this level, especially per-

1/ Including the recently created bureau of 'itandards, Technical Centre forMechanical. Industries, and Technical Centre for Construction MaterialsIndustries.

- bO -

baps a presumption that the Government will allow enterprises to charge pricessufficient to achieve this rate of return, while subjecting imports to strictcontrols.

Food Processing

4.47. The Plan expects sectoral value-added to rise by b.5 percent p.a. inreal terms, compared with only 1.5 percent p.a. in the Vth Plan period. Thisis an ambitious target, given the slow rate of expansion in agricultural oUt-put and in domestic demand even if exports may increase somewhat more rapidlythan projected in the Plan and marketing can be improved rapidly (in realterms exports fell during the Vth Plan). Given the limited potential forfurther import substitution, it seems unlikely that the subsector' s valueadded can grow four times as fast as it did in the Vth Plan Period, indeednearly as fast as total private consumption. Investment per job created (TD15,000) is in real terms lower that during the Vth Plan, and the incrementalcapital output ratio should drop from a very high 9.7 to 4.1 (in real terms);this is still quite high for what is normally a labor intensive sector.Investment needs may also be pitched rather on the high side, particularly inview of the low level of capacity utilization in many firms, even though thesector appears an economically efficient one in wbich to invest. In con-sequence, the Report scenarios (Table 4.2) project slightly lower totalinvestments in the subsector.

4.48 There is only one major food processing project in the VIth Plan, asugar project. The potential for some of the smaller projects is, however,affected by important demand, supply and other considerations which appear tohave been insufficiently examined:

(a) The projected need for additional flour milling capacity assumes thatthe current bread subsidy remains. Reducing it (for which a strongcase could be made) might appreciably reduce consumption--partly bycutting out some current wastage of bread;

(b) The demand for milk is expected to increase by 20 percent a year, asin the past, though obviously the pace is bound to slow eventually.However, since investment in milk processing appears far from proift-able at present, there is lttle likelihood of the additionalcapacity being created until pricing is made more realistic;

(c) It is pointed out that important quantities of sub-products from someprocesses are currently wasted (e.g. from olive oil processing) butthere are no clear recommendations as to how these should be util-ized. There is however a chemical industries project to producefurfural from the olive stones and almond shells;

- 61 -

(d) No attention is given to the possibilities of 3ncreasing the value ofolive oil exports, by concentrating on quality, especLally in refin-ing, and by improved marketing, particularly in northern Europe,wbere olive oil is a quasi-luxury, but one for which demand israpidly increasing (partly for health reasons). Greece is one of thecountries which has capitalised on this by marketing first-pressing-oil under a Greek label at a European wholesale price of aroundTD 1.250 a litre;

(e) In fruit and vegetable processing, especially for export, it isnecessary to consider more carefully what products can be expected tobe competitive. Unless it can capitalise on, for instance, a trans-port cost advantage, Tunisia is unlikely to be competitive in pro-ducts which need irrigation, but do not in competing countries.Instead of producing tomatoes for concentrate, an extremely pricecompetitive product on export markets, might it not be better toproduce fresh tomatoes for sale in tbe European winter (thousands oftons of tomatoes are air-freighted from the Canary IsLands to Europeevery winter);

(f) Tunisian wines might also be marketed in important quasntities inEurope under a Tunisian label. The problems of excessi supply of winewithin the EEC have not prevented producers in Argentina, Chile,California, and South Africa from seLling worthwbile quantities inGreat Britain, for instance. In quality some Tunislan wines are atleast as good as many of these.

Construction :aterials

4.49 This is the only sub-sector for which the Plan forecast as well asthe two Report projections foresee a marked reduction in investments in realterms; by 25 percent in the Plan forecast and the Report projection B, by 32percent in the Report projection A (table 4.2). This reflects changed Govern-ment priorities, away from highly capital-intensive industries, but also acertain market saturation in a sector that bad experienced very rapid growthduring the last decade and consistently over fulfilled Plan investment tar-gets. During the 1970s, cement consumption (cement accounts for nearlytwo-thirds of total value added in the sector) increased by 14 percent peryear, with an elasticity of 1.4 to gross fixedl capital investment--in part asa result of artificially low cement prices. I)omestic production expandedabout equally fast; this resulted in a very high per capita consumption ofcement, compared to other countries with a similar per capita income.

4.50 The cement subsector - almost fully publicly owned - faces three mainproblems: low prices imposed by Government, excessively high domestic demand,and high energy consumption. In addition, a number of technical problems haveprevented the two most recent cement factorieEs from achieving full production.Cement prices have consistently been low in Tunisia, in part because fuel oilused to be heavily subsidized, in part because price changes were generally

- 62 -

introduced too little and too late. At present wholesale prices of only 55-60percent of average Mediterranean import prices, a new plant cannot financiallysurvive. Such price policies obviously run counter to any Government strategyof increasing public enterprises savings (volume I, para. 41); it alsoexcludes any possible participation of private enterprises in this sector astentatively envisaged by Government; last but not least, it stimulatesexcessive cement consumption. In addition to low prices, a number oftechnical factors explain the bigh consumption; standards for ordinary portlandcement (French pre-1977 standards) are high and outdated so that on average atoo high quality cement is used; construction norms also are undulycement-intensive, so that more cement is used than necessary; most bigh andmiddle level engineers and technicians, trained along European lines, are wellfamiliar with the use of cement, but know little about such traditional localconstruction materials as lime and tiles; extensive research and trainingefforts should be undertaken to change this situation.

4.51 The progressive increase in domestic energy prices, carried out Ioy

Government since 1981 will improve the above situation to some extent and iSbelieved to lead to some slow-down in consumption and some energy savings.,under the condition that increased energy prices are indeed passed on toconsumers in the form of higher cement prices. Considering the very highenergy consumption of cement factories, more is needed. In particular, it isimportant to assess carefully alternative fuel sources (other than the presentfuel oil) in order to develop an optimal energy strategy for the county as awhole (Chapter II Energy, paras. 2.21-2.23); it will have to compare theeconomics of using alternatively or in combination, imported coal, locallignite, fuel oil, natural gas, refuse, etc. While the cement industry,understandably is highly interested in changing to natural gas, given the

cleanliness and ease of that energy source, this may not be the optimal use ofthe limited amount of gas available. Such an energy assessment should alsoexamine the possibilities of using less energy intensive building materialssuch as red brick for instance.

4.52 During Plan preparation, there were major discussions within the

administration on the optimal investment program, particularly on the need tobuild two more cement factories (the 7th and bth) toward the end of the V1thPlan period. A careful assessment of likely future demand trends led to thedecision to postpone both projects to the VIIth Plan or beyond. As a resultthe Plan investment program and the Report projection (assumption B) agree onan overall investment program of TD 300 million, with only minor differencesin the detailed intra-sectoral allocations. The two main projects arecompletion of the 5th and 6th cement plant started during the Vth Plan;furthermore, a series of urgent improvements in some of the existing plantsare required to straighten out their technical problems.

Metals and Engineering

4.53 In line with the high priority accorded to the metals and engineering

- 63 -

sector, the VIth Plan allocates 24 percent of imanufacturing investment to it.It is expected to account for 22 percent of all jobs created in manufacturing,and for the same percentage of the additional value added in the sector -reflecting a real growth of over 15 percent annually, against 13 percent ayear achieved during the Vth Plan. Althougb production for export Is expectedto rise faster still (by 19 percent a year in real terms) fundamentally thesector would remain an import substituting one, with about 82 percent of 1986output derived for the bome market, against around 84 percent in 1981. Out ofthe TD 385 million in investment planned, steel and metals represent TD bbmillion, mechanical industries TD 181 million, metal construction TD 76 mil-lion, but electrical and electronic products only TD 41 million. Nearly allthe investment proposed relates to specific identified projects; this gives asomewhat mislending impression of accuracy, as experience in Tunisia and else-wbere suggests that a significant proportion of new investment in this sectorstems from private sector projects which had not been identLfiecL at the Planformulation stage, while a large part of the projects identifiect will not infact be realized during the Plan period.

4.54 In real terms less than half the inve3tments planned for the sectorin the Vth Plan were achieved largely because of the substantial delay in thesteel mill project; this points to the difficuLty likely to be e!xperlenced Inmore than doubling the past actual rate. While this Report fully agrees withthe high priority attributed to this sector (albeit for somewhat differentreasons), it does not consider it possible to step up investments by over 2.3times; in fact the Report's own projections of a 1.7-2.0 times increase,depending on the scenario is still rather optimistic. Past good performancein creating jobs and in increasing exports was to a major extent due to smalland medium-sized enterprises, on which current plans do not appear to placeenough emphasis in investment allocation. The electrical and electronicproducts subsector also played a big role in the Vth Plan achlevements.Relative to the potential, it seems that current plans anticipate a rather toorapid growth in output for the home market; talke too limited a view of exportpotential, especially if policies and promotional efforts can be improved;give too little attention to the electrical engineering and electronicssector, especially for export, while over-emph;isizing non-electrical engineer-ing.

4.55 Several important projects, plus many lesser ones, seem economicallyquestionable in view of the limited size of the local market, minimumproduction units needed to achieve reasonable economies of scale, globalovercapacity on the world market (hence imports are frequently available atbelow the cost of production), and the worldwide character of the industryconcerned. Examples are passenger vehicle assembly operations, steel tubemanufacture, and a machine tool plant. A high priority for the development ofthe sector, and particularly of electrical and electronLc products, is howeverjustified in tlhe context of export potential - given the comparativeadvantages which Tunisia enjoys. Particular comments should be made on the ElFouladh steel-making project (TD 78 million). The feasibility study showed a

- 64 -

pretax financial rate of return of about 12 percent; and the economic rate ofreturn is probably similar. From the technical point of view this type ofmill (electric arc furnace based on imported scrap with billet continuouscasting and bar will) is attractive, because investment costs per ton andenergy consumption are both much lower than for integrated plants; yields arealso better than in a combination ingot/blooming mill. But the economies ofall steel investments are crucially affected by the state of the world steelmarket; if current real steel prices were to persist, and steel couldcontinue to be imported at below the cost of production in Europe, the projectwould be at best marginally viable, and a poor use of resources. Thelong-term price situation sbould be clearer around l984, and there couldtherefore be a case for going slow on the whole project and, thus, minLmizethe price risk (as may now be envisaged).

Chemicals

4.56 The cbemical subsector is one of the few, where this Report proposessubstantially lower investments than foreseen in the Plan (TD280 versus TD36Umillion, Table 4.2). It is dominated by the fertilizer industry processinglocal phosphate (two-thirds of Plan investments) but includes also processingof other minerals, rubber and light chemicals. Fertilizer production isanalysed in detail in Chapter III of this volume, but is included in the over-all figures cited here.

4.57 Projects in the beavy chemicals sector have been appreciably betterappraised than is the case in most other subsectors. This probably stems inpart from a greater level of tecbnical competence, which has been extendedfrom fertiliser processing to other processes. It may well also be becausethe subsector is far more export-oriented than is any otber part of theTunisian manufacturing industry; hence world market prices and conditions havebeen taken as a starting point for analysing the potential for new projectseven including some oriented primarily to the local market. Overall, thechemical sector value added is expected to grow by about 14.5 percentannually, less than half the real rate of increase achieved during the VthPlan period. Nonetheless, export projections are on the optimistic side,considering world market limitations, while the Plan's inplied rate of in-crease in gross production for the home market of about 20 percent per anliumseems very optimistic. The great attraction of investment in this sectoris in its contribution to exports; no other sector has better net foreignexchange effects per unit of investment. On all other counts it is noteconomically a particularly attractive sector; in particular investment needsare very high and job creation extremely low.

4.58 Studies on the new tire plant (STIP) appear in general to be soundlybased. But the plant would be a comparatively small one, producing a widerange of types. As with the steel mill, its economies will oe cruciallyaffected by what happens in European tire markets, currently very depressed,and hence as to whether imported tires will continue to be available at belowthe cost of their production. Possibly the worst is now past, and further bigcuts in European capacity are unlikely. But the viability of rehabilitating

- 65 -

the old[ tire plant (SONAP) appears more doubtful - involving a complete changein technology and making a wide range of tires in very small quantities. Morefundamentally, the question ought to be asked whether TunLsia should not betaking a longer-term view, seeking the collaboration of a multinationalproducer to establisb a much larger export oriented plant. Prima facie largescale car tire production for export is sometbing for which Tunisia hasappreciable comparative advantages. The process is fairly, but: not largely,labour intensive, requires fairly high labour skills, while tires are far moreexpensive to transport than the bulk raw materials on which they are based;Tunisia is well-placed geographLcally relative to origins and shipping routesfor the raw mtaterials, and is not too far from markets (note especially thebig vehicle assembly plants now under construction for two multinationals inSouth/Eastern Spain). But to tap the new car tire inarket abroad, theproduction would have to be large (at least I million units p.a.) and mountedby one of the big multinationals. Because of their own problems, they areunlikely to be keen in the immediate future, but might be in a few years. Totap the replacement market, one needs to be even more price competitive butpossibly quality does not count so much; nonetheless a foreign collaboratorwould be essential.

4.59 For light chemicals an output growth of around 16 percent annually iSprojected; as little of this represents products not already produced inTunisia, and as imports in significant quantities of sucb products are notgenerally allowed, the implied rate of growth in consumer demand for chemicalproducts is high. Little attention was given to export potential, with about90 percent of 1986 output being destined for the home market, nuch the sameproportion as at present. The ratber optimistic assessment of the growthpotential of the local market contrasts with an underestimated export poten-tial.

4.60 The Plan investment proposal of TD 360O million includes TD 23b mil-lion for fertilizer, TD 56 million for the processing of other minerals(including uranium), TD 40 million for rubber, and TD 28 million for lightchemicals. Based on the above considerations and on Chapter III Phosphates,this Report proposes a reduction to TD 280 miLlion; this might be achleved byreducing fertilizer projects by some TD 35-40 million, dropping the uraniumproject (TD 21 million, Cbapter III, para. 3.21), and delayLng projects in thetwo other subsectors (TD 20 million).

