Document of The World Bank FOR OFFICIAL USE ONLY Report No. 18752 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TUNISIA ECONOMIC COMPETITIVENESS ADJUSTMENT LOAN (LOAN 4069 - TUN) December 29, 1998 Social and Economic Development Group Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Unit of Currency = Tunisian Dinar) 1993 1994 1995 1996 1997 Tunisian Dinar per US$, period average 1.004 1.012 0.946 0.973 1.106 Tunisian Dinar per US$, end-of-year 1.047 0.991 0.951 0.999 1.148 FISCAL YEAR OF BORROWER January 1 - December 31 ABBREVIATIONS AND ACRONYMS CTN: Compagnie Tunisienne de Navigation ECAL: Economic Competitiveness Adjustment Loan EEC: European Economic Commission ECU: European Currency Unit EU: European Union FTA: Free Trade Agreement GDP: Gross Domestic Product GOT: Government of Tunisia IBRD: International Bank for Reconstruction and Development (World Bank) IMF: International Monetary Fund OC: Office des Cereales ONH: Office Nationale de I'Huile OPNT: Office des Ports Nationaux de Tunisie STAM: Socite Tunisienne d 'Acconage et de Manutention TD: Tunisian Dinar UNO: United Nations Organizations US: United States VAT: Value Added Tax WTO: World Trade Organization Vice President: Kemal Dervis Director: John Page Country Director: Christian Delvoie Staff Member: Auguste Kouame FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TUNISIA ECONOMIC COMPETITIVENESS ADJUSTMENT LOAN (LOAN 4069 - TUN) Table of Contents Page No. PREFACE EVALUATION SUMMARY PART I: PROGRAM IMPLEMENTATION ASSESSMENT A. Background 1 B. Program Objectives 2 C. Achievement of Program Objectives 3 D. Major Factors Affecting the Loan 8 E. Program Sustainability 8 F. Bank Performance 9 G. Borrower Performance 9 H. Assessment of Outcomes 10 I. Future Operations 10 J. Key Lessons Learned 11 PART II: STATISTICAL ANNEXES Table 1: Summary of Assessments 13 Table 2: Related Bank Loans/Credits 14 Table 3: Project Timetable 15 Table 4: Loan Disbursements: Estimates and Actual 15 Table 5: Indicators of Project Implementation 16 Table 6: Key Indicators of Project Operation 24 Table 7: Studies Included in Project 25 Table 8A: Project Costs 26 Table 8B: Project Financing 26 Table 9: Economic Costs and Benefits 26 Table 10: Status of Legal Covenants 27 Table 11: Compliance with Operational Manual Statements 29 [able 12: Bank Resources: Staff Inputs 29 rable 13: Bank Resources: Missions 29 This document has a restricted distribution and may be used by recipients only in the perforrnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.I IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TUNISIA ECONOMIC COMPETITIVENESS ADJUSTMENT LOAN (LOAN 4069 - TUN) PREFACE This is the Implementation Completion Report (ICR) for the Economic Competitiveness Adjustment Loan (ECAL) for Tunisia. The loan (loan 4069-TUN) was in the amount of US$75 million equivalent, approved on July 25, 1996 and made effective on December 6, 1996. The loan was closed on June 30, 1998, compared with the original closing date of December 31, 1997. The ECAL consisted of two tranches, one equal to US$37.5 million and the other equal to FRF193.9 million. The first tranche, released upon effectiveness, was fully disbursed by December 31, 1996; the second tranche was released on June 3, 1998, and the loan was fully disbursed by June 30, 1998. Parallel financing for the reform program was provided by the European Union in the amount of ECU 100 million and disbursed in two tranches of ECU40 million and ECU60 million respectively. The ICR was prepared by Auguste Tano Kouame, Economist (MNSED), and reviewed by Ms. Daniela Gressani, Sector Leader (MNSED) and Mr. Paul Moreno-Lopez, Senior Country Economist (MNCMG). Useful comments were received from Ms. Marisa Fernandez-Palacios, Portfolio Manager, Mr. Hassan Fazel, Senior Country Economist, and Ms. Fatma Felah, Operations Analyst (MNCMG). The Task Managers for the operation were Ms. Miria Pigato, Senior Economist (DECPG) and Ms. Linda Likar, Principal Economist (MNSHD). Preparation of this ICR is based on material in the project file and information collected through interviews of Staff and Government Officials. The Borrower contributed to the preparation of the ICR by commenting on the draft. The draft ICR was also discussed with the European Union. IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TUNISIA ECONOMIC COMPETITIVENESS ADJUSTMENT LOAN (LOAN 4069 - TUN) EVALUATION SUMMARY i. Introduction. Tunisia signed an Association Agreement with the European Union (EU) in July 1995. The Agreement entailed trade liberalization by a gradual phasing out of tariffs. Since the signing of the Association Agreement, the authorities have placed a stronger emphasis on improving the efficiency and international competitiveness of the economy with a view to easing its integration with Europe and the global economy. At the time this loan was prepared, many aspects of the international competitiveness of the Tunisian economy were in need of improvement. Though the real exchange rate has remained fairly stable, competitiveness has been hindered by high production and transportation costs, inadequate telecommunications services, labor market rigidities, limited and costly access to credit, and inadequate legal and incentives regimes. ii. Project Objectives. The main objective of the Economic Competitiveness Adjustment Loan (ECAL) was to improve the international competitiveness of the Tunisian economy in the aftermath of the signing of the Association Agreement with the European Union, with a view to achieving a sustainable increase in the rate of economic growth. The ambition of the program was not to tackle every single issue relating to competitiveness, but to focus on key areas suitable for immediate policy actions, and leave other areas for future operations. iii. The program supported five broad areas of policy reforms: a) Maintenance of a stable macroeconomic framework and fostering of a stable business environment; including by introducing fiscal measures to replace revenue losses from the expected tariff reforms; b) Acceleration of the implementation of the Association Agreement, including the elimination of tariff surcharges; thus easing domestic firms' access to capital and semi-finished goods used as inputs; b) Acceleration of the pace of privatization in competitive sectors and the opening up of new sectors to private capital so as to reduce inefficiencies and increase the role of the private sector in the economy; d) Reduce transaction costs and improve the regulatory and administrative environment in which enterprises operate, through lower transport costs, trade facilitation and an improved legislative framework; and e) Reduce labor costs by increasing flexibility in the labor market, particularly in lay-off procedures, while protecting workers and containing labor costs. iv. The initial timeframe for the operation appeared to be rather tight in view of (i) the need for the Tunisian authorities to build broad support for some of the structural reforms (i.e. liberalization of maritime activities and adoption of a new Company Code), and (ii) Tunisia's preference for gradual and cautious implementation of reforms that could have adverse social impacts or weaken government control in key sectors of the economy. v. Implementation Experience and Results. Overall, the program outcome is satisfactory. Key areas of major success include the maintenance of a good macroeconomic framework especially on the external front; the fast implementation of the free trade agreement included in the Association Agreement signed with the European Union; and the big push given to privatization in late 1997 to early 1998 which resulted in the successful privatization of two large cement companies. ii vi. On the macroeconomic front, Tunisia confirmed its commitment to macroeconomic stability and consolidated its reputation of a soundly managed eccinomy. Current account deficits were lower than pr-ogram targets in 1996 and 1997. The 1996 outcome may not necessarily be conducive to the improvement of long-term competitiveness as it was brought about by a slowing of investment-related imports. The 1997 outcome is more promising as it originated in a fast growth of exports and a strong services