RESTRICTED

FILE t .py Report No. P-942

This report was prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO THE

REPUBLIC OF TUNISIA

FOR A

HIGHWAY PROJECT

May 17, 1971

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

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

INTERNATIONAL BANK FOR RECONSTRIUCTIONAND DEVELOPMENT

RliPORT ANI) RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A

PROPOSEI) LOAN TO THE REPUBLIC OF TUNISIAFOR A HIGHWAY PROJECT

1. I submit the following report and recommendation on a proposedloan in an amount in various currencies equivalent to $24 million to theRepuhlij of Tunisia for a highway project.

PART I - HISTORICAL

2. The proposed project arises from preinvestment studies initiatedand carried out with the assistance of the Bank Group. On the recommendationof a 1966 Bank economic mission a comprehensive survey of Tunisia's transportsector was undertaken in 1967-68 with financial assistance of the UNDP andthe Bank as executing agency. On the basis of this study, the Bank identi-fied in December 1968 a high priority highway investment project consistingof the reconstruction of selected roads and bridges and the improvement ofhighway maintenance throughout the country. Since a considerable amount ofengineering studies was required for this project, the Bank made an Engineer-ing Loan (S2-TUN) of $850,000 in 1969 to help finance its preparation.

3. The Bank Group's previous lending for transport in Tunisia consistsof twqo loans for ports, one of $7.0 in 1964 and another of $8.5 million in l968,and a loan and a credit of together $17 million in 1968 for a railway project.Following the above-mentioned Engineering Loan, the proposed project wouldl bethe Bank Group's first major operation in highways.

4. Negotiations for the proposed loan were held in Washington fromApril 15 to 23, 1971. The Tunisian delegation was headed by Mr. Hf. Souissi,Director of the Highway Department, Ministry of Public Worlks and Ihousing,and included Messrs. M. Sefaoui, Director of the Transportation Department,Ministry of Economic Affairs, T. Kalai, Assistant Director of Taxation,Ministry of Finance, Z. Mestiri from the Ministry of Planning andA. Badra from the Tunisian Embassy in Washington.

5. Following is a summary statement of loans and credits to Tunisiaas of April 30, 1971:

-2-

Loan or Amount (US$ MillionjCreditNumber Year Borrower Purpose Bank IDA Undisbursed

29 1962 Republic of Tunisia Education 4.9 -

380 1964 Republic of Tunisia Port Development 7.0 -449 1966 Societe Nationale Development

d'Investissement Finance Co. 4.794 1966 Republic of Tunisia Education 13.0 3.9

484 1967 Republic of Tunisia Cooperative Farms 6.1 1.699 1967 Republic of Tunisia Cooperative Farms 3.1 .8

512 1967 Societe Nationale Developmentd'Investissement Finance Co. 10.0 1.8

573 1968 Office des Ports Port DevelopmentNationaux Tunisiens 8.5 5.8

581 1969 SONFDE Water Supply 15.0 13.8606 1969 SNCFT Railways 8.5 8.4150 1969 Republic of Tunisia Railways 8.5 5.1S2 1969 Republic of Tunisia Highway

Engineering .8 .1648 1969 Societe Nationale Development

d'Investiseement Finance Co. 10.0 7.6209 1970 Republic of Tunisia Water Supply 10.5 10.5724 1971 STEC Gas Pipeline 7.5 7.5238 1971 Republic of Tunisia Population 4.8* 4.8

Total (less cancellations) 78.1 44.8of which has been repaid to Bank and others 2.4

Total now outstanding 75.7Amount sold 1.6

of which has been repaid .6 1.0

Total now held by Bank and IDA 74.7 44.8 _

Total undisbursed 46.6 25.1 71.7

* Not yet effective

6. Implementation of the Second Education Project (Credit No. 94) hasbeen satisfactory, but disbursements have somewhat lagged behind schedule.A recent mission has ascertained that an unused balance of $3.2 million willbe available under this credit, resulting mainly from savings on constructionand equipment expenditures. As an interim measure, the closing date (December31, 1970) has now been postponed by seven months to permit the submission and

- 3 -

processing of pending withdrawal requests and to examine the Government re-

quest for utilization of the unused balance. I will in due course present

to the Executive Directors recommendations regarding the utilization of these

ftnds and a further postponement of the closing date.

7. A detailed account of the problems encountered in implementing

the Cooperative Farm Project (Loan No. 484 and Credit No. 99) was contained

in my memorandum to the Executive Directors of November 5, 1970 (R70-213).