Textiles, Clothing, Leather and Shoes

4.61. Textiles and leather are one of the five top priority sectors for theVIth Plan. The Plan investment target of TD L65 million includes TD 137million for textiles and clothing, TD 23 millLon for leather and shoes, and TD5 million for the artisanal sector. Overall, gross production for the homemarket is expected to rise by about 5.5 percent annually in real terms; thiswould represent a big improvement over Vth Plan performance, when (accordingto available statistics) it stagnated or even declined. This cloes seem ratheroptimistic; a growth of 2.5-3 percent annually during the Plan period is per-

- 66 -

haps as much as can be expected. On the export side, a 10 percent real annualgrowth is projected, far below what was achieved in the Vth Plan period(around 27 percent annually in real terms). Tbougb growtb at the Vth Planrate can hardly be expected to continue, this does seem to understate thepotential for increasing the real value of exports by a shift to betterquality products, while remaining within the EEC quotas. But major improve-ments in marketing would be needed; hence the sizeable difference between thetwo sets of Report projections for investments in Table 4.2. A really goodexport performance would mean that instead of the Plan target of 33,000 extrajobs being created in the VIth Plan period, there could be 59,000; but withoutbetter than projected exports, job creation is likely to fall well short of33,000.

4.62. On overall economic grounds, provided its production can be sold,either at home or abroad, the textiles sector particularly clothing, shoe andleather production is a very attractive one to develop. It needs less invest-ment per extra job and produces more extra output out of investment than anyother manufacturing sector; though it does not score very well on backwardlinkages, it is around average in terms of net trade effects and productivitygrowth. Consequently a major effort is needed to ensure that the potential isrealized for substantially higher exports, whether by Tunisian or by foreignfirms.

4.63. The Plan seem to expect, perhaps a little optimistically, thatTunisia will get a 10 percent higher EEC quota for textiles and clothing, butacknowledges the fact that it would be unrealistic to expect the totality ofquotas to be filled. In respect to clothing, there is considerable scope, notreflected in the Plan for improving quality and marketing, partly by becom,ingmore fashion-oriented; this would increase the average va]Lue of exports.There should be more emphasis on fine fabrics whicb are comparatively labor-intensive rather than on heavy ones, and linkages between local supplies andforeign owned export firms should be improved. The only large projects in thesubsector are the two phase program for rehabilitating and expanding SOGITEX,the state textiles entity, estimated to cost TD 17 million for the firstphase, with a larger second phase to follow. Part of the first phase isfinanced by a loan from the World Bank.

4.64. For leather, shoes, and leather products the presumed growth of localdemand is a starting point from which investment and employment needs arederived. Export forecasts are based on assumptions that: export orientedoperations (mostly foreign under the Law of 1972) will be created at the samepace as in the Vth Plan period; and, export of locally made shoes would risesharply from none at present to 20 percent of the total in 1986. Thispresumption is rather optimistic, in view of the problem of old equipment,poor quality leather and worker training. If 20 percent of local shoe produc-tion is to be exported, a far more active overseas promotion and marketingeffort, by individual concerns and perhaps also at a subsectoral level, willbe needed than is implied by the Plan. It probably also will need anincreased concentration on quality, and the average value of exported shoesshould be comparatively high. Plan projections do not appear to allow forthis.

- 67 -

Miscellaneous Industries

4.65. Miscellaneous industries are another sub-sector that figures amongthe top five priorities. The Plan assumed that 50 percent of estimated futuredemand for paper and board will be met by domestic production; t:he printingindustry's output will expand by 12 percent annually; 90-96 percent of estima-ted future demand for plastic products be met by local production; and thatthere will be a 14 percent annual growth in output in the remaining indus-tries. The aniticipated value added increase was estimated at 13 percent ayear as was achieved in the Vth Plan period. This does seem a Little optimis-tic. Since thiere are few new import substitution possibilities,, reflectingthe broad scope which the subsector has already achieved, I/ it is difficultto see overall. sub-sectoral production for the home market contiLnuing toexpand substantially faster than total consumer spending on industrial pro-ducts; bence the somewhat lower investment figure put foreward in the Reportscenario.

4.66 Nevertheless, this is an economically fairly efficient sector todevelop--second only to textiles--in terms of investment per job) created, andlabor and capital productivity. It scores poorly on net trade effects, how-ever, reflecting a typically low proportion of local value added. Thoughexport opporttnities could exceed Plan projections, provided marketing andpromotion abroad (to attract foreign investment) can be improved, they cannotpusb up overall value added growth by much.

1/ The report estimates that 85 percent of Tunisian demand for the productsof the subsector are already supplied by local manufacturers; in 1972 theproportioni was 90 percent.

- 68 -

CHAPTER V; TRANSPORT AND COMMWUNICATIONS

5.1 The VItth Development Plan proposes a nearly 12 percent aecline inreal terms for total investments in transport and communications (Table 5.2).This substantial reduction, however, is due entirely to the near compLetion otthe intercontinental gas pipeline during the Vth Plan, whLch accounted forover 20 percent of total actual plan outlays in this sector. Excluding this

unique project, total transport investments are proposed to increase by about5 percent and post and telecommunications investments by a high 56 percent.Based on a detailed analysis of the projects included in the Plan, this Reportproposes an overall investment level, that is only slightly lower (TD 1.04billion versus TD 1.1 billion in current prices, para. 5.14). These verysimilar overall levels, however, hide a number of significant differences,concerning several sub-sectors and individual projects. This Report proposes,for instance, nearly 25 percent lower investments for railways, but a 25percent larger rural roads program. As a general rule, it gives higherpriority than the Plan to rehabilitation and modernization of existingtransport infrastructure to the detriment of new construction, and higherimportance to the expansion of secondary and tertiary transport links to thedetriment of the primary network. It is particularly critical of the verysubstantial rail and road investments proposed by the Plan along Tunisia'seastern coast.

MAIN PROBLEM AREAS

5.2 Tunisia possesses a well-developed transportation network. Thesystem is best developed in the coastal provinces of the Northeast and East,areas which contain more than half the country's population. Roadtransportation is the major mode used for goods and passenger transportation,and its share of total traffic has increased steadily to about 85 percent otpassenger and goods traffic (excluding minerals) by now. The railway plays animportant role in phosphate export, concentrated on about 30U km of lines inthe South of the country; on the rest of the network traffic density is verylow with the exception of passenger traffic in the coastal areas between Tunisand Sfax. In 1980, 12.9 million tons of freight passed through Tunisianports, including 11 million tonnes of international traffic. The port ofTunis/La Goulette handles nearly 50 percent of general cargo and Sfax about50 percent of dry bulk traffic, mainly ore exports. Tuie rapic growth of theeconomy and the increases in traffic during the last decade made it necessaryto expand transportation facilities considerably. To that ena, large invest-ments were made in certain high cost projects, to the detriment of mainternanceand of more modest but more economic improvements. The Government now aims tomake up the shortfall in programs for modernization, rehabilitation and main-tenance of the existing network and to increase efficiency in the transporta-tion sector. This new orientation calls for a greater effort to foster ruraland regional development, in line with Tunisia's development strategy, thlroughinvestments in rural roads.

5.3 Road Infrastructure. Although one-half of the classitiea network ispaved, most of the roads were built before independence to standards of align-

- 69 -

ment, width and carrying capacity which have since been rendered inadequate bythe rapid growth of traffic. A program of rehabilitation of the main network,comprising strengthening and widening works over about 1,900 km of roads wasdrawn up at the beginning of the IVth Plan (1972-7b) but because of rapidinflation, only 1,000 km was executed, and the program was not continued inthe Vth Plan (1977-81). At the beginning of the Vth Plan the appropriationswere directed mainly toward a program of modernization and expansion of capac-ity. It was not until the latter years of the Vth Plan that the Governmentadopted a more balanced strategy for development of the road network, partic-ularly in order to sustain a more vigorous polLcy of rural and regional devel-opment. Road traffic is at present growing at about 8 percent pi.a..

5.4 Railways. The railway network is operated by the Socioit Nationaledes Chemins de Fer Tunisiens (SNCFT), a semi-autonomous public agency. Inspite of a program of modernization undertaken during tne course of the IVthPlan (1972-76), the railway is handicapped by poor network design, theexistence of two gauges, and the lack of long-aistance freight traffic.Phosphate transportation constitutes the only important traffic of goods,while passenger traffic is concentrated mainly in the coastal area betweenTunis, Sousse and Sfax. With the exception of tne lines serving; the phosphatetraffic, freight traffic density is low. Freight traffic developed littleduring the period 1970-75, but between 1975 and 1980 it grew steadily at about7.5 percent p.a., as a consequence particularly of increases in constructionmaterials and grain traffic. Rail passenger traffic has grown steadily atabout 7 percent p.a.. The financial situation of the SNCFT has beendeteriorating since 1972, and the defLcit has continued to grow as aconsequence of rates which are generally lower than average costs. However,the deficit should fall in 1982 as a result of a 10 percent increase intariffs in August 1981, the first since 1978. In spite of these difitLculties,SNCFT envisages a large program of investments, including in particulardoubling of the track between Tunis and Sousse, and construction of new linesbetween Sousse and Mahdia and between Gabes and Medenine. During the VIthPlan (1982-86), SNCFT's main priorities shoula be rehabilltation of track,improving efficiency, rationalizing Services, particularly in favor of bulkfreight traffic, and establishing reasonable rates.

5.5 Ports are operated (and largely owned) by the Office des PortsNationaux Tunisiens (OPNT). Its financial situation is satisfactory; follow-ing the introduction of a new tariff structure in July 1979, revenues in 1980were 20 percent higher than in 1979. However, the rates remain too low in

relation to costs, and a study is at present under way with a view to revisingthem. Productivity of the ports is average. tt can be improved by increasingoperational efficiency and by providing speciaLized facilities to accommodatemodern shipping technology. Sea transportation is handled by the ComapagnieTunisienne de Navigation (CTN), a semi-autonomous enterprise, whLch owns19 vessels with a capacity of 140,UUO tons. The company has set itselt thegoal of a 30 percent share of international traffic by the end of the VIthPlan. Following recent rapid expansion, CTN should enter upon a period ofconsolidating and optimizing the operations of its facillties.

5.6 The four airports, Serving international trattic, are managed by theOffice des Ports Aeriens de Tunisie (OPAT). Following the rapid growth ot

- 70 -

tourism, large investments have been allocated in recent years to thissector. Generally speaking, the existing facilities are now satisfactory,and benceforth the VIth Plan investments should be limLted to improving theexisting airports. Tunis Air, on international routes and also on domestic

services, has seen its financial situation worsen during recent years as aconsequence of expensive purchases of new aircraft and because its operatingcosts have risen faster than its revenues. At present it possesses a capacityin excess of demand and does not plan any new expansion in the medium term.Aircraft purchases under the VIth Plan will be mainly for replacement otexisting capacity. Tunisavia operates a small fleet of aircraft for cbarterflights and also for a limited number of regular domestLc flights.

5.7 As a general rule the productivity of Tunisia's transport system iswell below its potential. More particularly, the sector could improve thequality of services and reduce transportation costs Dy Lmproving theorganization and regulation of the system. For example, the quality of theservices offered by public road transport companies is often consideredinadequate by the users, who then switch to private operators or to ownaccount transportation. This diversion of traffic is costly to the economyconsidering that private transportation is limited to small trucks. TheGovernment hopes to tackle this problems by rationalizing the public sector inorder to make it more competitive. More particularly, the VIth Plan objectiveaims first of all to reorganize the road transportation companies. Otberexamples of low output are the railway operations, with the exception ofphosphate transportation, and the handling of general cargo in the ports.

5.8 The low productivity of transportation enterprises, combined withregulation and price control has created a very large gap between transporta-tion costs and rates. Only the STM 1/ manages to break even with the ratesnow in force. In the case of SNCFT, the average passenger revenue coversbetween 40 percent and 60 percent of marginal costs, and average treighttraffic receipts between 50 percent and 95 percent. Phosphate transportat:ionis the only operation allowing the SNCFT to cover its costs. Apart from theSTM, all other public transportation enterprises are in deficit and are a,considerable burden on the budget. In contrast, the ports and airports cancover their operating costs.

5.09 A key problem is the lack of qualified staff. ThLs situation isdetrimental not only to good management but also to the preparation ofinvestment projects and to planning and coordination of the sector as awhole. The planning weaknesses are responsible for: a) a lack of soundguidelines and well-defined priorities and appropriate investment programs forthe future; b) heavy investments in sea transportation and in railways, whichare reflected in a high level of foreign-exchange expenditure, and c) a lackof adequate appropriations for maintenance and rehabilitation of the existinginfrastructure. The Government has engaged consultants to draw up developmentplans for the various subsectors and to study coordination of thetransportation sector as a whole. Moreover, the Ministry of Transportatlonrecently set up a transportation coordination unit with some foreign technlicalassistance.

1/ Soci4t4 des transports des marchandises (for road transport of freight).

- 71 -

PAST AND FUTUJRE INVESTMENTS

Investments Iuring the Vth Plan

5.10 Thie main goals of the Vth Plan were; a) to improve the existinginfrastructure, particularly through modernization and rehabilitation works;b) to promote; rural development by improving rural roads; c) to increase theshare of international traffic handled by Tunisian carriers; and d) toreorganize the regional transportation companies. Although these goals werereasonable, the importance accorded to sea and air transportation developmenthas been reflected in heavy expenditures of fDreLgn exchange and 1lmitedbenefits, at least in the short term. In the highway sector, major works onthe Tunis-Turki motorway and Bizerte bridge have absorbed more resources thanexpected. This led to delays in the execution of an urgent program of modern-ization and rehabilitation of existing roads from which the country could havereaped more substantial benefits. Actual investments exceeded Plan targets byabout 13 percent (in current prices). 1/ Plan torecasts were exceeded Ln allsubsectors except sea and air transportation. Most of this, however, reflectshigher than expected inflation. In part, it was also due to tbe addition ofnew projects, for example, railway projects such as the Gafsa-Gabes line. Atpresent tne investments already committed in tne transportation sector thatwill spill over into the VIth Plan amount to about TD 375 million, whichcorresponds to well over 40 percent of the proposed program in the VIth Plan.

Table 5.1: INVESTMENTS OF THE VTh PLAN (1977-81)(TD million--current prices)

Forecast Actual PercentageTD Percent TD Percent Execution

Railways 75 15 137 25 183Roads 113 23 120 22 106Road transportation 92 19 104 18 113Ports 39 8 43 8 1ltSea transportation 79 16 61 11 77Airports 33 7 33 b 100Air transportation 62 12 57 10 92

Total 493 100 555 /1 100 113

/1 Excluding the Algerian-Italian intercontinental gas pipeline (TD 170million) as well as posts and telecommunications (TD 74 million) tor agrand total of TD 799 million for the entire transport and communLcationssector.