account. Tunisia also maintained external reserves worth more than 3 months of imports, a historical high. The sound external position commanded confidence in Tunisia's economy. The country was able to raise significant amounts of capital on international financia' markets at favorable rates in 1997, and to attract a relatively large amount of foreign direct investment in 1998. To improve economic competitiveness in a durable manner, the macroeconomic achievements on the external front will need to be accompanied with strong actions geared at improving fiscal balances, reducing inflation and improving employment. vii. On the trade liberalization front, Tunisia started implementing the Association Agreement two and a half years before the ratification of the Agreement in all EU countries. This move signaled strong commitment on the part of Tunisia. The authorities managed to partially offset the short-terrm losses of fiscal revenues due to the lowering of tariffs, by introducing other revenue measures (e.g. broadening of the VAT coverage and upward adjustment of some VAT rates) as well as some expenditure restraint measures (e.g. reducing food subsidy and controlling capital expenditures). On the privatization front, Tunisia made a big leap forward in 1998 after a decade of slow and inconsequential privatization, raising its cumulative privatization receipts since 1987 from 400 million dinars to over 830 million within a year. This impressive result was achieved largely through the sale of two large cement companies. viii. Despite the program's large success, a number of policy actions envisaged to lower enterprises' cost of doing business -- increasing the efficiency of maritime transport, introducing some flexibility in the organization of dock labor, and adopting a new Company code -- were still to be completed though at an advanced stage at the time the loan was closed. Two technical waivers and a partial waiver were granted to allow for the release of the second tranche of the loan. However, the financing arrangements and the cost of implementing the project did not change as a result of the delays. ix. Key factors that affected achievement of the major objectives. In 1996, abundant rainfalls boosted agricultural output by 29 percent after two years of negative growth, and tremendously helped GDP growth which reached 7 percent that year. In 1997, Tunisia succeeded in raising funds on international capital markets at very favorable conditions, which allowed the country to exceed the target for foreign exchange reserves selt in the ECAL program. On the other hand, the need for, and difficulties in, building broad support for deregulation of maritime activities and the revision of the Company Code slowed program implementation. x. Performance of the Bank. The Bank showed flexibility during program preparation and reached an agreement with the authorities to postponing the banking sector reform component initially envisaged in the operation in order to arrive at a fully satisfactory policy package for the sector. This change entailed a reduction of the loan amount by half. During program implementation, while recognizing Tunisia's preference for gradual implementation of reforms, the Bank pressed for fast reformis where there was a strong case to do so. For example, through the program, a large-scale privatization was successfully undertaken for the first time in Tunisia. In addition, the Bank closely coordinated its loan preparation and supervision with the European Union, and worked closely with the IMF on the macroeconomic framework for the operation. xi. Performance of the Borrower. Tunisian officials were actively involved in the design of the program and took full ownership thereof. During program implementation, the borrower experienced some delays in meeting some loan covenants because of the political sensitivity of the measures involved and the need to build broad support before implementing them. In other areas - such as macroeconomic management and privatization, the Tunisian authorities occasionally implemented measures that went beyond program targets. During program supervision, Tunisian officials responded to Bank's requests for information dissemination, although, at the initial stage of program implementation, information on the status of the privatization program was not made public. xii. Project sustainability. Macroeconomic stability is likely to be sustained, given the track record and the generally good initial conditions; however, inflexibility of budgetary expenditures (essentially due to a heavy wage bill), worsening external financing conditions, and in general a deteriorating international scene, constitute factors of risk. Regarding trade reforms, much progress has been made, and there is momentum. It is unlikely that reversals will take place. However a much more severe deterioration in the world economy could cause demand for Tunisian exports to stagnate, worsen the trade balance, and perhaps slow down fiurther tariff reductions. A much worse international situation would also have effects on the ability of the Tunisian economy to reduce unemployment. Lastly, improvements on the regulatory and labor market fronts are likely to proceed slowly, in part because of the need to generate broad support. xiii. Working closely with the authorities, the Bank has just appraised a second Economic Competitiveness Adjustment Loan (ECAL II) that will consolidate progress made under the first ECAL. The second ECAL will primarily aim at strengthening the banking sector by improving banking regulation and settling bad loans owed by public and semi-public enterprises. xiv. Key lessons learned. The first lesson leamed through the program supported by this loan is that there are gains to be made in fast, yet orderly implementation of structural reforns as seen with privatization and trade reforms. The Tunisian authorities and the Bank should continue to seek ways to speed up structural reforms in other areas of the economy. The second lesson is that collaboration with other development partners such as the EU and the IMF can greatly leverage Bank's resources and enhance the impact of Bank's intervention. IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TUNISIA ECONOMIC COMPETITIVENESS ADJUSTMENT LOAN (LOAN 4069 - TUN) PART I - PROJECT IMPLEMENTATION ASSESSMENT A. BACKGROUND 1. From independence in 1956 to the mid-1980s, Tunisia's development process was essentially government-led. Government undertook large public investment programs whose rationale was not always to provide services of a public good nature. Government also felt the need to supplement private investment deemed insufficient, and to ensure adequate levels of investment in areas of strategic national interest. In 1986, oil prices fell markedly and caused a fall in oil related revenues for the Government. This added to the effects of the large public outlays and rigid current public expenditures to cause a near balance of payments crisis. 2. Since then, Tunisian authorities have consistently pursued a program of economic adjustment and structural reforms aimed at instilling macroeconomic stability, introducing market determined incentives, and improving the outward orientation of the economy. Sound macroeconomic management has helped withstand the impact of adverse developments, such as drought, the Gulf war, and slow economic growth in Europe in the early 1990s. Annual real GDP growth increased from an average of 3 percent during the 1980-86 period to more than 4 percent during 1987-97, and growth rate of per capita income doubled to 2.4 percent per annum, which, combined with enlightened policies for human resources development, helped to significantly reduce the share of the population living in poverty. From 9 percent in 1980-86, the average annual rate of inflation declined to 6 percent in 1987-97 mainly as a result of a gradual reduction in the fiscal deficit (from an average of 5.5 percent to 4.2 percent), and a better control of monetary aggregates. The country's external position has improved tremendously, with end- of-year gross foreign reserves increasing from the equivalent of 1.3 months on imports on average during 1984-86 to 2.2 during 1987-1995 and to over 3 during 1996-98. Furthermore, the cautious implementation of economic measures has helped minimize social disruptions and conflicts. 