The Executive Directors approved amendments to the original Loan and Credit

Agreements on November 17, 1970. These amendments became effective on

March 24, 1971. and disbursements have been resumed.

8. As a result of flood damages in the fall of 1969 and the necessitv

of giving priority to the repair of these damages, the Railroad Project

(Loan No. 606 and Credit No. 150) is about one year behind schedule. The

railroad company (SNCFT) has made efforts to reduce this delay, and sub-

stantial. procurement contracts have been recently signed or are about to be

signed. A matter of concern is the weak financial, position of SNCFT, due

principally to loss of traffic because of the flood damages, delays in

repairing these fully and non-payment of freight charges by the railroad

company's largest client, a phosphate mining company. However, the Covern-

ment is now implementing recovery programs for SNCFT and the phosphate

company designed to restore their financial position.

9. Initial delays in the preparation of bidding documents and in the

letting of contracts account for slow disbursements under the Second Port

Project (Loan No. 573). A number of important contracts have now been

awarded and a normal rate of disbursement can be expected hencefortlh.

Disbursements under the First Water Supply Project (Loan No. 581) are now

reaching a satisfactory rate. Implementation of the three Loans to Societe

Nationale d'Investissement (Nos. 449, 512 and 648) is proceeding satisfacto-

rily. Loan No. 724 to Societe Tunisienne de l'Electricite et du Gaz becanme

effective on May 12, 1971.

10. In 1962, TFl invested $3.5 million ($2 million as a loan and

$1.5 million as equity investment) in NPK-Engrais, a phosphate fertilizercompany. In 1966, IFC macde an investment of D 300,000 (about $571,500) in

the share cnpital of Societe Nationale d'Investissement (SMI), which) in

1970 was increased h)v $630,000 allowing IFC to maintain its 20 percentparticipation when SNI doubled its share capital.. In 1969, IFC made an

investment of $9.9 million ($8 million as a loan and $1.9 million in share

capital) in COFITOUR, a tourism development and holding company.

11. The Bank and IDA are presently considering, projects in fisheries

and tourism infrastructure as well as a fourth loan to Societe Nationale

d'Investissement. A report on a proposed loan and credit for an agricul-

tural credit project will be presented to the Executive Directors in due

course.

- 4 -

PART II_- DESCRIPTION OF THE PROPOSED LOAN

Borrower: Republic of Tunisia

Amount: $24 million equivalent in various currencies

PurEpse: To help finance improvement of 275 km. of roads,

reconstruction of 51 bridges and culverts, re-surfacing and rehabilitation of 1,920 km. of roadsand consulting services, as well as refunding ofthe $850,000 Engineering (project preparation)Loan.

Amortization: In 30 years including a 5-year period of grace,through semi-annual installments beginningJune 15, 1976 and ending December 15, 2000.

Interest Ratd 7-1/4 percent per annum

Commitment Charge : 3/4 of one percent per annum

Estimated EconomicReturn on the Project: Above 16 percent

PART III - THi PROJECT

12. An appraisal report entitled "Appraisal of a Highway Project,

Tunisia", (PTR-75a) is attached.

13. Tunisia's road traffic has increased considerably over the pastfew years as a result of urban development, increased agricultural product-ion and a rapidly expanding tourism industry. The extent to which Tunisia's

economic development is dependent on an efficient highway network was clear-ly demonstrated bv the heavy flood of late 1969 when both production and

exports were considerably reduced because transport facilities had been bad-ly damaged. Reliable farm-to-market roads and an adequate primary road net-

work which connects centers of production, consumption and export are re-quired to support and promote agricultural development. Similarly, develop-ment of tourism, the country's most important foreign exchange earner, relies

to a large extent on the road system.

14. The highway network is fairly extensive and generally adequatein coverage and length. However, its design characteristics are insuffi-

cient to cope with the growing traffic. Furthermore, an important backlogof periodic maintenance has accumulated as a result of inadequate budgetary

allocations for this purpose. Finally, Tunisia's transport sector is

cliaracterized by inadequate arrangements for overall coordination and form-ulation of policies, severe restrictions particularly on road transport an(1

an inappropriate taxation system.

-.5-

13. The proposed project consists of: (a) improvement of about 275 ofprimary and secondary roads serving the southern hinterland of Tunis and thecoastal region of Hammamet, one of Tunisia's most important tourist areas;(b) reconstruction of 51 bridges and culverts, mainly in northern andcentral Tunisia; (c) resurfacing and rehabilitation of about 1,920 km. ofpaved roads throughout the country; and (d) consulting services for pre-investment studies for further road improvements and for assistance in con-struction supervision, implementation of the highway maintenance program,improvement of transport coordination and a study of road transport regula-tions and road user charges.