Source: Ministry of Planning and Finance

1/ Excluding pipelines and post and telecommunications

- 72 -

5.11 The number of jobs created during the Vth Plan is estimated at 6,000in road transportation, 3,000 in SNCFT and 1,000 in sea and air transporta-tion, giving an overall growth of about 5 percent p.a. The cost per jobcreated ranges from TD 18,000 for road transportation to TD 47,000 for SNCFkTand more than TD 90,000 for CTN and Tunis Air. Since the VIth Plan willaccord priority to labor-intensive investments, the increased importance givento road transport (table 5.2) finds an additional justification in therelatively low capital intensiveness of this mode of transport.

Investments During the VItb Plan

5.12 The VIth Plan proposes an overall investment program for transportand communications that is nearly 12 percent below the actual investmentvolume achieved during the V Plan (Table 5.2). Tnis apparent decline, how-ever, is due entirely to the completion of the Algerian-Italian intercon-tinental gas pipeline during the Vth Plan; excluding this exceptional projectthe Plan proposes a 15 percent increase in real terms, 6.7 percent fortransport and 78 percent for post and telecommunications 1/. Within thetransport subsector, emphasis is given to railways and roads, which see theircombined share of investments increased from 45 percent during the Vth Plan to52 percent during the VIth; all other sub-sectors see their programs eithermaintained or even reduced in real terms.

TABLE 5.2: INVESTMENTS OF THE VITH PLAN /1(TD million at 1982-86 prices) /2

Vtb Plan VIth PlanActuals Plan Project ons Report Proposals

Railways 214.1 255 196Tunis tramway 5.5 84 84Roads 187.5 224 247Trucks and buses 157.0 62 70Ports 67.2 61 77Sea transport 95.3 100 90Airports 51.6 31 23Air transport 89.1 93 83Sub-total transport 867.3 910 870

Pipelines 265.6 10 1uPost and Telecommunications 115.b 180 160Grand Total 1,248.5 1,100 1,040

/1 For detaLls, see Table 5.3/2 See footnote 1/ in volume I, page 28.


1/ This Report has not analyzed in detaLl the investment: proposals for postand telecommunications, which account for some 2-2.5 percent of total Planinvestments.

- 73 -

5.13 In reviewing investment priorities in the transportation sector thisReport takes into account the following factors;

- the VIth Plan objectives;

- the foreseeable increase in demand in the different sub-sectors;

- the program of ongoing projects to be completed during the course ofthe new Plan;

- projects in an advanced stage of preparation (feasibility and designnearing completion, or projects being appraised by financialagencies);

- projects considered in preceding plans but not yet implemented; and

- the absorptive capacities of the various subsectors.

5.14 Based on these factors, this Report is recommending an investmentprogram of TD 1,040 million in current prices Eor transport and communicationscombined, or some TD 60 million less than proposed by the Plan. The main cutsare in railways and telecommunications, where the Plan proposed substantialincreases even though both sub-sectors do not correspond to the Plan'spriority of employment creation and need not be expanded as rapidly asproposed. On the other hand, this Report proposes more for road and roadtransport as well as for ports. This priority program accommodates allongoing projects, all high priority new projects and about bU percent of allsecond priority projects (Table 5.3). In the post and communicationssub-sector it envisages a 10 percent reduction in the Plan proposals; thiswill reduce the proposed increases from 56 to 38 percent in real terms, stillthe highest in the sector.

5.15 The recommended program for the transport sub-sector (Table 5.3)comprises three components;

(a) TD 3619 million (42 percent of the total) in projects started duringthe Vth Plan and whose execution is to continue during the VIthPlan. Nearly one-half of the program is thus preempted by on-goingprojects;

(b) TD 344 million (40 of the total) in new first-priority projects whoseexecution during the period of the VIt:h Plan is extremely importantto economic development and failure to execute would have signLficantadverse consequences on economic growth;

(c) TD 157 million (18 percent of the totcil) in new second-priorityprojects which are economically viable, necessary and justified, butwhich could be deferred fully or partially to the VILth Plan, withoutcreating unmanageable bottlenecks for economic growth.

An analysis of each sub-sector and the main differences between the twoproposals is given below.

- 74 -

5.16 Railways. The investments proposed by this Report focus mainly onprograms for rehabilitation of track, structures, signalling, and renewal ofequipment. It also includes completion of the Gafsa-Gabes line which wascommitted during the Vth Plan. For equipment, better utilization of theexisting stock should make it possible to defer part of the proposed expendi-tures. The Report proposes that doubling of track between Tunis and Soussenot be started until the end of the period, at the earliest. Altbough tthisproject cannot be undertaken until higher priority works are completed on thesuburban lines to Hamman Lif and Borj Cedria, the Plan proposal assumed thatdouble tracking to Sousse would be completed by about 1987. It also proposesto postpone construction of the Sousse-Monastir line, whicb is part of thieSahel Commuter project.

5.17 Roads. In order to sustain the VIth Plan orientation toward ruraland regional development, this Report gives priority to the rehabilitation ofthe existing network and the improvement of rural roads. These programs,already under execution, would account for about half the proposed roadinfrastructure budget. The Plan also provides for continuatLon of the work onthe motorway, particularly toward Hammamet and later toward Enfidaville by1986, and also improvement of the Kairouan-La Skirra road (GPZ), which wouldimprove the long-distance links between the North and the South. Both thleseprojects which are financed by foreign assistance, are likely to cost morethan expected by the Plan. Because of the backlog of works, particularly inrehabilitation, this Report suggests strongly that the share of roadinfrastructure in the total program be increase to about TD 245 million atcurrent prices, as compared to TD 224 proposed by the Plan. The bulk of theincrease should go to modernization, rehabilitation, and rural roads for whichthe Plan does not provide adequate allocation. On the other hand, executionof the motorway toward Sousse should receive lower priority. Finally, thePlan includes as much as TD 17 million for the construction of two major roadsin the North East which are of doubtful economic viability.

5.18 Road Transportatxon (trucks and buses). The effort in road traos-portation is expected to decline substantially compared to the Vth Plan. Aconcentration of investments on renewal rather than expansion implies both anincrease in productivity in the public sector and possibly a much greater rolefor private operators.

5.19 Ports. Proposea investments in the ports sector are expected to

remain at about the same level as during tne VIth Plan (TD 75-80 million). Inaddition to continuation of the ongoing works at La Goulette and Sfax, tt,ePlan provides for the construction at Bizerte of a berth accessible to oiltankers of 100,000 tons. Taking into account the other necessary projectsthis Report proposes a somewhat larger investment program than the Plan so asto cover the foreseeable needs up to the year 1990.

5.20 Airports. Investment priorities are directed mainly toward modern-ization and rehabilitation of the existing facilities at Monastir and Jerbaand also expansion of the air terminal at Tunis. They are justified by theconsiderable increase in tourism expected during the period of the VIth PLan.The Tabarka airport project, clearly, is of low priority and is not includedin this Report's proposal.

- 75 -

5.21 Sea -and Air Transportation. The development ot sea and air trans-portation should enter into a phase of consolidation following the perLod ofrapid expansion during recent years. The share of investment devoted to thesetwo subsectors would decline to less than 20 percent of the total investmentprogram or about TD 170 million at current prLces as compared to TD 186 mil-lion proposed by the Plan. Priority is given mainly to the renewal of exist-ing capacity rather than to expansion.

- 76 -

Table 5.3: PROPOSED MAIN PROJECTS IN THE TRANSPORTATION SECTOR(TD million current prices)

Plan Proposal Report ProposalOngoing New Ongoing Ist 2nd. GrandProjects Projects Total Projects Priority Priorlty Total

Rail transportation

Gafsa-Gab'es 5 - 5 8 - - aSahel link 17 - 17 - - - -

Double track - 2.6 26 - - 1U 10Other infrastructure 22 71 93 22 49 - 71Rehabilitation - 34 34 - 37 - 37Rolling stock _ 80 80 11 20 39 70

Total 44 211 255 41 106 49 196

Tunis Tramway 84 - 84 84 - - 84RoadsAutoroute 12 17 29 14 20 - 34Grand Tunis 4 15 19 2 15 5 22Modernization 13 10 23 25 7 8 40Rehabilitation 33 10 43 21 40 5 b6Rural Roads 14 30 44 18 37 - 55Municipalities - 14 14 - - - -Other 25 27 52 14 6 10 30

Total 101 123 224 94 125 28 247

Trucks and buses - 62 62 - 2b 44 70

Ports 29 32 61 49 19 9 77

Sea Transportation 50 50 100 50 21 19 9U

Airports 5 26 31 - 23 - 23

Air Transport 74 19 93 51 24 8 83

Sub-Total Transport 387 523 910 3b9 344 157 870

Gas Pipeline /I 10 - 10 10 - - 10

Post and Telecomm. /l 64 116 180 64 96 160

Grand Total 461 639 1,100 443 597 1,040

_I Not analyzed in detail in this Report.


- 77 -

CHAPTER VI: THE HOUSINP, SECTOR I/

6.1 Togel:her with energy (Chapter II) housing is one ot the two sectorswhere this Report projects substantially higher investmnents than the Plan(Table 6.5). The key reasons underlying this discrepancy are tinree: (1) thisReport believes that the number of housing units constructed during 1975-80was much higher than the Plan figures indlcate; thus projections for the VIthPlan ought to start from a much higher level, in terms of housing units; interms of value, the two estLmates are very close; (2) future demand will beconsiderably higher than the VIth Plan assumes, particularly for private con-struction; (3) Government would find it very difficult to reduce spontaneousprivate construction below a certain level; more than that, it would not bedesirable to do so, given the large justified demand for satistactory housing,particularly in urban areas, and the high labor intensity of private housingconstruction, that fits in well with the VIth Plan's declared objective ofincreased employment creation.

PAST TRENDS AND PRESENT SITUATION

6.2 Based on a detailed comparison of the 1975 census and the 198Upopulation and employment survey data, this Report concluded that the numberof new tiouses constructed during the 1975-8U period was nearly twice thenumber used by the Plan as the basis for its projections (Table b.5).According to this analysis, the total housing stock increased from about1,005,800 in L975 to 1,120,400 or by nearly 114,600 units; in addition,however, close to Z2O,UO0 units were demolished during the same period andreplaced by hi.gher quality houses, resulting in total construction of some314,000 new houses (Table 6.1). This replacexent effect was pairticularlystrong in the rural areas wbere the number of substandard housing declined bynearly half (Urom 218 to 114,000 units); the qualitative improvement waslargely the result of a rural slum clearance program which relocated 42,000gourbi (shanty) dwellers. The Plan assumes, however, that only 1bU,UU0dwellings were constructed during the Vth Plan. In money terms, the twoestimates are nevertheless very close as the Plan assumes much lilgher unitcosts (Table 6.5).

Table 6.1: REPORI ESTIMATES OF PAST HOUSING CONSTRUCT10N 1975-1980(number of unit B)

Urban Rural Total

Net increase 139,100 -24,550 114,550Demolished and rebuilt 53,900 145,550 199,450Total new construction 193,000 121,000 314,U00

Source: missi.on calculations.

1/ More details on this sector are provided in the bank's Hous:Lng SectorReview report 4013-TUN, dated September 20, 1982

- 78 -

6.3 The demand generated by new families, migrant households, and theneed to rehouse nearly 200,000 households stretched the capacity of bothpublic and private sectors to provide a sufficient supply of new housing. Inspite of a net increase of over 139,00U units, occupancy rates increasedmarkedly in urban areas; the number of families per dwelling rose from 1.09in 1975 to 1.16 in 1980, yielding an average 6.7 persons per unit or 3.4 perhabitable room. Over 40 percent of new housing consisted of one-roomdwellings built by the private sector, resulting in an increase in the numberof urban families living in one-room units from 17 percent in 1975 to 26 per-cent in 1980.

6.4 Substantial Lmprovements have been achieved in the level of basicurban services: in 1980, 84 percent of families were connected to theelectricity network and 71 percent to the public water supply as opposed to71 percent and 56 percent, respectively, in 1975 1/. However, the rapidexpansion of the urban housing stock has outpaced the ability to keep up withthe necessary sewerage extensions. The percentage connected to both the waterand sewer systems fell from 80 percent in 1975 to 72 percent in 198U, causinga deterioration in urban sanitary conditions. Although a rise in the annualrate of sewerage connections can be expected as the extensive primary networkexpansions currently undertaken are completed, the problems inherent incontrolling the location and expansion of the informal settlements thatcurrently account for over 50 percent of urban housing construction presentdifficult planning issues.

6.5 In spite of the fact that it exceeded by about 25 percent toe VthPlan target, housing investment in Tunisia has tended to be relatively low,averaging 4.3 percent of GDP, and has tended to fall in recent years relativeto the mid-1970s. In countries whose economy is comparable to that ofTunisia, it is generally in the order of 5 percent of GDP. The annual growthof 11.9 percent of housing investment was lower than the 14.7 percent annualgrowth rate of total fixed investment, indicating a relative drop of housinginvestment at a time when total investments were growing rapidly.

6.6 The effectiveness of the public sector in the production of housLngis obscured by its triple role of developer, lender, and subsidizer. As adeveloper, it controlled 41 percent of housing investment and produced 2bpercent of new housing. As a lender, it provided financing equivalent to 9.6percent of total housing investments; its direct subsidies being equal to anadditional 5.3 percent. However, the difficulty of unraveling the real costsof the multiplicity of hidden subsidies that underly the activities of thepublic and semi-public agencies involved in the production of housing makesit impossible to estimate accurately the public costs of the 8U,000 or sodwelling units in whose construction and/or financing the state participated.

6.7 The ability of the private sector to finance housing construction issubstantial. Including the 28 percent of housing costs in publicly-assisteaprograms financed by the private sector, it contributed 70 percent to total

1/ For electricity issues, see Chapter II, for water supply and sewerage,Chapter VII.

- 79 -

housing financing. It should be noted that 96 percent of the TD 843 million(in average 1982-86 prices) invested in housing by the private sector was thedirect contribution of households acquiring thbeir own home. This representsan annual propensity to invest domestic savings in housing equal to 3 percentof GDP.

Table 6.2: REPORT ESTIMATES OF HOUSING FlNANCING 1975-1980

Urbao Rural Total

Number of UnitsPublic sector 38,33') 42,120 8U,450Private: formal 58,260 6,140 64,400

informal 9b,410 72,740 169,150Total 193,001) 121,000 314,000

Million TD (average 1982-86 price) /1

Public sector /2 39'9 95 494Private: formal 404 6 410

informal 218i 77 295Total 1,021L 178 1,199

/1 156.2% of 1980 prices; see footnote 1/, voLume I, page 28./2 of whicb 28% privately financed

Source: mission estimates.