3. Economic adjustment, and therefore securing stable macroeconomic environment for private investment, took place in a very dynamic global economic environment, particularly in countries -- in Asia and Eastern Europe -- competing with Tunisian products in international markets (especially in the European Union). In Tunisia, the process was slow and piecemeal. The authorities implemented a partial trade liberalization, the thrust of which was to give trade protection to import competing firms and tax advantages to enterprises producing exclusively for exports under subcontracting agreements in low skill activities such as garment assembly. The 2 former hindered an efficient utilization of capital resources and the latter may have introduced labor market biases towards unskilled labor. Many of Tunisia's competitors increased their comparative edge; achieving higher labor productivity (either through low wages or through higher technical skills, or both), and lower costs of transportation of goods and services. 4. Tunisia signed an Association Agreement with the EU in July 1995. The Agreement, which was the first to be signed between the European Union and a country of the Middle East and North Africa region, entailed trade liberalization by a gradual phasing out of tariffs. Since the signing of the Association Agreement, Tunisian authorities have placed a stronger emphasis on improving the efficiency and international competitiveness of the economy with a view to easing its integration with Europe and the global economy. As an indication of the authorities resolve to open up the economy, the implementation of the Association Agreement started in Tunisia two and a half years before its ratification by all EU countries; and the privatization of public enterprises received a big push in late 1997 and early 1998. 5. At the time when this loan was prepared, many aspects of the international competitiveness of the Tunisian economy still needed improvement. Though the real exchange rate had remained fairly stable, international competitiveness was hindered by high production and transportation costs, slow and inefficient port and customs procedures, inadequate telecommunications services, labor market rigidities, limited and costly access to credit, and inadequate legal and incentives regimes. 6. Whilst in the 1970s and early 1980s, the Bank's lending program to Tunisia was in support of investments in infrastructure, social development and agriculture, since the beginning of Tunisia's adjustment process in 1986, the Bank has also supported broad economic reforms through seven adjustment operations for a total of US$989 million. The latest adjustment operation is the Economic Competitiveness Adjustment Loan. B. PROGRAM OBJECTIVES 7. The main objective of the Economic Competitiveness Adjustment Loan (ECAL) was to improve the international competitiveness of the Tunisian economy in the aftermath of the signing of the Association Agreement with the European Union, with a view to achieving a sustainable increase in the rate of economic growth. The program was expected to increase the efficiency of resource allocation in the economy and the productivity of the private sector; strengthen Tunisia's balance of payments and consolidate its access to private capital markets; and facilitate the integration of Tunisia with world markets. 8. The program supported five broad areas of policy reform: a) Maintain a stable macroeconomic framework and foster a stable business environment; including by introducing fiscal measures to replace revenue losses from the expected tariff reforms; b) Acceleration of the implementation of the FTA; including the elimination of tariff surcharges, thus easing domestic firms' access to capital inputs and intermediate goods; c) Acceleration of the pace of privatization in competitive sectors and the opening up of new sectors to private capital so as to increase the role of the private sector in the economy and reduce inefficiencies; d) Reduce transaction costs and improve the regulatory and administrative environment in which enterprises operate, through lower transport costs, trade facilitation and an improved legislative framework; and e) Reduce labor costs by increasing flexibility in the labor market, particularly in lay-off procedures, while protecting workers and containing labor costs. 3 9. The ambition of the program was not to tackle every single issue relating to competitiveness, but to focus on key areas suitable for immediate policy actions and leave other areas for future operations. The initial timeframe for the operation appeared to be rather tight in view of (i) the need for the Tunisian authorities to build broad support for some of the structural reforms (i.e. liberalization of maritime activities and the adoption of a new Company Code), and (ii) Tunisia's preference for gradual and cautious implementation of reforms that could have adverse social impacts or weaken government control in key sectors of the economy. C. ACHIEVEMENT OF PROGRAM OBJECTIVES 10. Overall, the program outcome is satisfactory. Key areas of major success include the maintenance of a good macroeconomic framework especially on the external front; the fast implementation of the free trade agreement included in the Association Agreement signed with the European Union; and the big push given to privatization in late 1997 and early 1998 which resulted in the successful privatization of two large cement companies. Despite the program's large success, a number of policy actions envisaged to lower enterprises' cost of doing business -- increasing the efficiency of maritime transport, introducing some flexibility in dock labor, and adopting a new Company code -- were still to be completed though at an advanced stage at the time the loan was closed. Two technical waivers and a partial waiver were granted to allow for the release of the second tranche of the loan. 11. Macroeconomic Management. On the macroeconomic front, the major achievement of the program was Tunisia's improved external position and enhanced access to foreign capital both through international capital markets and foreign direct investment. The 1996 current account deficit was lower than program target owing to low investment related imports in 1996, which may not be promising for future competitiveness. Investment related imports picked up in 1997; exports also grew fast - albeit slightly less so than program target - and the services account showed a strong turnout. Hence a current account deficit in 1997 lower than program target. The external debt to GDP ratio improved considerably, declining from 58 percent in 1995 to 54 percent in 1997. Foreign reserves ended up at a higher level than targeted -- at historical high cushions of 3.2 and 3.3 months of imports in 1996 and 1997 respectively. The stronger reserves position is a reflection of Tunisia's improved ability to raise funds on international capital markets at favorable conditions. In 1997, the authorities were able to tap the US dollar euromarket for the first time, raising US dollars 400 million at very favorable rates of 140 basis points above US Treasury for 10-year notes, and 180 basis points above US Treasury for 30-year bonds. They also raised Yen 12.5 billion in 20-year Samurai bonds with a coupon of 4.35%. Table I: Program macroeconomic targets and results 1996 1996 1997 1997 Program Actual Program Actual targets targets Exports (Good and non factor 4.7 0.5 7.3 6.9 services) Manufac. Exports 4.4 -11.8 8.2 7.5 % Share of GDP Fiscal Balance -3.8 -4.0 -3.0 -3.4 Current Account -3.8 -2.7 - 3.8 -3.4 Reserves (months of imports) 3.0 3.2 3.1 3.3 Debt outstanding 53.1 55.6 52 54 4 12. Though good, the macroeconomic achievements on the domestic front were less impressive. At 3.4 percent of GDP, the 1997 fiscal deficit of the central government was an improvement over the 1996 level of 4.0 percent. But in both years the fiscal deficit missed the program targets. The 1996 fiscal slippage was due to a steeper drop than expected in trade- related fiscal revenues during the first year of the implementation of the FTA. Behind the 1997 fiscal slippage were rigidities in current expenditures (particularly the wage bill), lower than expected oil revenues, and a slower than expected impact of the new revenue measures designed to compensate for declining trade related revenues in the second year of the implementation of the free trade agreement. The authorities confirmed their commitment to macroeconomic stability and made great strands at limiting fiscal slippage by implementing expenditure restraint measures not foreseen in the program. The inflation rate was 3.7 percent in 1996 as in 1997, lower than the projected level of 4.5 percent in 1996 but higher than the projected level of 3.3 percent in 1997. There is room for further reduction in inflation as it remains higher than in major European trade partners -- EU inflation averaged 2.1 percent per year in 1996-98. 