16. The construction and maintenance program would be executed bythe Highway Department of the Ministry of Public Works. A special unitwill be created within that Department, assisted by consultants, for con-struction programming and supervision. As regards the maintenance program,agreement was reached during negotiations on a reorganization and strength-ening of the Department's highway maintenance services, also to be assistedby consultants. The provision of adequate budgetary allocations for theexpanded highway maintenance program was also agreed upon.

17. An important objective of the project is the improvement ofcoordination and policy formulation in the transport sector. To this ef-fect wider responsibilities, particularly with regard to investment pro-gramming, will be conferred on the Transportation Department of the Ministryof Economic Affairs. Moreover, agreement was reached during negotiations onthe modification of current transport regulations which often are obsoleteand restrict efficiency, and on a further review by 1974 of the then exist-ing regulation of the road transport industry. Finally, a study will bemade of the present road user taxation system with a view to simplifyingand rationalizing this system. Consultants will assist the government inimplementing this work.

18. The estimated total cost of the project is $41.7 million. Theproposed loan of $24 million would cover its foreign exchange componentand refinance the $850,000 Engineering Loan under which the project was

prepared. The project will yield substantial savings in highway usercosts. Its internal economic return is estimated to be above 16 percent;the highway improvement program as a whole would have an aggregate economicreturn of about 21 percent, the bridge reconstruction program 16 percentand the resurfacing and rehabilitation program about 20 percent.

19. Construction works will be executed by contractors selectedthrough international competitive bidding among prequalified firms inaccordance with Bank/IDA guidelines. Two partly government-owned construct-ion companies are expected to participate in prequalification and bidding.During loan negotiations, agreement was reached on arrangements which willensure that these companies will participate under the same conditions asany other construction company.

-6-

PART IV - LEGAL INSTRUMENTS AND AUTHORITY

20. The draft Loan Agreement between the Bank and the Republic ofTunisia, the Report of the Committee provided for in Article III, Section4 (iii) of the Articles of Agreement of the Bank and the text of a Resolutionapproving the proposed Loan are being distributed to the Executive Directorsseparately. IThe Loan Agreement substantially conforms to the pattern ofagreements used for highway projects. Its effectiveness is dependent uponthe Borrower entering into a contract satisfactory to the Bank with consult-ants for the purpose of assisting the special unit to be established withinthe Highway Department. (Section 8.01)

PART V - THE ECONOMY

21. The latest economic report on Tunisia dated May 4, 1970 (EMA-22a)was distributed to the Executive Directors on May 5, 1970, and an updatingmemorandum was issued on March 3, 1971. An economic mission which spentfour weeks in Tunisia in March, is now preparing its report. A basic datasheet is annexed.

22. Tunisia's economic development during 1970 has, on the whole, been

less favorable than had been forecast. GDP at constant prices, which atthe beginning of 1970 was expected to rise by 7.2 percent, grew by not morethan 3.5 percent. Agricultural production stagnated as a good grain harvestwas offset by poor olive and wine crops. Output in most other sectors alsofell short of expectations partly because of disruptions caused by thedisastrous floods in September/October 1969. Domestic demand, on the otherhand, continued to rise faster than real output. Private and public consump-tion increased by 9 percent. The combination of low production and buoyantdemand put pressure on prices and led to a 7 percent increase in imports.As exports grew only slowly, the current account deficit in the balance ofpayments rose by $15 million to an estimated $110 million. But the deficitwas more than covered by increased foreign aid, and reserves continued torise moderately.

23. Tunisia's economic development over the last few years had beenaffected by unfavorable weather conditions, severe marketing cotlstraintsespecially for exports, and a number of organizational difficulties whichresulted in slow production growth, inadequate public savings, increasinginflationary pressures, and a high external debt burden. These factorshave contributed to recent political changes and led to a serious searchfor a more successful set of economic policies. These efforts culminatedin a new economic strategy, presented by the Prime Minister last November,which aims at accelerating the growth of production and exports by reducingdirect government interference in economic decisions, encouraging privateinitiative and entrepreneurship, and by relying more extensively on marketforces as guide for investment and production. More specifically, the

- 7 -

Covernment has stated its intention to give priority to increasing agri-cultural output, and to the promotion of labor intensive small and mediumscale industrial enterprises. Productivity and export orientation will bethe principal criteria for investment allocation. Workcers' emigration willbe encouraged as an outlet for surplus labor, while efforts to control theincrease in population will be intensified.