6.8 Over 74 percent of all houses built during 1975-8U were constructedby the private sector, the large majority in the informal sector, i.e. withoutadhering to existing development standards and bureaucratic procedures andoften on land either owned by Government or whose title is unknown. Thissector is, how,ever, far from disorganized. In contrast to the shanty towns orthe early 1970s, it develops large residential areas of good quality usuallyby small builders, but mostly at high density and without infrastructure orcommunity facilities.

6.9 The ability of public programs to address the housing needs of lower-income households is difficult to assess in the absence of accurate householdincome data. The population groups targeted by public programs vary consider-ably, as do the levels of subsidy; yet, all programs, except those intended tobuild rural or slum relocation housing, anticipate an equity of over TV IU)00.Considering that median household incomes in urban areas are on the order ofTD 1450 per annum, 75 percent of state-aided housing constructed between 1975and 1980 was not intended for low-income households. Whereas there has beena reduction in the percentage of urban households living below the absolutepoverty level, the ability of the lowest quint3.les to acquire housing is,however, sharply limited by both their ability to save the equity required aswell as by their limited recurrent resources, once basic nutritional, cloth-ing, and transportation needs have been met.

- 80 -

FUTURE HOUSING DEMAND

6.10 Future housing demand depends essentially on three factors; futuregrowth of population, changes in average family sizes and the spatial distri-bution of tamilies. The first factor is self-explanatory. Changes in averagefamily sizes are important, as housing demand depends more on the increase inthe number of families, than the number of total inhabitants; thus, at agiven level of population, the smaller the average family size, the greaterthe number of families and the larger the demand for housing. Finally,important migratory movements create additional demand for housing, in thereceiving areas (mostly towns) while they might create surplus housing in thedeparting areas.

6.11 Two scenarios have been worked out to project these trends. ScenarioA essentially assumes continuation of past population growth trends concerningtotal population as well as rural-urban migration; this is basically the Planscenario. Scenario B is more of a worst case projection, assuming not only aslightly higher total population growth but also a much stronger urban migra-tion. Both scenarios expect a marked decline in the average family size fromabout 5.7 persons in 1980 to 4.3 in 1986 as the high number of young Tunisiansreaching adulthood start to form their own families. In consequence, tnenumber of families is expected to increase much faster than total population;even in rural areas, where total population is projected to decline, thenumber of families is expected to increase quite rapidly.

Table 6.3: PROJECTION OF POPULATION AND FAMILIES

Mid-1980 End-l198Actuals Average Annual Growth Ratesin '000 Scenario A Scenario b

People: urban 3,595 3.9 5.3rural 2,972 -.2 -1.3

Total 6,567 2.2 2.b

Families: urban 623 8.8 9.9rural 521 4.6 4.3

Total 1,144 7.0 7.6

6.12 Over the 6-1/2 years between mid-1980 and the end of 1986, the numberof families is expected to increase by 570 and 629,00 respectively. Evenassuming a substantial increase in the average occupancy rate from toe past1.02 to about 1.1, as an increasing number of young families will remain intheir parents' homes for lack of affordable accommodations elsewhere, the netdemand for new dwellings would jump to around 550,000, or five times tne netincrease during 1975-80 (Table 6.1). On the other hand, the number otdemolished and rebuilt housing is projected to reach only about half the1975-80 figures, as the major slum clearance programs have largely come to anend, particularly in the rural areas, and will continue only at a much lower

- 81 -

pace. Total demand for new housing, therefore, would reach about 620-670,000

units depending on the scenario; this is about twice the 1975-80 figures as

estimated by this Report, but nearly four times the 1975-80 figures as esti-mated by the Plan (Table 6.5) and proposed by the Plan for 1982-8b.

Table b.4: PROJECTED HOUSING DEMAND 1980-198b

Scenario A Scenario 1

Net increase in the number of families 57U,U00 629,0UU

Occupancy rate I.U9 1.1

Net demand for new dwellings 521,000 572,UU0

Demolished and rebuilt 97,000 97,OUOTotal demand for dwellings 618,UUO 669,W00

Source: mission projections.

Table 6.5: THE DIFFERENT INVESTMENT PROPOSALS

VIth Plan Projections

Vth Plan Demand InvestmentsEstimated Totals ' Scenario Scenario Proposals

Plan Report A B Plan Report

No. of units ('000)

Public 75.1 80.4 155 155 1O6 106

Private 84.9 233.6 320 360 54 219

Total 160.0 314.0 475 515 160 325

Million TD /1Public 447 494 1,041 1,041 555 555

Private 834 705 909 1,129 445 645

Total 1,281 1,199 1,95U 2,170 1,00U 1,200

/1 In L982-86 prices.


INVESTMENTS DIJRING THE VITH DEVELOPMENT PLAN

Quantitative Aspects of the Proposed Program

6.13 There can be little doubt that the above demand cannot be completelysatisfied during the period of the VIth Plan. Even assuming a substantialdecline in the unLt construction costs in line with the Plan objective of

- 82 -

giving priority to low cost housing and of discouraging luxury housing,construction of 618-b69,000 new dwellings is projected to cost TD 1.5-1.7billion in 1980 prices for the 6-1/2 year period mid-1980 to the end of 1986.For the five years of the VIth Plan this corresponds to 475-515,UO0 unitscosting TD 1.95-2.17 billion in current prices, or 23.4-2b.5 percent of totalPlan investments (as corapared to 18 percent during the Vth Plan). For a E'lanthat attributes, rightly, top priority to directly productive investments,preferably export oriented or import substituting, such a high share ofhousing investment is not acceptable, even though housing construction is verylabor intensive, and thus fulfills one of the priority requirements of theVIth Plan. At the same time, the implied increase of 63-81 percent in realterms over estimated actual investments during the Vth Plan (Report figures)suggests that absorptive capacity constraints would make this target verydifficult to achieve even if Government wanted to do so. While this Reportprojects a substantially higher amount of spontaneous private housingconstruction than the Plan, particularly in the informal sector, it expectstotal housing investment to remain well below the level necessary to satisfythe entire demand.

6.14 The Plan foresees the construction of the same amount of dwellings ashave been constructed during the Vth Plan according to its own estimates; inline with its declared policy of giving priority to low cost housing, itforesees a 22 percent decline in unit costs, and, thus, an equal decline Intotal investment outlays; such an investment program would only satisty aboutone third of total demand as projected by this Report. This Report proposesto construct marginally more dwellings than have been constructed during theVth Plan according to its own estimates, also at slightly lower unit costs;it foresees that total investment outlays (in real terms) would remain aboutthe same in the two plans. This proposal would result in the construction oftwice as many dwellings as proposed by the Plan covering about two-thirds ofthe estimated total demand.

6.15 The two proposals agree on the proposed investment program in thepublic sector. The disagreement concerns exclusively private housing con-struction. According to its own figures on past actuals, the Plan foreseesa 36 percent decline in the number of new private housing construction ancl a47 percent decline (in real terms) in the average unit costs of new dwellingsfinanced by the private sector. Given the rapid increase in demand, thisReport does not consider that likely; its own projections foresee an onlymarginal decline in the number of dwellings build in the private sector arid aless than 10 percent decline in average unit costs, based on its own figureson past actuals. As mentioned before, this Report considers it neitherpossible nor desirable to reduce spontaneous private housing construction asmuch as proposed by the VIth Plan. A number of macro-economic policy changesadvocated in volume I of this report might conceivably slow down privatehousing construction somewhat, such as higher interest rates, higher cemenltprices, special taxes on luxury housing, and generally more cautious incomespolicies. It would be difficult, however, to visualize introduction of policymeasures that could reduce private construction by 36-47 percent; such areduction could probably not even be achieved through physical controls, thatwould be politically very unpopular and extremely difficult to administer.,

- 83 -

6.16 Considering the undisputed need for more and better housing, the highlabor intensity of private housing construction and the fact that even theReport proposail would result in a substantial decline in overal]L nousing

investments relative to the total investment program (from 18 percent to 14.4percent) an imvestment target of TD 1.2 billLon as proposed in I:bis Reportdoes not run counter to the Government's stated priorLties for l:he VIth Planand, tbus, would seem quite acceptable. It would still only covrer two thLrdsof the incremental demand, and, thus, result in considerable overcrowding ofexisting and new facilities; any further reduction would seriously increasethe risk that construction of low quality, unserviced, spontaneous communitieswould reappear at the urban fringe just when Tunisia seemea to t)e masteringthis problem.

The Quality of Public Housing Investments

6.17 A last aspect demanding consideration is the quality and appropriate-ness of the proposed investment program, particularly in the public sector.In spite of thie proposed 30-40 percent increase in publLc housing investments,the program will be unable to assist the housing needs of about half of the1980-86 incremental urban demand. This raises a fundamental question as tothe appropriateness of current housing policy both in terms of the housingstandards (and costs) that it provides and of the income groups it has chosento assist. Thie proposed strategy (namely, lower housing costs, new dwellingdesign, high taxes on luxury construction to finance the rest of the sector)is going in the right direction. Coupled with appropriate measures in theconstruction sector (Chapter IV, para. 4.5U on construction materials) itcould use bousiing construction for promoting employment and small scaleenterprises. But this Report considers that the implementation of thisstrategy should be studied more rigorously in all its aspects (technique,financing, institutions, etc.). This is particularly urgent, s.nce theGovernment's past policies have suffered from conceptual and organizationaldeficiencies that have hampered their effectiveness. Specifically:

- They did not adequately address the needs of 60 percenl: of urbanhouseholds whose income is Lower than TD LUU. This group accountedfor 52 percent of the 1980 urban population and is growing rapidly asa resiult of migration from rural areas;

- They did not anticipate, or respond to, locational shifts in demand.As a result, regional inequalities among the country's urban areasare expected to increase, with substantial concentration oflow-quality spontaneous housing in the more rapidly urt>anizinggovernorates of the South, the Northwest and the Center West;

- They have been largely unsuccessful in providing the level of urbanservices necessary to prevent a further deterioration of the urbanenvironment. While this is due, in part, to the substantialalteration of migratory flows that have occurred since 1975, the

- 84 -

inter-agency division of responsibilities and the difficulties incoordinating their intervention in the field have acerbated thelogistical problems posed by shifting demand patterns;

They have been costly as standards have been high and the tiscalimplications in a period of rising demand are considerable.

6.18 More particularly, the review of the effectiveness of currentprograms, undertaken both by the Ministry of Housing during the preparationof the Vlth Plan and by the mission, raise numerous questions and suggest anumber of modifications. There has clearly been an underutilization ofCNEL's 1/ resources as indicated in its large short term construction creditsto SNIT 2/ and selected private developers. It sbould be clarified whetherthis is part of a conscious policy to extend the public sector's role to theproduction as well as the financing of housing. This is especially true inlight of the recent failure of CNEL's types A and B savings contracts,targeted at lower-income households. They had to be abandoned as a result ofthe bigh costs of SNIT's turn-key projects, these costs being attributable tothe housing standards selected rather than to the rise in construction coistsresulting from an inadequate financing formula.

6.19 The Government's subsidies to CNEL's programs are likely to increasevery rapidly over the coming years given CNEL's forecasted increase in

activity. This raises two questions: the ability of the Government to defraythe rising costs of its current subsidization policy; and wnether these sub-

sidies are equitably allotted, given that all CNEL savers, regardless ofincome, are presently entitled to tbem. The policy of encouraging the partic-ipation of a broad spectrum of socio-economic groups in CNEL's housing savingscontracts has been eminently successful, as demonstrated by the rapid rise incontracts, starting in the late seventies. If thLs policy Is to be continued,however, it would be advisable to re-examine the current subsidization otmortgage interest rates, which are not only increasingly costly, but favorhigher income households. A modulated approach favoring smaller contractssubscribed by households with incomes under TD 120 would be more equitable;the Government may want, therefore, to examine the impact of a sliding scaleof interest subsidies on the rate of production of different housing types.

6.20 FOPROLOS 3/ programs are also characterized by a surplus of resourcesand an almost total dependency on SNIT. The reliance on turnkey projects (97percent of which are undertaken by SNIT) has resulted in a 52 percent increase

1/ Caisse Nationale de l'Epargne-Logement (National Housing and Savings Funa).

2/ Soci6td Nationale Immobili&re de Tunisie (National Real Estate Company).

3/ Fonds Social pour la Promotion du Logement des Salarids (Workers HousingFund).

- 85 -

in production costs in four years; in consequence the outreacb of the programwill shrink dramatically. Originally conceived for households lwitb incomesbetween TD 64 and 96, the new cost schedule will restrict the program tobouseholds earning more than TD 150 or about twice the SMIG.

6.21 The rental programs for civil servants and other salaried employeesprovided rental housing of moderate income standard. There is, however, asubstantial gap between the quality and cost cf the dwelling an,d the askingrent. :In order to meet the real costs of financing, operating, and maintain-ing the buildiLngs current costs should be increased about three to fourtimes. This hidden subsidy underlying the public sector's rental programs maywell pose some difficult long term financial problems for the social securityagencies that finance it. More importantly, it does not create a moael forextending publicly financed rental housing to the lower-income groups who aremost in need of them. It is clear therefore that a tnorough study of theimplications of the current policy is required, from the point of view of theability of the public sector to sustain even the reduced rate of productionthat has been projected for the VIth Plan period as well as for its long-termconsequences on the financial soundness of the sponsoring social securityagencies.

6.22 Nece_sity to Extend Loans for Housing Construction. GLven the rapidincrease in the production of public housing, it is neither probable nor, forthe reasons stated above, desirable that SNIT will be able to satisfy theentire demand., It would therefore be advisable to capitalize upon the growingcapacity of AFH 1/ to provide serviced sites, particularly in the Tunisregion, and encourage CNEL savers to take a construction mortgage and havetheir dwelling constructed by a private builder rather than buy a turn-keyunit of SNIT. The lower construction costs of the private sector would allowpurchasers to buy larger units; and the shorter construction period wouldallow the construction of a larger number of units, SNIT normally requiringfour to five years to complete a project.

1/ Agence Fonciare d'Habitation (Land Development Agency).

- 86 -

CHAPTER VII: WATER SUPPLY AND SEWERAGE

WATER SUPPLY

7.1 The VIth Plan proposes an overall investment program for water supplyabout 42 percent higher in real terms, than that achieved during the Vth Plan,12 percent more for urban zones and large villages (SUNED program), but 3.7times more for small rural villages and hamlets (DGR program). This Reportagrees with that proposal, in the overall as well as in its details. Based onpast experience it expects the SONED part of the program to be implemented toabout 95 percent; thus, its recommendation to reduce these investments fromthe proposed TD275 million to TD 260 million, in current prices. Consideringthe huge increase proposed in DGR investments, and the generally limitedabsorptive capacity in the Ministry of Agriculture, of which the DGR programis a part, this Report does not believe that the small villages water supplyprogram can be implemented fully on time but does not want to make anyconcrete projections of its own. As discussed in chapter I of this volume,this Report projects a 12 percent shortfall in the total investment program ofthe Ministry of Agriculture.