13. Tax measures. The implementation of the FTA with the EU has a short-term adverse impact on government revenues due to the forgone trade related fiscal revenues. The issue of ensuring tariff reduction with fiscal revenue neutrality was then a major concern of the program, and new compensatory revenue measures were introduced under the program in order to avoid that implementation of the FTA cause a deviation from government's fiscal stance in the short- term. The compensatory measures included an increase of the value added tax rate from 6 percent to 10 percent for certain petroleum products and to the standard rate of 17 percent for others - such as unleaded gas and heavy fuels; an increase of the minimum rate of taxation for income profits from 10 percent to 15 percent; and the inclusion of imported capital goods in the 10 percent VAT rate category. VAT related revenues increased by 160 million dinars between 1996 and 1997, that is an increase of 16 percent, compared to an increase of 12 percent a year earlier. 14. The increase in VAT revenues was however insufficient to compensate for the decline in trade related fiscal revenues caused by the implementation of the free trade agreement. To limit the fiscal slippage, the authorities implemented expenditure restraints measures consisting in increasing the administered prices for subsidized food products (mainly flour, semolina, oil, and milk), and thus limiting government transfers to the Caisse Generale de Compensation or the fiscal cost of food subsidies to 1.7 percent of GDP as foreseen in the program. As part of their efforts to limit fiscal slippage in 1997, the authorities took additional expenditure restraints measures by freezing certain expenditures in 1997 (especially in the capital expenditure category) for a total of about US$120 million. 15. The 1997 revenue measures were consolidated in 1998 - with an increase of the (standard) VAT rate from 17 percent to 18 percent for most products (and decrease of the rate from 29 percent to 18 percent for some products); an increase of VAT rate on petroleum products from 10 percent to 18 percent; and an increase of VAT rate on electricity for domestic users from 6 percent to 10 percent. The 1997 and 1998 measures are now yielding substantial revenue increases, with an increase of nearly 32 percent in VAT related revenues in the first 10 months of 1998 over the same period in 1997. The authorities consider these reforms as structural and have no plan to modify the VAT structure in the near future. 5 16. The program also introduced some transparency in the allocation of subsidies to the public agencies in charge of commercializing cereals and oil. Government policy to fix the prices of cereals and oil to consumers contributed to operating deficits of the Office des Cereales and Office Nationale de I'Huile; and budgetary transfers proved inadequate to cover those deficits. The above agencies financed their deficits through borrowing from the banking system. Under the program, government decided to repay the arrears that those agencies had built up vis- a-vis banks, namely the Banque Nationale Agricole. To settle the arrears, the government received an advance of 960 million dinars from the Central Bank to be repaid through the budget over 12 years without interest. Moreover, the Government decided to make adequate budgetary transfers to the Caisse Generale de Compensation in order to ensure that no further arrears develop vis-a-vis the banking system. 17. Trade Policy. The Association Agreement signed with the European Union in July 1995 includes a phased creation of a free trade area. Under the Agreement, tariffs on import of goods (excluding agricultural goods) will be progressively eliminated over a 12-year period (1996- 2007), starting with those on capital and intermediate goods. The program supported by this loan helped accelerate the implementation of the FTA by incorporating the phased tariff reduction in the 1997 budget and by helping to expedite the ratification of the FTA by the Chamber of Deputies. The implementation of the free trade agreement in Tunisia began roughly two and a half years prior to its ratification in all EU countries. The early start at implementing the FTA signaled strong commitment on the part of Tunisia. Other major achievements of the program are the removal of all trade surcharges, and the harmonization of tariffs on capital good imports from outside the EU. 18. Despite possible short-term costs that may arise from increased competition faced by domestic firms, the program has helped confirm that the FTA represents a unique opportunity for sustained growth. With the implementation of the FTA, Tunisian firms will have easier and less costly access to intermediate goods on international markets, which should contribute to improving their competitiveness. They will also have access to a larger market for their products. Imports of machinery and semi-finished products have accelerated in 1997 and 1998 with a potential positive effect on the productivity of firms; and manufacturing exports have already shown signs of accelerated growth in 1997 and 1998. In order to further reduce tariffs, the Government aims at streamlining the rates and reducing the average tariff rate from 43 percent in 1997 to 25 percent in 2001. The Government also concluded negotiations with the World Trade Organization on the complete elimination of quantitative import restrictions (mainly on cars) by 2001, and has negotiated tariff harmonization arrangements with a number of countries outside the EU. 19. Reducing the Role of the State in Competitive and Commercial Sectors. Until late 1997-early 1998, the Tunisian privatization program, launched in 1987, had proceeded rather slowly. With the program supported by this loan, the privatization program made an important leap forward. In 1998 alone, privatization yielded revenue of 435 million dinars for government's budget, more than the combined privatization proceeds of the previous 10 years. The 1998 balance of payments also greatly benefited from Government's renewed privatization effort in the form of increased foreign direct investment, a boon at a time when borrowing from international capital markets was made difficult for emerging market economies due to the financial crisis in Asia and Russia. 6 20. The success of the privatization program in 1998 was however slow in coming. During the preparation of the ECAL, Tunisian authorities compiled a list of 63 public enterprises to be privatized. The Bank and the authorities agreed upon that list. Tunisian officials subsequently informed the Bank that some small companies had been removed from the list for reasons having to do with political sensitivity or strategic interest. This, and delays in receiving technical assistance to strengthen the Privatization Unit in the Ministry of Economic Development, delayed the implementation of this component of the program. 21. The government willingly substituted the public enterprises removed from the original list with other public enterprises in order to meet program target of bringing to the point of sale at least 51% of the capital of a number of enterprises corresponding to 50% of net assets of the agreed list of 63 public enterprises. This allowed for the privatization of the Societe des Ciments d'Enfidah and the Cimenteries Jebel Ouest, which generated over 400 million dinars in foreign investment. 