24. IHowever, mulch remains to be done to carry out the structural re-forms envisazed by the Covernment. Institutional changes will have to bemad(e and the responsibilities of government agencies, banks, and enterprisesneed to he newly defined in order to establish a more efficient economicsystem. Adequate export incentives will have to be given andl more liberalexchange regulations are required. In additioni, there is urgent needl fora reappraisal of sectoral policies. The Fourth Plan, which will sooni beprepared, could play a leading role in the implementation of the necessatryecononmic reforms.

25. Tunisia's external debt burden is high. In 1970, about 22 per-cent of gross foreign exchange earnings had to be spent on servicingexternal debt obligations, most of it for public and publicly-guaranteeddebt. Tle structure of external debt, however, has been improved in recentvears by reducing the amount of new short and medium-term borrowing. Never-tleless, payments on present debts will remain large in coming years, and(while there is scope for some additional borrowing on conventional terms,Ttnisia will continue to depend to a large extent on the availability ofaid on concessional terms.

PART VI - COMIPLIANCE WIThI ARTICLES OF ACREETTENT

26. I am satisfied that the proposed loan would comply with theArticles of Agreement of the Bank.

PART VII - RECONNENI)ATION

27. I recommend( that the Executive Directors approve the proposedloan.

Robert S. McNamaraPresident

May 17, 1971

ANINEX

TTUNISIA

BASIC DATA

Area 164,000 square kilometers63,380 square miles

Population (mid-1970 estimate) 5.1 million

Annuial Rate of Growth (1965-1970) 2.8 percenXrensity 31.0 per km

Gross Domestic Product (1970) 1/ P 565.1 million

Per Capita. (1970) 1/ US$ 211Annual Rate of Growth (19(65-1970) 2/ 0.6 percent per capita

Industrial Origin of GDP (1966 Prices) Annual Growth Percent Sharcs1965-1970(%) 21 1970

Agriculture -3.9 l.9Miining, !Water and Power 18.6 8.9Manuifacturing 5.1 15.3Construction and Public works 2.0 8.yTransport and Communications 1.3 8.3Services 2.7 25.5Government 'Wages and Salaries 7.4 18.4

GDP at Factor Cost 3.4 100.0

Expenditure on GDP (Current Prices)

]'rivate Consumption 3.9 63.8PLblic Consurmption 10.6 19.9Gross Investment 1.2 22.2lExports on Goods and NFi 8 .7 292.- 7less: Imports of Goods and NFS 2.2 -28.6

Expenditure on GDP 5-9 100.0Gross Domestic Savings 9.8 16.3

Resource Gap as % of Investment (1970) 26.8

Money, Credit and Prices Annual Growth End-19701965-19700() (D. million)

MIoney 3)upply 9.0 198.8Time and Saving Deposits 11.7 56.0Bank Credit to Government, Net 2.9 91.1Bank Credit to non-Government Sectors 12.5 271.6Consumer Price Index (1962 = 100) 2.9 134.7Wholesale Price Index (1962 = 100) 3.1 148.o

General Government Operations Annual Growth 19701965-1970 (%) (D. million)

Current Revenue 9.8 196.1Current Expenditure 11.2 173.8

Current Surplus 22.3Gross Fixed Capital Formation -0.7 45.7Other Capital Expenditure 6.8 24.9

Overall Deficit 2.2 48.3Domestic Financing, Net -22.0 3.0External Financing, Net 6.6 45.3

Balance of Payments

Exports of Goods and Services 10.2 171.4Imports of Goods and Services 4.2 229.4

Current Account Deficit -58.oNet Public Capital 50.8Net Private Capital 1X.2

Change in Reserves -7.0

Net Foreign Assets (End-1970) -o.6

External Debt 1970

Public Debt outstanding at Year t s End ($ million) 760.0

Debt Service Ratio (%) 22

IMF Position (US$ million) December 31, 1970

Quota 35.0Drawings outstanding 19.5

Bank/IDA Position (US$ million)

Bank loans (less cancellations) 70.1Repayments 2.3Total loans outstanding 67.8IDA credits (less cancellations) Ox.oTotal Bank/IDA 107.8

of which disbursed 44.undisbursed 63.4

Rate of exchange 1 US$ = 0.525 Dinar (D)

2/ At current factor cost and at the official rate of exchange.

2./ 1970 compared to 3-year averages centered on 1965 to remove theeffect of exceptionally good weather on agriculture in 1965.

May 17, 1971