Past Trends and Present Situation

7.2 The Public-domain water ressources sector is administered by the.Ministry of Agriculture. The National Water Utilization and DistributionCompany (Socidte Nationale d'Exploitation et de Distribution des Eaux--SONEDE), an autonomous public agency under the jurisdiction of the Ministryof Agriculture, is responsible for producing and distributing drinking waterin the urban centers and the semi-urban and rural centers with populationsexceeding 500. The Ministry of Agriculture's Rural Engineering Division

(Direction du Genie Rural -- DGR) is responsible for water supply to ruralvillages of less than 500 inhabitants.

7.3 The water supply situation in Tunisia compares favorably with thatin other developing countries (Table 7.1). Almoxst the whole of the urbanpopulation has access to water supply, nearly 75 percent by private connec-tion. The picture is less rosy in the rural and semi-urban sector, where only22 percent of the population receives public service; it is hoped to doutilethis percentage by the end of this decade. To see these figures in their truelight, it has to be borne in mind that about 20 percent of the population iswidely dispersed, making public water supply service impracticable.

7.4 The major constraint on rapid development of water supply is the!long distance from water sources to urban sectors, wbich requires water to becarried by conduits of considerable length. As a result, capital and operat-ing costs of water production, transportation and distribution facilities; areappreciably higher than they are in other countries. These expenses rise evenhigher when the water sources are brackish, as Ls often the case; thisrequires mixing with fresh water obtained from other sources. Per capitainvestments for water supply services tend to become prohibitive in areas withwidely disbursed populations.

- 87 -

Table 7.1: WATER SUPPLY BY MODE AND AREA, 1980(in percent)

Semi-urban and Rural AreasUrban areas /I Private Total

SONEDE SONEDE DGR Systems Total Country

Private Connections 74 22 -- -- 22 43Standpipes 26 17 b -- 23 24Cisterns -- -- 7 12 19 12Wells -- -- 24 5 29 17Unharnessed sources - -- -- 7 7 4

Total 100 39 37 24 100 100

Population (million) (2.57) (3.83) (6.40)

/1 Towns with over 20,000 population.

Source: Ministry of Plan and Finance, Provisional Report on water supply inthe IVIth Plan Development, June 1981.

7.5 Becaiuse of the size of these investments, the multitude of smallrural villages, and the budgetary constraints, the Government has up to nowgiven priority to the urban sector, where a large number of persons canbe served with limited financial resources. Slow that almost all urbaninhabitants have access to water supply, priority is shifting towards therural siector, where the Government is directing efforts at improving thestandards of Living, increasing agricultural production and slowing downurban migration. In the past the Rural Engineering Division (DGR) has beentrying with very limited means--in terms of st:aff, equipment, and funds--toserve this sector. The projects usually covered the construction of publicwater points, the rehabilitation of wells, ancd very simple, small-scale watersupply systems. These facilities are then handed over to the villageauthorities, which are responsible for operating and maintaining them. Thisprocedure is not very satisfactory, and operations and maintenance are ofteuintermittent and less than sufficient because of lack of qualifted staff andfunds.

7.6 All water supply connections are provided with a water meter, andconsumption is billed quarterly at an average tariff of TD 0.121/m3; town-ships pay a siLngle tariff for standpipe consumption. This tariff, dated from1977, is inadequate, and an increase of 50 percent is being implemented in twostages during 1982. Other two-yearly increases are planned for the future tomeet inflation. The cost of water will not change much in real terms, sincethe economies of scale are offset by the fact that the water sources to beexploited in the future will be less and less easily accessible. Followingthe increase in tariffs, SONEDE will be able to cover 20 percerti: of itscapital expencliture in addition to its operating expenses and debt service;SONEDE's financial situation is hoped to maintain thLs ratio in the future.A further 20 percent will be covered by connecting fees paid by consumers and

- 88 -

40 percent by loans, leaving 2U percent for budgetary subsidy. Consideringthat the Budget collects more than these subsidies in the form of taxes andimport duties on water-sector activities, the sector can be considered neutralvis a vis the Government's budget.

7.7 Achievements of the Vth Plan. In spite of having encountered certaindifficulties, particularly in connection with pipe procurement, SONEDE largelyachieved its goals for the period 1977-81 when total investments amounted toTD 162.4 million or 94 percent of the forecast total. Bearing in mind thatinflation had been higher than anticipated when the Plan was prepared,(particularly for imported products during the period 1978-80), in terms ofphysical volume, the Vth Plan was executed to about 89 percent. The executionrate was particularly high in the case of improvements (124 percent) and ruralcenters (102 percent). In addition to SONEDE, the Rural Engineering Division(DGR) of the Ministry of Agriculture carried out investments totaling TD 15million of which TD 4.4 million came from the Ministry of Agriculture budgetand TD 10.6 million from the Rural Development Program (PDR) financed throughthe Gouverneurs by the Ministry of Planning and Finance. Tne works carriedout include:

- 269 rural centers with populations under 500

- 1,800 water points

- 900 improved wells.

To these accomplishments must be added State assistance amounting to TD 2.8million for the construction of 12,700 cisterns.

Investments During the VIth Plan

7.8 In accordance with the Government's policy of improving as much aspossible the living conditions of the disadvantaged population, both in therural areas and in the urban centers, SONEDE has adopted the following goalsfor the VIth Plan. In the urban sector, it will attempt to meet the increasedneeds by establishing new connecting infrastructure from the productionsources; improve the conditions of potable water distribution in the largetownships by renovating their distribution networks on the basis of themaster-plan studies (37 towns); improve the rate of service by making 35,C00connections each year, i.e. a total of 175,000 connections over the five-yearperiod (75 percent of these connections will go to poor households, wbich willbe allowed to spread the connecting fee over time); continue the activities,already started, for improving the water supply conditions in small andmedium-sized townships. In the semi-urOan and rural sector, it will increaseaccess to the water supply network by the rural population, by assuming theservice responsLbility for 168 localities.

7.9 As a result of this program by the end of the VIth Plan in 1986 65percent (4.7 million) of an estimated total population of 7.177 million, wouldbe supplied from SONEDE's networks; the population served by connections wouldtotal 3.77 million, giving an overall connection rate of 53 percent; theconnection rates would rise to 92 percent in the urban sector and 34 percent

- 89 -

in the rural sector; and volume consumed would increase at an average rate of6 percent to 187.5 million m3.

Table 7.2: WATER SUPPLY INVESThENTS in the VTH AND VITh PLAN

TD million in current prices PercentagesVth Plan VIth Plan Vtb Plan VItb Plan

Forecast Actual Forecast Actual Forecast

SONEDE ProgramLarge new projects 102.7 89.0 1b4.7 49.4 42.7Renewals (large towns) 6.7 8.8 19.2 4.9 5.0Small and medium towns:improvements 15.6 19.3 24.0 10.7 b.2extensions 8.1 8.3 18.4 4.b 4.8

Others 40.2 37.0 48.8 20.5 12.7

Total /1 173.3 162.4 /2 275.1 90.1 71.4

DGR ProgramRural villages - 15.0 110 8.3 28.b

State - 2.8 _ 1.6

Total 180.2 /3 385.1 100.0 10U.0

/1 This is the total investment program for water supply shown in the Plandocuments; the DGR program is part of agrLcultural investments.

/2 Corresponding to TD 244.8 mLllion in 1982-86 prices.73 Corresponding to TD 271.6 million in 1982-86 prices.

Source: Ministry of Planning and Finance.

7.10 SONEDE's investment program is based Dn technically ancl economicallysound projects designed to provide the lowest-cost solutions to meet thereasonable goals that the Government has set out for the VItn Plan. becauseof circumstances unforeseeable at this time thb implementation of someprojects is bound to suffer some delays, but it can be expected that about 95percent of the Plan is implementable. It should be noted that aibout 30percent of capital expenditures are directed to the non-dispersed ruralpopulation, wbich is reasonable considering that this segment accounts fornearly 25 percent of total population.

7.11 To remedy the weaknesses of water supply in the rural sector the VItnPlan foresees a major DGR program in very small villages, that wrould more thanquadrupple total capital investments from tne past level ot TD 23.4 million in1982-86 prices 1/ to TD 110 million. The program would provide drinking water

1/ DT 15 million in current prices (Table 7.2). For a definLtion of "1982-86prices" see footnote 1/ volume I, page 28.

- 90 -

to 1,000 villages and hamlets comprising 700,000 inhabitants; it is part ofthe investment program of the Ministry of Agriculture and thus, is likely tobe affected by the same absorptive capacity constraints as discussed in tflechapter on agriculture (Chapter I, para. 1.09). To make better use of exist-ing rural water supply installations, Government is proposing a study of theinstitutional aspects and the problems of operation and maintenance. Mean-while, the DGR intends to transfer the facilities to be built in villages witharound 500 inhabitants to SONEDE to ensure their efficient operation andsatisfactory maintenance.

7.12 For the program of SONEDE and DGR combinea a comparison of actualexecution during the Vth Plan with the proposals of the VIth Plan shows anoverall increase of 42 percent at constant prices. 1/ The increase is highestin the rural sector, where the share of the DGR program in the total risesfrom 8.3 percent to 28.6 percent. At the same time, the large projects and

the network renewals in the large centers maintain their iiaportance whileimprovements in the small and medium-size centers suffer a relative reductionfrom 10.7 percent to 6.2 percent.

7.13 Tunisia's water resources are not very large. The exploitable

resources amount to 3,000 million m3 (3 T) a year, of whicb 58 percent isalready being exploited, including 7 percent for drinking water. By the

year 2000 more than 90 percent of exploitable resources will be harnessed,including 22 percent for drinking water supply. Since the new resourcesare located further and further away from the population centers it can beexpected that water will become more and more expensive in real terms andthat over the long term desalinated seawater is going to become competitive.It is with this concern in mind that SONEDE has instLtuted a plan of action tocombat waste in terms both of losses of network and waste by consumers. Thisplan consists mainly in:

- strengthening the activities for detecting network leaks;

- adopting suitable equipment to limit losses and improve theconditions of executing connection works;

- arousing an awareness among collective consumers (publicestablishments, hospitals, administrations, schools, etc.) to avoDicwasting water. Wastage of water is not very great among residentialconsumers.

THE SEWERAGE SECTOR

7.14 The Plan proposes a 21 percent increase in real terms in totalsewerage investments, from TD 103 million actually invested during theVth Plan (in average 1982-8b prices) to TD 125 million. 2/ TnLs Report

1/ From TD 271.6 to DT 385.1 million in average 1982-86 prices (Table 7.2).

2/ Excluding TD 18.7 million of tourism related sewage projects implementedduring the Vth Plan and TD 12 million planned for the VIth Plan which areincluded in the tourism sector investment program. In current prices, andexcluding TD 12.1 million of tourism related projects, total sewerageinvestments reached TD 65.9 million during the Vth Plan.

- 91 -

reluctantly agrees with this proposal, considering the Plan's overallinvestment priorities which attribute low priority to this sector (Volurae I,para. 62). From a strictly sectoral point of riew a program of some TD135-140 million would have appeared more satislactory and fully justified.

Past Trends an,d Present Situation

7.15 Municipalities used to be responsible for the sewerage systems witnintheir boundariies, with supervision by and techiical and financlal assistancefrom the Ministry of Agriculture until 1974, arid from the Ministry ofInfrastructure since then. In 1974 the "Office National de l'Assainissement"(ONAS) was established with responsibility for planning, building,rehabilitating, operating and maintaining all sewerage systems within thecommunes, together with those in tourist areas and industrial zones. ONAS iScurrently operating sewerage systems in 26 mun:Lcipalities and six touristareas. The program for taking over responsibility for further comunuesdepends on the pace of execution of projects initiated by ONAS and theavailability of qualified personnel. In the ccommunes for which it is not asyet responsible, the local authorities operate the existing sewerage systems,and ONAS supervises projects for new systems.

7.16 DurinXg the Vth Plan, ONAS encountered considerable problems in carry-ing out the tasks assigned to it mainly because it required launching theGreater Tunis project while simultaneously creating its own structure. Inaddition, some of the Tunisian contractors were undertaking sewerage work forthe first time and were unable to hire qualified personnel because vocationaltraining in this field was not available. In spite of these difficulltles,ONAS exceeded the total investment target; total expenditures by the end of1981 amounted Ito TD 61.2 million, an increase cif 14 percent in current pricesover the Plan forecast. The breakdown of actual investment by major projectsis as follows;

TD Million

1. Completion of old projects b.12. Rehabilitation, equipment and buildings 3.23. First National Project (Greater Tunis) 38.24. SIDA P?roject (Kairouan, Sfax) 5.85. Second National Project (Tunis, Sfax) 4.06. Seventeen Cities Project 2.27. Studies, etc. 1.8

Total 51.2

Bearing in mind tnat inflation was higher than expected, particularly between1978 and 1980, the physical volume achieved was close to that planned.

7.17 Expenditures under the Vth Plan outside of the ONAS budget were asfollows.

T) Million

1. Sewerage in tourist areas 12.12. Flood protection 3.93. Miscellaneous U.8

Total lb.8

- 92 -

Compared with the Plan forecast of TD 18.3 million, this represents a 92percent execution rate in current prices.

Investments During the VIth Plan

7.18 Despite the sizable projects undertaken since the establishment of

ONAS, much remains to be done to improve sewerage services in the maincities. The cumulative lag of the last thirty years has to be made up, andthe existing systems must now be rehabilitated and expanded. In addition, inmany small towns, bousing density is such that individual sewerage connectionscannot be provided. The tecbnical criteria formulated by ONAS are acceptable;a special emphasis on sewerage during the VIth Plan would therefore be justi-fied.

7.19 The present connection rate to sewer systems is an overall 40 percentfor Tunisia's 155 communes (about 3 million people), and 62 percent for the26 communes for which ONAS is responsible (about 1.7 million people), whichinclude the thirteen communes of Greater Tunis, where the connection rate is71 percent. Wben preparing the VIth Plan, the National Sewerage Sector Com-mission set the following targets:

(a) a 60 percent connection rate for 1986 for the country's communes as awhole. This Report accepts this as a desirable objective;

(b) an 81 percent connection rate for 1990. This target looks unreal-istic, particularly because it would require investments of TD 415million in 1981 prices over the ten-year period; and

(c) an increase in the volume of treated water from 27 million miJ in1980 to 51 million m3 in 1982 and 96 million m3 in 198b, of whict60 million m3 in the Tunis region.