22. With the successful privatization of these two large cement companies, Tunisian authorities achieved more than the privatization targets foreseen in the program. They brought to the point of sale more than 51 percent of the capital of enterprises, corresponding to 54 percent of the net assets of the selected enterprises. The Government hired a renowned international investment firm as advisor for the privatization of the cement companies, and the sale was made under international competitive bidding procedures. All participants have praised the Government for the transparency of the process. Moreover, under the program, the Government began publishing sale outcomes and articles on the results and impact of the privatization program in local economic journals and newspapers. The recent success of privatization is perceived as a key asset in moving forward the privatization agenda in coming years. 23. Deregulation of Maritime Activities and Trade Facilitation. This is an area where progress has been slow under the program. To improve competitiveness, this component of the program was aimed at reducing the cost, and increasing the speed, of shipping. Areas of progress were accompanied by areas were program objectives remain to be achieved. Going beyond the mere submission of a draft legislation as planned in the program, the Government has approved a law abolishing the privileges granted to Tunisian ship-owners in chartering, a big step towards the liberalization of maritime activities. A draft law on commercial port activities is currently being reviewed by the Chamber of Deputies and its adoption is expected in the near future. However, little progress was made in incorporating the redefinition of the functions of OPNT and the new regime of maritime domain. The authorities need to shift to a more rapid reform stance in maritime transports if the competitiveness of Tunisian exporters is to be markedly improved. 24. Progress was slow and partial in introducing flexibility and competition in working conditions of dock labor. Negotiations between the government and workers' union were protracted and decision making was politically sensitive. A draft law was presented to the Chamber of Deputies but had not been approved, let alone published in the Official Gazette, at the time of the release of the second tranche of the loan, and a technical waiver was granted. 25. Progress was made in restructuring the Compagnie Tunisienne de Navigation (CTN), the state maritime company. However there is no indication of progress towards its privatization. The restructuring of the Societe Tunisienne d'Acconage et de Manutention (STAM) lagged. A consulting firm prepared a restructuring plan, but the Government found the work unsatisfactory, 7 and another plan will be prepared. At the time of the release of the second tranche of the loan, a partial waiver was issued because of delays in adopting the restructuring plan of STAM. 26. Under the program, a trade facilitation committee composed of all concerned groups in Tunisia, produced the single trade document (liasse unique) envisaged in the Association Agreement with the EU. The liasse unique was published as decree in the Official Gazette in December 1997. The decree simplifies the documentation and ports procedures and brings the customs code up to date and in conformity with the EU code. This is expected to reduce the time required for custom claims processing and clearance. 27. Telecommunications. In Tunisia, entry of private capital in the telecommunications sector is tightly controlled although global experience suggests that, thanks to recent technical progress, the telecommunications sector can no longer be viewed as a natural monopoly sector. Many countries have indeed privatized their national monopolies and allowed the emergence of new private service providers. Tunisian authorities presented to the Bank an agenda for the liberalization of the telecommunications sector in Tunisia. The proposed plan was slow and fell short of Bank's expectations; it proposed selling just 10 percent of Tunisie Telecom - the public monopoly - only by 2002, and liberalizing mobile telephone and paging services only in 2000. The slow development of telecommunications may put a break on the development of the Internet in Tunisia, and deny firms expanded and affordable access to information, a key input and a key element of their efficiency and international competitiveness. The authorities have invoked the strategic character of telecommunications to justify the overly cautious approach to its liberalization. 28. Business Environment and Labor Cost. To improve competitiveness of enterprises, one of the objectives of the program supported by this loan was to adapt the legal framework, increase flexibility of the labor market, and decrease the cost of labor while improving workers' protection. A new company code was drafted under the program. The new draft represents important progress; among other innovations, it enables mergers and acquisitions -- previously not possible. The drafting of the new company code took longer than anticipated at program formulation stage, and its submission to the Chamber of Deputies - a key condition for the release of the second tranche of the loan - was delayed because the Government used a broad consultative process to prepare the draft. The draft was submitted to all Ministries concerned as well as to the private enterprises organization for comments. At the time of the release of the second tranche of the loan, a technical waiver was granted on this component of the program in order to allow the Government enough time to complete the consultative process and possibly facilitate the approval of the new Company Code by the Chamber of Deputies upon its submission by the Government. 29. Reforms were introduced to increase the flexibility of the labor market and reduce labor costs. Procedures for lay-offs for economic reasons were eased; a draft law was submitted to the Chamber of Deputies creating a limited severance scheme to cover the separation packages paid to workers laid-off for economic reasons; and measures were taken to reduce the burden of social security contributions for employers in the non-agricultural private sector. 8 D. MAJOR FACTORS AFFECTING THE LOAN 30. Factors not generally subject to Government's control. In 1996, abundant rainfalls boosted agricultural output by 29 percent after two years of negative growth in the sector. This tremendously helped GDP growth that year. In 1997, Tunisia succeeded in raising funds on international capital markets at very favorable conditions, which allowed the country to exceed the target for foreign exchange reserves set in the program. The situation has changed somewhat in 1998. Because of the Asian financial crisis, foreign investors who do not have enough information to differentiate between emerging market economies, are asking for very high spreads or withdrawing funding. Under the circumstances, despite Tunisia's good records of macroeconomic management, the financing of its external capital needs may prove expensive in 1998 and 1999. For 1998, the situation is eased by good inflows of foreign direct investment owing to the success of the privatization program. 31. Factors generally subject to Government's control. Program implementation was slowed by the need for, and difficulties in, building broad support for deregulation of maritime and port activities, and for reforming the business environment. The disbursement of the second tranche was delayed by six months. At the time of the release of the second tranche of the loan, the deregulation of dock labor, the adoption of a new company code, and the restructuring plan of STAM were lagging. Two technical waivers and one partial waiver were granted to take account of substantial progress made in other program areas. E. PROGRAM SUSTAINABILITY 32. Progress made under the program appears sustainable to a large extent. The authorities are committed to moving forward on key program components such as the deepening of trade liberalization and privatization - with two other large cement companies expected to be privatized in 1999. They are also prepared to make headway in areas where reforms were deemed premature under the program supported by this loan. The authorities are thus deepening reforms in the financial sector, improving banks portfolio, introducing new instruments for government borrowing, facilitating the emergence of a secondary market, and deepening the interbank foreign exchange market. These reforms will contribute to the efficiency of the financial system and help sustain progress made in the real sector under this loan. The authorities are also looking to reforming the civil service.. Such reform will contribute to (i) reducing the weight of the public sector wage bill on public resources therefore making the fiscal stance sustainable, and (ii) strengthening the administration's capacity to support the private sector in upgrading international competitiveness. 33. A number of factors may however change the perceived sustainability of important program components. Macroeconomic stability is likely to be sustained, given the track record and the generally good initial conditions; however fiscal inflexibility mainly due to the wage bill, contingent liabilities due to enterprises or banks that may not sustain competition from European firms, worsening external financing conditions, and in general a deteriorating international scene constitute factors of risk. In Tunisia, many university graduates prefer to wait two to three years for a Government job rather seek employment or self-employment in the private sector because of low wage at entry levels and job insecurity in the latter sector. Because job creation in the formal private sector is inadequate, the public sector continues to absorb a large number of new graduates. For social reasons, a continuation of weak job creation by the private sector may 9 make it difficult for the government to reduce intake of new graduates in the civil service, reduce the share of the wage bill in the budget, and maintain its fiscal stance. 34. Much progress has been made in trade reform. There is momentum, and it is unlikely that reversals will take place. Tunisian trade is still highly concentrated with Europe. If the resilience shown by European countries so far to the crises affecting Asia, Russia, and Japan fades out, demand for Tunisian exports may stagnate, affecting the sustainability of external balance. This could inspire non-market responses to restore external balances, with risks of slowing the implementation of trade liberalization. 35. Owing to Tunisia's tradition of public enterprises and public provision, the privatization drive is still not comprehensive. Notwithstanding the success of the 1998 privatization, there is some uncertainty as to how the country will manage to expedite the sale of some other public enterprises previously identified for privatization. If privatization lags behind trade reforms, and efficiency in the production of goods and services continues to be constrained by non- competitive public enterprises in the manufacturing and services sectors, domestic producers may not be able to compete with imports. This may usher in some company closures, slow down the development of the manufacturing and formal services sectors of the economy, and could inspire some pressure for protective measures. F. BANK PERFORMANCE 36. The Bank maintained an active dialogue and cooperation with the Tunisian authorities during program design and implementation. The Bank showed flexibility during program preparation and reached an agreement with the authorities to postponing the banking sector reform component initially envisaged in the operation in order to arrive at a fully satisfactory policy package for the sector. This change entailed a reduction of the loan amount by half. The authorities are now addressing the banking sector reform in a second ECAL where the Bank has put more effort at helping to design policies to strengthen banks' portfolio and banking regulation. 37. Some program components were rather ambitious and the initial timeframe for program implementation rather tight. However, during supervision, the Bank took into account Tunisia's preference for gradual and cautious implementation of reforms, while encouraging fast and vigorous reforms where appropriate. This accommodating yet determined approach paid off. For example, through the program, a large-scale privatization was successfully undertaken for the first time in Tunisia. The Bank also persuaded the authorities that the dissemination of information on the privatization process to the public was critical to improving the image of privatization and to maintaining its public acceptance. The Bank closely coordinated its loan preparation and supervision with the European Union, which provided parallel financing to the reform program, and worked closely with the IMF on the design and monitoring of the macroeconomic framework of the operation. G. BORROWER PERFORMANCE 38. Tunisian officials were actively involved in the design of the program and took full ownership thereof. During program implementation, the borrower experienced some delays in meeting some loan covenants because of the political sensitivity of the measures involved, the need to build broad support before implementing them, and the time required for the Chamber of 10 Deputies to discuss and pass draft law presented them by the Government. In some program areas - such as macroeconomic management and privatization, the Tunisian authorities successfully implemented measures that went beyond program targets. During program supervision, Tunisian officials responded to Bank's requests for information dissemination, although, at the initial stage of program implementation, information on the status of the privatization program was not made public. H. ASSESSMENT OF OUTCOME 39. Through policy actions taken under the program, significant progress was made towards achieving the development objective of improving the international competitiveness of the Tunisian economy. The program helped maintain a stable macroeconomic environment in Tunisia. Real GDP growth was strong -- though aided in 1996 by a strong recovery of the agricultural sector thanks to abundant rains. Tunisia's external position was soundly managed in 1996-1998, and the level of foreign exchange reserves was adequate to cover three months of imports of goods. During its 1998 article IV consultations, the IMF expressed confidence in the Tunisian macroeconomic framework. To markedly improve international competitiveness, inflation will need to be reduced further in 1999 and beyond. 40. With strong trade liberalization and a successful privatization program, Tunisia has advanced its reform agenda and confirmed its readiness to undertake the changes necessary to ensure macroeconomic stability and compete in the global economy in the 21st century. The implementation of the FTA with the European Union was speeded up and is on track. The privatization of two of the largest cement companies was decisive and successful. The momentum should be maintained and privatization moved forwards throughout other sectors of the economy. Program achievements were less than comprehensive in terms of improving the regulatory and administrative environment in which enterprises operate. I. FUTURE OPERATIONS 41. Working closely with the authorities, the Bank has already appraised a second Economic Competitiveness Adjustment Loan (ECAL II) that will consolidate progress made under the first ECAL. The second ECAL will attempt to reform the banking sector by, among other things, strengthening banking regulation and cleaning banks' portfolio of bad loans owed by public and semi-public enterprises. The new operation incorporates the recommendations made by a government-sponsored Banking Commission created in January 1997. The Bank is also undertaking a private sector assessment which will help gain a broader understanding of the private sector in Tunisia, its needs, the remaining impediments it faces in improving its competitiveness, and whether and when domestic firms are likely to provide the supply response to the implementation of free trade agreement with the EU. A trade promotion and facilitation project is under preparation, which, in addition to improving intemational marketing and export guarantee, will help put in place a trade facilitation system (including an electronic data interchange system) that would improve the efficiency of Tunisian ports and thus help improve international competitiveness. Also, a transport sector loan under preparation will help consolidate reforms in maritime transport initiated under the ECAL. 11 J. KEY LESSONS LEARNED 42. The first lesson learned through the program supported by this loan is that there are gains to be made in fast, yet orderly implementation of structural reforms. In the two program components that had the greatest success -- trade liberalization and privatization -- the speed of reform has been faster than in other reform areas. Faster implementation did not however mean that Tunisian authorities analyzed and implemented reforms with less caution than is traditionally the case. The Tunisian authorities and the Bank should continue to seek ways to speed up structural reforms in other areas of the economy. 