7.20 On this basis, ONAS prepared a TD 198 million program for the VIt:hPlan. 1/ This is clearly too ambitious. It would represent tbree times t:hevolume of works slated under the Vth Plan, in constant prices, and is clearlybeyond ONAS' absorptive capacity. While ONAS' performance during the Vth Planwas excellent, its situation was always precarious. If the structure of ONASwas considerably strengthened (public works management, administrative andfinancial management and project coordination and planning), it would bepossible to exceed the present investment level of about TD 20 million peryear. A further constraint placed upon ONAS is the obligation to assumeresponsibility for all cities where works are carried out.

7.21 The Plan proposes total investments of TD 125 million. After a care-ful assessment of the present situation, foreseeable needs, projects underimplementation, and new projects ready for implementation, this Report pult

1/ Excluding TD 12 million of tourism related sewage projects included inthat sector's investment program.

- 93 -

together an ideal investment program of about TD 138 million, excludingtourism related projects (Table 7.3). This program represents the ainimumwhich would still allow ONAS to attain a 60 percent connection rate in 1986for all urban areas. From ONAS' original proposal, this program has cut TI) 50million by deEerring three projects until after the VIth Plan (one concernsthe treatment of effluent from existing systems, the other two include asizable rainwater component), that will not affect the rate of connection tosewerage systems. Furthermore, it achieved au additional cutback ininvestments of around TD 10 million by deferring the Greater Tunis andGreater Sfax projects by one year. Any further reduction in investmentswould, however, entail abandoning the Plan's objectives, which from a strictlysectoral poini: of view, seem worth achieving.

7.22 Nevertbeless, as mentioned above (para 7.14) this Report accepts afurther reduction in the program to TD 125 million as proposed by Government,in line with t:he overall setting of priorLties for the VIth Plan. This couldbe achieved mainly by postponing the Thirty City project by one year (TD 12million), whi'Le a slight slow down in the supiplementary program could make upfor the rest.

Table 7.3; REPORT PROPOSALS FOR AN [DEAL INVESTMENT PROGRAM

TD Million in current pricesTOTAL 1982 1983 1984 1985 1986

a. Large cities project 24 13 9 2 - -

b. Seventeen Cities project 16 5 6 5 - -

c. Thirty Ciities project 40 - 1 12 15 12

d. Towlns in the Medjerdah Basin 16 - 5 6 4 1

e. Supplemenitary program 3 - - - 1 2

f. Extension of existing instal- 4 - - - 2 2lations

g. Rehabilitation 20 3 4 4 4 5

h. Fourth project: Greater Tunis 4 - - - 1 3

i. Greater Sfax and bypass channel I - - - I

j. Studies 4 1 1 1 1 -

k. Carry-over from Vth Plan 6 5 1 - - -

TOTALS 138 27 27 30 28 26

Source; Ministry of Planning and Finance; ONAS.

- 94 -

CHAPTER VIII: THE EDUCATION SECTOR

8.1 The VIth Plan proposes a 20 percent increase in education investmentsin real terms over Vth Plan actual outlays, focussed heavily on primary andsecondary education (Table 8.1). Considering the continued substantialincrease in Tunisia's school age population and the urgent need to improve thequality of the education system, this Report agrees with this proposal; itpoints out, however, that in several respects the program has not yet beenclearly defined, i.e. while reasonable targets have been set, the concretestrategies to achieve them are often still lacking.

PAST TRENDS AND PRESENT SITUATION

8.2 Having established an education infrastructure that is quantitativelycommensurate with national needs, Tunisia is now embarking upon a criticalphase in the qualitative development of its education and training system.Since independence, Tunisia has achieved remarkable progress in the educationsector. Only 23 percent of the 6-14 year old age group were enrolled in school

in 1958; in 1981/82, adjusted enrollment ratios exceeded 100 percent I/ and25 percent, respectively, for primary and secondary schooling; tertiary levelenrollments grew from less than 800 to 32,800. Female participation ratesreached 42 percent in primary and 37 percent in secondary schools. Vocational

and technical education/training expanded and diversified rapidly.

8.3 Because of this numerical growth, propellea by social demand and

political commitment, two serious consequences occurred. First, financialcosts rose rapidly, so that by 1970 education expenditures reached about 8.7percent of GDP and 27 percent of total government outlays; they have remainedclose to those levels since. Second, nigh dropout and repeater rates havecharacterized the system from the start, particularly at the primary level.Given that many of the dropouts did not find employment and were in any caseill-equipped for jobs that might have been available, the marginal return oninvestment in formal scbooling declined. Causes of low efficiency include;rigid practices, outmoded program content, insufficient funds to achieve anadequate standard of didactic materials, late entry of many students to theprimary level, and grade repetition.

8.4 Because curricula have lacked relevance to employment needs, over theyears many school leavers and graduates have gone into unemployment, or havebeen obliged to accept jobs beneath their educational attainment levels. 2/In response, compensatory arrangements such as an extension of the primaryschool cycle to grades 7 and 8 have been grafted onto the school system inorder to give prospective school leavers some pre-vocational preparation.They bave also sought to reorient secondary school enrollments towards voca-tional courses and technical studies, and to shift university enrollmentstowards science and technology. But these ad hoc efforts have been character-ized by a lack of priority between conflicting aims: to widen access for

1/ Including repeaters.

2/ Chapter IV Manufacturing Industries, para. 4.17.

- 95 -

upward progression in the system as a matter of social equity, to keepyoungsters in school longer and out of unemployment, and to enhance students'employability commensurate with the economy's needs for skilled and trainedmanpower. In consequence, the moeasures undertaken have not prcduced all oftheir intended impact, and the Government has decided that a thorough reformof the education and training system is needed.

8.5 The Vth Plan Period (1977-81). Due to higher than anticipated growthin school enrollment and to shortfalls in compensatory provision for schoolleavers not progressing to secondary education, grade repetiticin and dropoutexceeded Plan targets; in 1979/80 the primary school completion rate stood at62.3 percent against the target of 82.5 percent. On the other hand, althoughlimited by resource constraints, the expansion of practical courses proceededsatisfactorily. As for primary-to-secondary ichool progression, in-servicetraining of teachers together with a revision of curricula and syllabi ledto a pass rate of 39.4 percent on secondary school entrance examinations(1979/80), 8 percent above the target. Efforts to improve internal efficiencyat the secondary level met with mixed results: the number of d[ropouts shot upin the lower cycle, but declined in the upper cycle. Negligible improvementwas recorded in annual rates of progression from lower to upper secondary buttargets related to enrollment structure were met. At tne university level,enrollments in science and technology were increased to 52 percent by 1980/I1.

8.6 Training policy focussed also on unemployed adults andt on raising theproductivity and opportunity for advancement of workers already employed.Measures were undertaken to broaden the range of specializatiouns available, toimprove quality, and to ensure closer relevance to employment needs. At thesame time, particular attention was paid to regional employment needs includ-ing the extension of training infrastructure to areas which were less well-endowed with training institutions. Special emphasis was placed on providingopportunities for unskilled workers to undertake training in skills closelyrelated to regional and sectoral employers' needs. Finally, eXIsting arrange-ments to provide an initial year of on-the-jol> training as qualification forpermanent employment were extended to agriculitural employers to facilitate theplacement of agricultural training center graduates in the private sector.The Vtb Plan experience pointed out that apprentice training needed substan-tial improvement, suffering from a severe laclc of apprentice trainers and alsofrom poor coordination.

OBJECTIVES AND INVESTMENTS OF THE VITH DEVELO]'hENT PLAN

8.7 This Report is in basic agreement wiith the general objectives of theVIth Plan in the education sector and with the proposed investment program.The main problem will be to increase quality of education at all levels,reduce the number of dropouts and repeaters, at a time when the number ofschool children is expected to increase even more rapidly than in the past.Among others, this raises an urgent problem oE the quantity and. quality ofteacher training facilities. The long discussed education reform that willresult in a substantial change in the present system is likely to be imple-mented gradually during the period of the VIth Plan: it will be the majorintellectual challenge during the VIth Plan period as discussed in the thirdsection of this chapter.

- 96 -

Table 8.1: Proposed Investment Program(million TDs at average 1982-86 prices) 1/

Vth Plan V[th PlanActuals Proposals

Primary education 12.2 35Secondary education 62.9 125Higher education 108.8 80Technical training 50.0 51Miscellaneous 4.5

Total 238.4 291

1/ For a definition of "average 1982-86 prices" see footnote I/ volume I,page 28.

Source: Ministry of Planning and Finance

8.8 While total investments are proposed to increase by little more than20 percent over the preceeding Plan period, intrasectoral priorities show amajor change. Thus, the main emphasis shifts from higher education to theprimary and secondary levels, which see their investment allocations doubleand triple. This program de-emphasizes costly expansion of higher education(27.6 percent is allocated to that level compared with 45.6 percent under theVth Plan) in favor of accommodating enrollments and consolidating gains at theprimary level, combined with selective expansions of secondary, vocational andtechnical schooling and the strengthening of occupationally-oriented trainingat those levels. This policy orientation is a sensible one.

8.9 As regards primary schooling, the essential issue in addition to theeducational reform is the optimal national configuration of primary schoolfacilities from the point of view of redressing regional disparities ineducational provision. Subsumed under this issue are such obvious questionsas whether to build new schools or replacement schools, or to expand existingones, and at what locations with appropriate catchment areas? What would bethe optimal size of a school at each location for meeting enrollment targetsat lowest possible costs? The configuration finally adopted would provide anoverall framework for delimiting the investment package and for schedulingbuilding projects. Education planners will soon have an adequate data basefor such analyses, since they are now extending the school mapping exercise tothe entire country with assistance under the World bank's Third EducationProject. School mapping for secondary education will be completed bySeptember 1982 and for primary by mid-1983. The Plan foresees construction ofslightly over 3,000 new primary schools.

8.10 Objectives for primary education call for full enrollment of boys and93 percent enrollment of girls by 1986/87. Internal efficiency targets areset at 30 percent for repetition and 11 percent for dropout in grade b by

- 97 -

1986/87; for progression to secondary schooling, they envisage maintaining45 percent of grade completers over the Plan period. The Government shouldurgently formtulate a comprehensive strategy in detail for reachilng thesetargets. Improvement in the internal efficiency is to be promoted, first,throughl the porovision of sufficient teachers in the face of an expected 4percent: annuaLl enrollment growth, and secondly, through the improvements ofteacbing staff to replace substitute teachers and those recruit:ed amongsecondary school graduates or leavers.

8.11 In consequence, the program will expand prLmary teacher training asover 16,400 new primary school teachers must be trained during the next fiveyears. Since 1977 the insufficient graduation of qualified teachers fromthe six small teacher training institutes (ENI) has led to a heterogeneousrecruiting of teaching personnel directly from secondary school graduateshaving no previous pedagogical training. The principle of recruiting exclu-sively from ENI graduates and other diploma hDlders who have completed apedagogical training has been adopted as the guideline. The quality ofteacher training will be improved through the introduction of a full year ofpractice teaching. As an emergency measure, however, a number of shorttraining courses will be carried out during the Plan period to quicklyincrease the output of qualified primary teachers (2,300 additional teacherswill be needed in 1982/83 and 3,500 in 1986/87). In consequence, the four newENIs to be built would provide a short one-year post-secondary pedagogicalcourse for holders of tne baccalaureate as weLl as a regular program of fouryears following lower secondary education plus one year of pedagogical train-ing.

8.12 Investment plans for secondary schools envisage the creation of134,700 new student places to cater to an enr,ollment forecast to grow at 7.5percent p.a. during 1981/82-198b/87. Of these 84 percent will be in theacademic streams and 16 percent in the technical ones (i.e. mostly in tech-nical secondary schools--lycees techniques). Measures to improve internalefficiency and reduce unit costs have yet to be delineated. Tbe Plan hopesthat internal efficiency will improve as a result of efforts to enhance thecaliber of the teaching staff. To that end, a new department in the Ministryof Education has been established and is charged with conducting in-servIcetraining, evaluation and pedagogical supervision.

8.13 The proposed expansion of Ly4e TechniLques, however, raises seriousissues of internal efficiency and external productivity. Well over 40 percentof entrants into the two technical streams (industrial and conimercial) droppedout before completing their programs in receni: years. Instead of investing ina costly expansion (unit costs being roughly I:wice those of upper cycle,general secondary schooling) a reduced attrition combined with a subsequentbut modest expansion might enable technical secondary trainIng to cater tolabor market needs. Preliminary estimates of manpower demand in the inter-mediate technical category suggest that, at their present levels of outturn,graduates froim technical secondary schools would have to compete witn general

I

- 98 -

secondary school graduates for the limited number of skilled jobs. Thisraises the additional question as to how well the content of Lycee Techniquetraining actually responds to employers' needs for well-prepared, technicalpersonnel, wbo can be promoted via on-the-job experience into efficient,skilled employees. To cater to the economy's needs for senior technicalpersonnel, consideration might be given to developing post-secondarypolytechnical institutes as an alternative to costly expansion of LycdeTechniques. A study of industrial technician training needs will beundertaken soon to help clarify options in this regard. It should estimatemanpower supply and demand by sector, by broad occupational category, and byregion, using the compound model which is installed at the Ali Bach HambaInstitute. Available information depicts continuing surpluses in the lowerand deficits in the intermediate through higher categories of manpowerqualification.

8.14 Higher education is to receive TD 80 million for capital investmentunder the VIth Plan to accommodate forecast enrollments. A detailed strategy,however, remains to be worked out. As a first step utilization of existingfacilities will have to be inventoried in order to determine the currentstatus and measures for improving it. Construction practice should also meritscrutiny to preclude the design and building of facilities that areunnecessarily luxurious and expensive. Alternatives to the proposeddecentralized university system should be explored given the currentlyunderutilized university capacity. An appropriate mix of policy measuresaddressed to low internal efficiency (over 30 percent repetition in first yearcourses) and inordinately high recurrent outlays should accompany the VIthPlan investment implementation. The proposed much more vigorous selectLon atthe level of the baccalaur4at would be an important first step in thisdirection.