43. During program preparation and throughout implementation, the Bank, the IMF and the EU agreed on a common macroeconomic framework and worked together on policy measures. The second lesson learned through the operation is that this type of coordination greatly enhances the relationships between the institutions at the operational level, and can be highly appreciated by Tunisian authorities -- in fact, the authorities indicated that any follow-up to ECAL should also be coordinated with the EU. The lesson is heeded in the ECAL II under preparation; the Bank, the EU and the African Development Bank are working jointly on the Government's reform program to be supported with loans or grants from these institutions. 13 PART II: STATISTICAL ANNEXES Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not Applicable Macro Policies X Sector Policies X Financial Objectives X Institutional Development X Physical Objectives X Poverty Reduction X Gender Issues X Other Social Objectives X Environmental Objectives X Public Sector Management X Private Sector Development X Other (Trade Liberalization) X B. Project Sustainability Likely Unlikely Uncertain x C. Bank Performance Highly Satisfactory Deficient Satisfactory Identification X Preparation Assistance X Appraisal X Supervision X D. Borrower Performance Highly Satisfactory Deficient Satisfactory Preparation X Implementation X Covenant Compliance X E. Assessment of Outcome Highly Satisfactory Unsatisfactory Highly Satisfactory Unsatisfactory x 14 Table 2: Related Bank Loans/Credits Loan/Credit Purpose Dalte of Status Title Approval Loan 2754 To support Government's September Closed June 30, 1989 ASAL agricultural sector reform program, 1986 Agricultural focussing on increasing producer Sector prices, reducing subsidies on inputs, Adjustment strengthening extension and research Loan and increasing interest rates. US$150 M Loan 2781 To support the initial phase of February Closed in December 1989, one ITPAL Industrial Government's adjustment program 1987 year behind schedule. The Trade for the industrial sector, including fulfillment of certain conditions and Policy price and trade liberalization and (concerning labor issues, the Adjustment fiscal reform. introduction of a VAT tax and Loan the design a foreign exchange US$150 M risk system) took longer than expected. Loan 2962 To support the medium-term June Closed in June 1991, 26 months SALI Structural macroeconomic adjustment program 1988 behind schedule. The delay Adjustment Loan of the Government and continue the was due to slow US$150 M trade liberalization and foreign implementation of liberalization exchange risk coverage reforms measures, because of a severe initiated under the ITPAL; reform of drought, rising unemployment taxation through introduction of and declining investment. VAT and simplification of income Loan 3109 To support the government's public July Closed in June 1993, 2 years PERL enterprise reform, including legal 1989 later than planned because of Public and institutional reforns; to slow progress in privatization Enterprises reinforce the Government's program (for fears of social unrest), and Reform Loan of divestiture and restructuring. delays in the preparation of US$130 M performance contracts. Loan 3078 To support the reforms of the June Closed in June 1995, 6 months ASAL II marketing, institutional and price 1989 later than planned. Agricultural framework in agriculture, reorienting Sector public investment in agriculture and Adjustment Loan improving the management of US$84 M natural resources. Loan 3424 To support efforts to achieve higher December Closed in December 1994 as EFRSL growth and employment creation, 1991 scheduled Economic and restoring internal and external Financial balances, after the Gulf war, Reform strengthening private sector Support Loan development and existing access to US$250 M commercial borrowing. _ _- 15 Table 3: Project Timetable Steps in Project Cvcle Date Date Planned Actual/Latest Estimate Pre-Appraisal 11/27/95 11/27/95 Appraisal 2/27/96 2/27/96 Negotiations 5/2/96 5/2/96 Letter of development policy 6/12/96 6/12/96 Board Presentation 7/25/96 7/25/96 Signing 8/2/96 8/2/96 Effectiveness 12/6/96 2/2/97 First Tranche 8/31/96 12/31/96 Second Tranche 6/30/97 6/3/98 Loan Closing 1 12/31/97 6/30/98 Table 4: Loan Disbursements: Cumulative Estimates and Actual FY 1997 FY 1998 Appraisal Estimate (US$ millions) 75 75 Actual (US$ millions) 37.5 75 Actual as % of Estimate 50 100 Date of Final Disbursement 12/31/1996 6/3/1998 Note: IBRD fiscal year ends on June 30 16 Table 5: Indicators of Project Implementation Objectives Actions Taken Before Actions Before Board Actions Before Second Implementations Status or During Preparation Approval T'ranche Macroeconomics Acceleration in During the last 5 years, GDP Adopt a satisfactory Satisfactory implementation Tunisia maintained strong GDP growth of 6.9%, 5.4% economic growth to incrtased atan annual rateof medium-term of macroeconomic program. and 5.1% in real terms in 1996, 1997 and 1998 a 5-6% a year while 43%, but only 3.4% in 1994, macroeconomic framework, respectively Inflation remained around 3.7% in 1996 and improving because of a decltne In including targets to be 1997, and will be slightly lower in 1998. macroeconomic 1994, both the u flation rate monitored: - reserves, Export earnings expanded by 6.9% in 1997 and the balances and 14, bot the budget defict ae exteal debt, export growth growth rate for manufacturing exports was strong at economic (47)adtebde eii and fiscal deficit. Tecretacutdfctwslwrta h competitiveness (2.7% of GDP) remained 7.5%. The current account deficit was lower than the under control. ECAI, target by 0.4%.. Foreign direct investment in 1996 and 1997 were close to 1995 GDP growth was only US$300 million or 1.5% of GDP, most of which took 2.5% in 1995, due to place in the energy sector. In 1998, foreign direct continued poor results in the investment soared to US$800 million thanks to the agricultural sector; inflation privatization of two cement companies that jointly reached 6.3% because of generated US$410 million in foreign direct investment. price increases in food products. The Fiscal deficit Reserves were higher than the ECAL target, reaching 3.3 (4.2% of GDP) was higher months of imports in 1997 thanks to increased grants than planned. After a from the EIJ and better than expected access to foreign significant improvement in capital. Tunisia issued Yen 12.5 billion in 20-year 1994, the current account Samurai bonds with a coupon of 4.35%, as well as notes deficit deteriorated to 4.0% and bonds on the Yankee market amounting to US$400 of GDP. The external debt to million under exceptionally good terms. GDP ratio was 54.7%, down Although the debt to GDP ratio was slightly higher than from an average of 62.8% the program target, it has improved considerably, during 1987-94. declining from 58% of GDP in 1995 to 54% in 1997. 