8.15 One priority for higher education is strengthening of the scientificand technological research capacity ("R&D"--research and development) aimed atadvancing the role of technology as an "engine" of Tunisia's economic andsocial progress; no detailed strategy has yet been elaborated however. Pastefforts have been characterized by insufficient continuity in research direc-tions, management policies and program supervision, as well as by an inade-quate flow of information to research staff particularly in agriculture andhealth. Similarly, research rarely reaches farmers or health workers inrural areas. Future plans must be focussed on resolving these fundamentalproblems. Development of R&D capacity requires several levels of skills anddisciplines, including senior managerial and planning staff, scientists invarious fields, intermediate-level technicians, managers of experimentalstations and other research institutes, as well as social scientists to helplink research with application. Many of these are badly missing. At theuniversity level, programs of study to meet such needs require that prospec-tive scientists acquire, in addition to theoretical knowledge, practicalresearch skills that will enable them to apply theLr specialized knowledge asmembers of multi-disciplinary teams whose primary function is to generateapplicable technologies. The aim of graduate training ought to be that of

_ 99 -

producing scientists not only interested in fundamental research but also ofconducting effective field work.

8.16 The Government's overhaul and reinforcement of agricultural educationand training are in line with the new priority and strategy for agricultureset forth undier the VIth Plan; it focuses on meeting rising derands forspecialized expertise and skills that are demanded locally and fortechnically-trained manpower. Formal two-year programs of the agriculturaltraining centers are being cut back, and both these centers and the agrIcul-tural secondary schools will cater increasingly to specialized,, sbort coursetraining; up to half of the potential trainees will be technical staff frompublic service, and the rest local agriculturalists plus some skilled worKersand other personnel from local farms, "agro-combinats", cooperatives and theNational Agricultural Union (UNA) branches. In addition, short: courses inextension methodology will be given to extension agents in a proposed NationalAgricultural Teacher Training Center and in the bigher Institut:es of agricul-tural education. Quality of instruction will be upgraded in ttle centers,schools and higher institutes to form specialLsts im areas sucth as irrigationand hydrology, irrigated crop farming, agricultural mechanics, ruralengineering/m,aintenance and animal husbandry. These subject specialists areneeded to back-up regular extension agents and thereby ensure effectivelinkages between agricultural research, extension, and the private sector,including cooperatives. The new programs are also expected to provide thetechnical and extension services with badly needed supervisory field personnel.

8.17 Recurrent costs of agricultural education and training have tendedto be high. However, measures already taken as well as those underway torationalize agricultural schooling are expected to lower this burden andtbereby freeing resources for the improvement of agricultural extension andresearch. The agricultural secondary school program has been sitreamlined andconcentrated in farm sites which have the appropriate facilities for practicalwork. Enrollments are in line with projected requirements for junior tecn-nicians and intakes for technical training institutes. The abcive-mentionedincrease in the numbers of short course trainees who, based on full-timeequivalency, would rise from 9.5 percent in 1981/82 to 60.0 percent by 1990/91of the clientele served in training centers and secondary schools.

8.18 Investments for vocational training Dther than agriculture allow forcompletion of the physical expansion program initiated in the closing phase ofthe last Plan, and its extension to four more disadvantaged regions. Skillneeds in each area will be specified under the employment promotion and man-power development programs to be inducted by the newly institutea Commissariatof Regional Development. Lack of data on employer needs may continue toretard progress towards the objective of broa,iening the range of skillspecializations in which training is offered. Amongst some of the specializa-tions for which training is currently provided (e.g. in textilets and in con-struction) effective demand is falling off whilst in other fields, such as theelectrical and mechanical industries, demand LS projected to increase.

- 100 -

8.19 As for apprenticeship training, specific targets remain to be fixed.A major problem is the present lack of some 90 trainers. Equally disturbing isthe fact that, in addition to the 18,000 apprentices now under contract withOTTEEFP 1/, about the same number of unregistered apprentLces ("apprenticessauvages') are estimated to work, mostly in small enterprises in the infoiinalsector where they may be exploited and are cut off from opportunities toupgrade their skills. A main barrier to incorporating them into the formalcontract scheme stems from the absence of trade testing on the completion ofapprenticeship and hence of official, skilled worker certification. OTTEEFPplans to set up a trade testing and certification system and draft legislationto bring all the unregistered apprentices in the informal sector under coII-tract; however, this will boost still further the demand for trainers whoserecruitment the Office should now begin to plan in detail.

8.20 Although reliable figures are lacking, spot surveys by the Ministryof Education and OTTEEFP have revealed that upwards of 40 percent of allgraduates of the Ministry's lower secondary level vocational training program,unable to find jobs, wind up as trainees in the Office's vocational trainingcenters where they constitute approximately 50 percent of total enrollments.This raises the question whether the Ministry of Education can and sbouldoperate vocational programs.

THE EDUCATIONAL REFORM

8.21 A proposal for educational reform was accepted by the Council ofMinisters in the Spring of 1982 after many years of discussion and reflectionthat led to a consensus on the basic philosophy of the new education system.It should afford all TunisLans equal opportunities for intellectual growth,and for vocational development so aligned with the economy's needs as to openavenues for gainful livelihood and upward social mobility. Therefore, itwould be characterized by a flexibility attuned to optimally tapping thecountry's human resource potential while simultaneously enhancing socialequity. The reform will be introduced gradually starting in the Fall of 1L984.

8.22 The new system would retain children in school until the legalminimum working age of 15 years, and along the way give them sound cognitLveand prevocational knowledge and skills. It would permanently extend a secondchance to all students and former pupils including dropouts. In contrast, theexisting system is a "closed" one with cycles of instruction at primary an,dsecondary levels that lack occupationally oriented objectives; annually iitsends thousands of youngsters into the labor market without directly employ-able skills and witn no second cbance, often branding them as social misfitssimply for having failed to pass the academic tests of selection at theappointed times. Furthermore, insufficient coordination is achieved betweenthe different secondary and tertiary education and training programs that arecarried out by different ministries.

1/ Office of Emigration, Employment, and Vocational Training.

- 101 -

8.23 In particular, the reform proposes to replace the six years ofprimary and three first years (tronc commun) of secondary schooling by anine-year course of basic education ("Ecole de Base") similar to that found inmany Middle Eastern countries; in consequence, all children would be expectedto finish nine years of schooling, while to date about half of them leaveschool after six years. The "Ecole de Base" would comprise tbree cyclesubstructures in which instruction time would be increased to 25 hours perweek in the f:Lrst three-year cycle and to 30 tlours per week in the two uppercycles. The number of students per class would be fixed at 30 in all of thenine grades (the present average is 34). A diversified system was proposedfor secondary education composed of two broad types of schools: academic/scientific and technical; the first would have a common initial year ofstudies followed by a three-year course. The technical secondary school wouldhave two 2-year cycles; the lower one would have a terminal program of voca-tional education leading to a diploma but with the option, based on examina-tion, of progression to the upper cycle. 1/ These schools would supplant allexisting secondary schools. At the tertiary level, all existing institutionswould be integrated into one university which would be regionalized into sixcampuses. The university system would have a two-year post-secondary programwith terminal studies attuned to labor market requirements for senior tech-nician personnel, but with the option, again based on examination, of progres-sion to the regular four-year university course. Existing vocational traininginfrastructure would be converted to short course skill training for all drop-outs and school leavers of the "Ecole ae Base". Approximately 45-50 percentof primary sclbool graduates would progress to secondary education controlledby a coimpetitive entrance examination. Similarly, at the tertiary level,admission would be controlled by competitive examination (at present allBaccalaureat graduates are given automatic ent:ry) and flows would be adjustedaccording to manpower requirements.

8.24 While this system is very attractive, it will not be easy toimplement with success. Transformation per se of the six-year cycle into anine-year program of basic education may not improve internal efficiency ofprimary schooling significantly as shown by experiences with similar reformselsewhere in the world. These experiences cotifirm that well conceivedstrategiLes and specifically targeted measures to raise internal efficiency areessential. The reform anticipates that curricular and pedagogicaldevelopments c:ombined with semi-automatic grade promotion under the "Ecole deBase" format would facilitate attainment of 3-4 percent grade repetition and2-3 percent annual dropout rates on the average. Technical committees havebegun work on curricula, pedagogy, investment planning, and teacher training.As their work advances, the Ministry of Education might consider devising andsimulating the results of alternative strategies which would allow for gradualestablishment of the "Ecold de Base" by incorporating important elements ofthe curricular content and objectives and pedagogy of the nine-year program asthese are procluced. One aim of this exercise would

1/ The Ministry of Education's lack of success in operating vocationaltraining programs (para 8.20) requires close scrutiny of th:Ls proposal.

- 102 -

be to determine the most cost effective mix of school program components, i.e.one which among other things would avoid overloading the curriculum to thedetriment of the learning process (effective acquisition of basic cognitiveknowledge/skills). Promising strategies to arrest grade repetition and toreduce attrition could then be essayed and evaluated during the first phase ofthe "Ecole de Base" installation. The financial implications of extendingbasic education from six to nine years will have to be assessed verycarefully and compared to the likely advantages of the change. The Lmpact onteacher requirements (quantitatively as well as qualitatively) has to beanalyzed so as to avoid serious bottlenecks developing in this respect.

8.25 The planning and development of new structures and content forsecondary and tertiary education will have to be carefully coordinated wLththe introduction of the "Ecol4 de Base" which, in any case, can be introducedonly very gradually. Experience elsewhere with the introduction of systems ofdiversified secondary education should also be taken into account. As itusually constitutes a sharp departure from education traditions and practices,performance of the diversified system can be thwarted by the slow pace ofattitudinal cbange and by resistance. It requires wide-ranging changes inteacher training and other components of the educational system, costlyphysical and other inputs, new pedagogical methods. Compared to conventionalschooling, the diversified system would be complex to manage and administer.

8.26 Given their current preliminary status of preparation, it is pre-mature to comment on reform proposals for bigher education.

- 103 -

CHAPTER IX: THE HEALTH SECTOR

9.1 Health is one of the two non-directly productive sectors, for whLchthe VItb Plan foresees a substantial increase in investments, exceeding 3bpercent in real terms. This reflects to a large extent a certa:Ln catch-upeffort, as a number of important hospital projects proposed under the Vth Planwere somewhat delayed and will be implemented largely during the VIth Plan.This Report accepts the proposed overall investment volume of T]) 180 million,but proposes substantial changes in the mntra-sectoral allocation, giving moreemphasis to maintenance and strengthening of existing infrastructure as wellas to the expatnsion of basic health services, to the detriment of new hospitalconstruction (Table 9.3).

9.2 As health, population and family planning are closely 3 nterrelated,the first section of this chapter summarized Tunisia's population prospects aspresently projected. The second section deals with the health plan proper.

DEMOGRAPHIC PROSPECTS AND POLICIES

9.3 As meintioned in Volume I of this report, rapid populatlon growth hasbeen with Tunisia for a long time. Together with the recent slowdown in emmi-gration, it hats contributed heavily to the persistent unemployment problemthat plagues the country since the 1960s. Recent INS (National Institute ofStatistics) figures indicate a slowing down in demographic growt:h whichalthough less than anticipated, is nevertheless quite clear. Comparing themain demographic parameters for the two decades 1962-71 and 1972-81 (and alsobasing itself in part on population and employment figures for 1.980), INScalculated that the fertility rate dropped fronm 200 to 155 per 1,000, thegross birth rate from 44 to 36 per 1,000 and the gross mortality rate from16 to 9 per 1,000. The natural growth rate of the Tunisian population hasthus decreased from 2.6 - 2.8 percent per annun on average to 2.4 - 2.bpercent between the two decades. As a result of major migratory movementsbetween 1962 and 1971 (net emmigration of 250,)UO persons, including 100,000foreigners), the net growth rate during that perLod was only 2.2 percent.With a substantial subsequent decrease in emmigration between 1972 and 19S1(61,000, consisting mainly of Tunisians), the net rate of growth increased to2.55 percent during the 1970s. The aging process of the populat:ion has nowbegun; the median age, which was estimated to I>e 17.7 in 1975 is put at around18.3 for 1980. Meanwhile the proportion below age 15 seems to hlave decreasedfrom 43.8 percent to 41.7 percent while those over bO have Lncreased from 5.8percent to 6.7 percent.

9.4 INS has prepared new projections for the period 1981-2001, based onan equal reduction in fertility and mortality. Assuming a zero migratorybalance until the end of the century, this results in a net growth rate of2.34 percent p.a. in 1986, declining to 1.62 in 2001. On this basis, theTunisian population, currently estimated at b.1) million, would reach 7.4million in 1986, and 10.1 million in 2001. The total number of birtns between

- 104 -

1981 and 2001 would be around 4.7 million. If current trends were to persistit would result in a total population of 12.1 million in 2001 and 7.5 millionbirths between now and the end of the century.

Table 9.1; DEMOGRAPHlC DATA, 1981-2001

1981 1986 1991 2001

Total population (millions) 6.6 7.4 8.3 10.1Fertility rate (thousands) 133.8 118,8 103.7 8b.1Gross birth rate (thousands) 32.8 30.8 27.6 21.3Gross mortality rate (thousands) 7.6 6.9 6.2 5.1Net growth rate (X) 2.52 2.34 2.14 1.62

Source: National Institute of Statistics

9.5 INS has also prepared regional projections assuming, on the one band,that the fertility and mortality trends in each region would be the same asfor the country as a whole and, similarly, that internal migratory movementswould follow the same trends as during the period 1970-75. On the basis ofthese calculations, the disequilibrium between the Northeast and the Northwestwould become even greater than at present; the Tunis agglomeratLon would havea population of 2.1 million in 2001, i.e. 20.7 of the total population (asagainst 1.2 million or 18.1 percent in 1981), while the Northwestern regionwould contain only 13.8 percent of the total population in 2001 as against16.4 in 1981 (and 17.3 percent in 1976). The results of these projectionswere considered unsatisfactory by the VIth Plan Demography and EmploymentSubcommission. The first results of the population and employment survey of1980 are in fact showing a net slowing-down in migratory flows into thecapital, to the benefit of some regions that were losing population between1970 and 1975 (Sfax and Sousse in particular). Furthermore, developmentpolicy is attempting to correct existing regional imbalances, and it was Wiiththis in mind that such measures as the revision of legislation on investmentand industrial decentralization, and the creation of a General Comiissariatfor Regional Development were adopted.

9.6 At the same time there is a need for a more effective demographicpolicy, and a number of steps have already been discussed for reducing thebirth rate. First of all, it will be necessary to expand faminly planningservices not only to maintain the positive results achieved so far in urbanareas, but also to improve coverage of rural populations. Additional measuresinclude: limiting the number of children qualifying for family allowances tothree (instead of four); replacing paid maternity leave by unpaid leave WLth

effect from the fourth pregnancy; raising the minimum legal age of marriage.These proposals were reviewed by the Demography and Employment SubcomnissLon,whicb recommends instead the adoption of positive incentives, such as premiumsfor spacing births (increase in the allowance if the interval between twobirths is at least 30 months, for example); increasing the amount of familyallowances or the single wage indemnity (indemnit4 de salaire unique); or

- 105 -

changes in rural, and suburban housing subsidies. It felt that the firstseries of measures would have a very limlted impact since they would essen-tially only affect the urban population, already well motivated. In addition,as a result of currency erosion, allowances do not meet the real costsfamilies have to cover, though currently estimated at around one third ofSMIG, they const:itute an appreciable proportion of wage earner income.

9.7 On this; issue, one thing to note is that the objective of the legis-lation is not for family allowances to cover all the additional expenditurescaused by the birth of a child in a household. What is more, the measuresrecommended by the Subcommission would considerably increase social expendl-ture. While the effectiveness argument may be sound (urban population alreadymotivated), it dtoes not alter the fact that most of the measures diiscussed canbe defended in terms of social justice; only wage earners (essentially themodern urban sector) benefit from social security, family allowances and thesingle wage indemnity.

PAST AND FUTURE OBJECTIVES AND INVESTMENTS

Achievements of the Vth Plan.

9.8 Total capital expenditure under the Vth Plan for the health sector isestimated at TD 84 million, in current prices including the central budget,the family planning program, social security!s health program, andi the privatesector. They constituted 2.8 percent of public capital expendituare and 1.9percent of total capital expenditure for the five-year period. Under the VthPlan, some major hospital projects were launched that have yet to be completedand therefore represent an appreciable prior comnitment for the VI:th Planinvestment program. This is the case in particular of the three UniversityHospital centers (Tunis, Monastir, and Sfax), as well as the regionallhospitals at Jendouba, Kasserine, Mabdia and M4ddnine. The VIth Plan assumes,that total commitments for projects already under way amount to some TD 10Umillion, leaving; very little room to add new projects to the healt:h program.Not all of those, bowever, have reached the stage of irreversible commLtment(para 9.18) and the room to maneuver is probably wider than the Plan assumes.

'Tbe Objectives c,f the VIth Plan

9.9 The VIth Plan proposes the systematic introduction of a basic healthpolicy integrating family planning activities in the fields of nut:rition,hygiene and sanitation, and health education to traditional curative andpreventive medicine. This policy is the outcome of a number of experiments inTunisia during the past ten years, undertaken with the assistance of bilateraland multilateral donors; twelve provinces are involved inLtially. This neworientation of bealth policy reflects the fact tnat Ln spite of massivecapital expenditure during the past decade, progress in the healtb conditionof the population is still inadequate, vast disparities between urDan andrural areas persist, and basic needs of the rural populatLon are still far

- 106 -

from being met. Major hospitals, some of which are still under construction,have essentially benefited the urban population and have had only a limitedimpact on rural areas although these account for more than 45 percent of theTunisian population in 1980. In addition, family planning operations havegenerally concentrated on the urban areas.

9.10 The main objective assigned to the sector is to guarantee an adequatehealth coverage of high quality to the entire population. To this avail, thePlan gives primary importancy to: (i) proper maintenance of the existinghealth infrastructure and its improved use; (ii) reorient:ation of new con-truction and equipment purchases towards basic health services and towardspreviously underequipped regions; and (iii) a more balanced distribution ofhealtb costs between the Government, social security, and the individualcitizens.

9.11 More concretely, the Plan has two broad goals: (i) to bring demo-graphic growth under control, and if possible to reduce it to an average of2.3 percent per annum between 1981 and 1986 (as against 2.7 percent p.a.between 1975 and 1981). This would entail an increase of 50 percent in thenumber of family planning acceptors, an ambitious objective that can only beattained if there is an appreciable growth in family planning activities,especially in rural areas, with improved coverage through the addition ofbasic health services; (ii) to reduce infant mortality, the level of whichis considered a good indicator of the health condition of a population, from85 per 1,000 to 60 per 1,000 in 1986. This objective is also ambitious andassumes expanded health coverage in rural areas. In this case as in theotber, the VIth Plan strategy recognizes that to attain these two objectivesrequires the systematic development of basic health care in urban and ruralareas.

9.12 In addition some narrower objectives incluae: a) the establishmentof a reliable system of epidemiological data collection; b) the containment ofendemic diseases (tuberculosis, malaria, schistosomiasis, waterborne diseases,etc.); c) systematic vaccinations; d) mother and infant care in addition lt0family planning; e) school medical services; f) treatment of comaon diseasesand supply of essential medicines; g) sanitation; and h) health education.

The Investment Program Proposed by the VIth Plan.

9.13 The actual investment program proposed in the new Plan does not fullyreflect the general priorities as outlined above, i.e. the development ofbasic health care in rural areas. Completion of hospitals under construct:Lon(TD 85 million) and construction of new hospitals and spas (TD 22 million),,account together for 60 percent of total investment in tbe health sector(Table 9.3). Basic health services, rural and urban, account for Little ocver14 percent including projects under implementati,j (TD 15 mIllion) and newprojects (TD 10.5 million). Maintenance and strengthening account for 21percent, and emergency services for 6 percent. The proposed program has beengrouped under three headings: continued geographical deployment of hospital.

- 107 -

establishments; provision of basic health centers xn all regions; and traLningof the slaff required. The last component, however, accounting for TD 3million, is nol formally part of the bealth sector program ot TD 180 millionbut is includedl in the eduction sector program; thus, it is not shown In Table9.3 below.

9.14 The V]:th Plan gives highest importance to complete the aospitalcoverage of the country by constructing and equipping a) a general 300-bedhospital at La Marsa, a Hospital/University Center (CHU) at Sousse and anotherat Bizerte; b) a regional hospital in each of the four provinces which stilllack one; and c) a district hospital in each of the 64 "delegations" not yetserved. Some specific projects are also proposed, such as the construction ofa nationasl blood transfusion center, the development of specialist surgeryservices at a number of bospitals, the construction of four regionalpsychiatric bospitals, etc. These projects were proposed by the health sectorworking group and, all too often, do not reflect urgent needs; moreover, theirimplications in terms of recurrent expenditure and additional manpowerrequirements were not carefully analyzed. Obviously, they cannot, all beimplemented within the scope of one plan-period and the allocation to thehealth sector, reduced by the need to complete inajor projects already underway, would not permit their financing. With the new general hospital of Tunisnearing completion, and the six new regional hospitals already operational,the expansion of the sector's infrastructure, aud its fLnancing, will have tobe reconsidered in view of the expected increase in operating costs and theneed to ensure adequate resources for the development of basic health services.

9.15 Concerning basic health services, the :Lnitial proposals of theMinistry of Public Health (MOPH), included the extension to the rest of thecountry, as from 1982, of the reform introduced in 1981 to integrate basichealth services in 12 governorates (8 supported by World Bank financing and 4by USAID). The Plan rightly considered that this would be premature; it haspostponed the starting date of this project to 1986. This delay would make Ltpossible to strengthen the planning and management capacity of the MOPH,upgrade the skills of existing health personnel, decentralize the sector'soperations and set up an effective monitoring system. These activities areall covered in the on-going Bank supported project which also includes a mid-term evaluation designed to prepare the extension of integrated basic healthservices to the remaining governorates.

9.16 From a strictly quantitative point of view, the training system willbe able to satisfy future demands (Table 9.2). However, the MOPH is wellaware of the present shortages in some categories of health personnel, of theuneven geographic and inter-service distribution of its staff, and of the needto update and revise training programs. The play of market forces willincrease the number of medical and paramedical graduates who are willLng towork in small towns and rural areas. Recent decisions, or measures stilluinder consideration within MOPH, will gradually solve these problems. Thesemeasures include direct incentives and the formulation of plans that insureitbe mobility of personnel allocated to areas considered as unattra,ctive;

- 108 -

special tax incentives to physicians working outside the main urban centers;and career development for Government physicians througb the academic upgrad-ing of several hospitals located in secondary towns. Finally, the researchand teacher-training center has already begun to revise paramedical personneltraining programs, and the national teacher-training committee of theuniversities is to do the same for medical studies. In both cases, thechanges in the curriculum will aim at better adapting medical and paramedicalstaff to the new requirements of a system that will attach increased import-ance to basic health services. Concurrently, it is planned to undertakeon-the-job recycling of personnel, beginning with the eight provinces coveredby the reform (para. 9.15).

Table 9.2: EXPECTED INCREASE IN PERSONNEL

1981 1986

Physicians 2,060 3,700Dental Surgeons 317 650Pharmacists 832 1,430Senior Technicians 1m030 3,240Specialist Nurses 2,390 2,690Nurses 5,100 11,630Auxiliaries 5,U70 7,720

Total lb,799 31,060

Source: Information collected by the mission; VIth Development Plan

The Investment Program Proposed by this Report

9.17 This Report fully agrees with the basic objectives of the VItn ]?lanas summarized above. While it is aware of the limitations imposed by tthe highamount of projects under execution carried over from the Vth Plan, it con-siders it possible and important to design an investment program that it; moreatune with these objectives than the one proposed by the Plan, without exceed-ing the overall investment level, proposed for the sector.

- 109 -

Table 9.3: HEALTH INVESrMENT PROGRAMS

VIth Plan Forecast ELeport ProposalTD Million Percent TD Million Percent

(in current pr7Lces)

Commitments arising out ofprojects under implementation 100.0 /1 55.6 70 /2 38.9

Hospital construction 84.9 /1 47.2 55 /2 30.6Basic health programs 15.1 8.4 15 8.3

Maintenance and strengthening ofexisting infrastructure 37.5 20.8 60 33.4

Construction of 3 maintenancecenters (Tunis, Sousse and Sfax) 0.5 0.3 1 0.6

Major repairs and additionalimproverments 15.0 8.3 29 16.1

Equipment and ambulance fleetrenewales 22.0 12.2 30 16.7

Expansion ofbasic Health services 10.5 5.8 17 9.4

Rural Health projects 3.5 1.9 7 3.9

Family planning program 3.0 1.7 6 3.3

Construction of urban centers 4.0 2.2 4 2.2

Emergency Services 10.0 5.6 )

Hospitals and Spas ) 33 l1.3)

Expansion and new construction 22.0 A 12.2 )

Grand Total 180.0 100.0 180 100.0

/1 Includiog TD 2.5 million of CNSS (Caisse Nationale de Securlt4 Sociale)financed investments.

/2 Including TD 2 million of CNSS financed investments.

Source: Ministry of Planning and Finance; miission projections.

- 110 -

9.18 The largest difference between the two investments proposals lies inthe estimate of commitments arising out of projects already underimplementation, estimated by the VI Plan at TD 100 million. Yet from astrictly financLal point of view, the only genuine commitnents are thoseprojects for whicn construction has actually started i.e., whose total cost isalready more than say 5 percent disbursed. On this basis, administratlonestimates can be reduced by more than TD 30 million, by excluding amongothers, the Sousse CHU, the three regional bospitals of Jerba, Siliana andSidi Bouzid and equipment and expansion for the Monastir hospital. Tbus, ofthe TD 180 million total Plan appropriation, only about TD 70 million areactually preprogrammed and the health program disposes of at least TD 110million to finance new projects rather than the TD 80 million estimated by thePlan. This higher than expected margin of flexibility ought to be used toreorient the program more profoundly than proposed by the Plan.

9.19 The TD 60 million for the maintenance and strengthening of the ex.Lst-ing infrastructure, as proposed by this Report, are justified in view of theserious state of disrepair of health equipment and facilities, a result ofinadequate appropriations for maintenance in the Ministry of Health's operat-ing budget over many years. However, the Report does not hiave the informationrequired to assess the real cost of each maintenance project, which, in anycase, are never very precisely calculated. It can therefore only propose aglobal amount and limit itself to stressing the priority nature of suchexpenditures, for which a high rate of return is obvious.

9.20 The continued expansion of basic bealth services is another highpriority. This item, however, receives little more than 14 percent of theglobal amount for the sector, old and new projects combined, or only TD 25.bmillion. It includes expansion of the system in the provinces covered underthe existing rural health project, the construction of new basic healthcenters in urban areas, as well as expansion of the family planning programs.While recognizing limitations of absorptive capacity as mentioned above, thisReport strongly proposes allocations of at least TD 32 mill-ion. In the firstplace, adding TD 3-4 million towards the end of the Plan period for ruralhealth projects would enable the full development of the rural healthinfrastructure to be maintained and to start covering the rest of the countryin 1985, instead of 1986, with a rural health infrastructure similar to theone presently financed in cooperation with IBRD. In the second place, sincerecent demographic analyses have sbown that the natural growth rate of thepopulation was higher than projected and that there is stilL a very highfertility rate in the rural areas, it would seem appropriate to double supportfor the National Family Planning and Population Office (ONPFP) from TD 3 miL-lion to TD 6 million.

9.21 The detailed Report proposals leave TD 33 million to finance newinfrastructure and emergency services. In spite of the lengthy list of Planproposals for new projects, there is insufficient information for the formula-tion of fully justified recommendations that take into account the prioritiesof the sector and the impact -- not only in financial terms but also as

- I11 -

regards staff and management aspects. Before any decLsion is taken regardingthe construction of new hospitals, and the creation and expansLon of newservices in existing hospitals or institutes, a careful evaluation should bemade of; (i) the financial and manpower needs related to the development ofbasic health services, and (ii) the foreseeable impact of each proposedhospital on manpower and training requirements and and on the capacity of theoperating budget to cover the appreciable increase in recurrent costsinvolved. Finally, an ad-hoc commission is recommended to define prioritiesand establish a realistic timetable of operations within the limits of the TD33 million available during the five-year peri.od. Projects selected in thisfashion might include some of these excluded above (pare 9.l1) from the listof projects aLready under implementation.

9.22 In any event, the gradual coming intc. service of the major hospitalsnow belig completed will appreciably increase operating expenditures, possiblyin excess of the Plan projected 14 percent per annum in current terms. I/Hence the importance of the Health Commission's recommendations to increasecharges for medical services by hospitals, and to implement reform of thehealth iinsurance system with a view to bringirtg contributions of the NationalSocial Security Fund (CNSS) more closely into line with the cost of the careactually receiLved by insured persons. Other measures under study include:setting up healtb/social work sections in some high schools (to avoid the needto construct rnew vocational schools for nurses); the development of existinginfrastructure through the recruitment of additional skilled personnel and thepurchase of aclditional equipment; improvement in diagnostic fac:Llities with aview to reducing the average hospital stay; and finally the development andexpansion of the basic healtb center program.

1/ This contributes to the rather high growtb rate of public consumptionprojected for the VI Plan.

public disclosure authorized tunisia l - report no. review ......1.6 the vith development plan...

Documents