17 Objectives Actions Taken Before Actions Before Board Actions Before Implementations Status or During Preparation Approval Second Tranche Fiscal VAT was introduced in Introduction of fiscal Introduction in the 1997 The authorities increased the value added tax rate from 6 Ensure 1988; a new Personal and measures to compensate the Finance Law of fiscal percent to 10 percent for certain petroleum products and sustainability of Corporate Income Tax Code loss in revenues resulting measures to compensate to 17 percent for others (notably, unleaded gas and heavy medium-term fiscal was promulgated in 1990; a from tariff and surcharge losses in revenues due to the fuels), the minimum rate of taxation for income profits framework. unified Investment code was reductions; extension of implementation of FTA; from 10 percent to 15 percent, and included imported approved in Dec. 1993 (Law VAT to the retail sector, capital goods in the 10 percent VAT rate category. The no 93-120). suppression of VAT 1997 revenue measures were consolidated in 1998 - with exemptions for imported an increase of the VAT rate from 17 percent to 18 percent equipment goods; revision of for most products (and decrease of the rate from 29 list of activities subject to percent to 18 percent for some products); an increase of VAT rate of 6% (action Repay the accumulated debts VAT rate on petroleum products from 10 percent to 18 taken in the 1996 Finance of the OC and the ONH vis-a- percent; and an increase of VAT rate on electricity for law). vis the banking system domestic users from 6 percent to 10 percent. during 1996; limitation of the Agreement on a sustainable budgetary allocations to the Government decided to repay the arrears that the fiscal program including (a) Caisse Generale de Office des Cereales and Office Nationale de I'Huile had fiscal measures to Compensation to 1.7% of built up vis-a-vis the Banque Nationale Agricole. The compensate losses in GDP. government received an advance of 960 million dinars revenues due to the from the Central Bank to settle the arrears. The amount implementation of FTA; (b) Reduction of budgetary will be repaid through the budget over 12 years without the reimbursement by the expenditures (net of debt interest. State of the accumulated service) in relation to GDP, The authorities also increased the administered prices for debts of the Office des without prejudice to social subsidized food products (mainly flour, semolina, and Cereales (OC) and the Office expenditures, on the basis of a milk), and limited the fiscal cost of food subsidies to 1.7 National de l'Huile (ONH) public expenditure review, percent of GDP. vis-a-vis the banking system; before the end of October (c) a mechanism through 1996, which will include the which the State will revision of the wage bill. reimburse at the at the end of each year the accumulated Submission to the Bank of a Action plan submitted to the EU and the Bank debts of these offices vis-a- study and action plan to vis the banking system. harmonize incentives in the Investment code on the basis of the new commitments made under the WTO and FTA. 18 Objectives Actions Taken Before Actions Before Board Actions Before Implementations Status or During Preparation Approval Second Tranche Trade Promote greater Signing of Free Trade Submission to the Chamber Publication in the official Law no. 96-49 of June 1996 ratified the free trade integration in the Agreement (FTA) with the of Deputies of a draft law Gazette of the law ratifying agreement with the EU. world economy. European Union (EU), in conceming the FTA with the the FTA with the EU. July 1995. EU. Inclusion in the 1997 finance Article 21 of the 1997 Finance Law (no 96-113 of Elimination of quantitative (a) Implementation of the law of the tariff reductions December 30, 1996) introduced the progressive removal restrictions (QRs) on imports tariff reductions included in scheduled up to the second of tariffs for the period 1996-2007 and considers January corresponding to 85% of list No. I of the FTA and year of application of the FTA 1, 1997 as the beginning of the second year of application domestic production. (All their extension to the rest of and of the scheduied of the FTA. Article 20 of the same law removed all tariff remaining QRs will be the world (action taken in the elimination in surcharges. surcharges. eliminated with the 1996 finance law); (b) Implementation and implementation of the FTA). publication in the official publication of the tariff Gazette of a decree reducing reduction program. by 10 percentage points all tariff surcharges on imports; Agreement on a plan to The GOT also concluded negotiations with the World (c) agreement on a schedule harmonize the structure of Trade Organization on the complete elimination of to eliminate the remaining tariffs imposed on non- quantitative import restrictions (mainly on cars) by 2001. tariff surcharges in equal European imports. Government also initiated several bilateral agreements to installments in the Finance extend the changes in trade policy under the FTA to its laws of 1997 and 1998. other non-EU trading partners. 19 Objectiyes Actions Taken Before Actions Before Board Actions Before Second Implementations Status or During Preaatiogn Approval Tranche Disengagement of the States Set up legal and institutional Govemment brings to the Government brings to the Towards the end of 1997 GOT hired a renowned Increase the role of framework for privatization point of sale (i.e. evaluation point of sale at least 51% of international investment firm to prepare two large the private sector in including; Law 89-9 completion, bidding the capital of a number of publicly-owned cement companies for sale under the economy; (definition of public documents and their enterprises corresponding to international competitive bidding procedures. To reach improve efficiency enterprises, rationalization of publication) at least 51% of 50% of net assets of the the goal of bringing to the point of sale 5 1 % of the and competitiveness; institutional responsibility of the capital of a number of agreed a list of public capital of enterprises corresponding to at least 50% of the strengthen fiscal selling stocks in blocks public enterprises enterprises producing goods net assets from the list, the GOT placed Jebel Ouest and balance; deepen through bids with corresponding to 50% of net and services (amounting to Enfidah, the two biggest cement companies on the list, up capital markets. specifications). assets of the agreed list of TD 1.413 billion) for sale in December 1997 and February 1998. As a public enterprises producing result, the GOT was able to fulfill this condition by early Privatization of 43 goods and services February 1998, bringing to the point of sale much more enterprises (between 1987 (amounting to TD 1.413 than 51% of the capital of enterprises corresponding to and 1994) worth TD 156 billion). 54% of the net assets of the selected enterprises. million (about 1% of the book value of public Public offering of more than Public offering of a minimum In addition, the Bank worked closely with the authorities enterprises producing goods 10% in the capital of at least of 10% in the capital of at to make the privatization process more transparent. As a and services). one public enterprise (not least 5 public enterprises result of discussions during supervision missions, the included in the above- (Offre publique de vente, GOT has begun publishing sale outcomes and has begun mentioned list of public OPV) where the State has a systematically preparing published articles on the results enterprises). majority holding (not included and impact of the privatization program in local economic in the above-mentioned list journals and newspapers. Prepare indicators on the size where the total net assets of public enterprises and correspond to TD 1.413 20% of Tunisair shares were offered to the public before their weight in the economy, million) loan approval. After loan approval, at least 10% of shares distinguishing; (i) public of two public enterprises were offered to the public enterprises in the Presentation of the program to through Ofre publique de vente, OPV). Government competitive sector, (ii) privatize the remaining 50% earmarked three other companies for OPV as soon as strategic public enterprises, of the agreed list of public conditions on the stock market were conducive. and (iii) public institutions. enterprises and other actions The indicators should also to reduce the role of the State included, for each public in the medium-term. enterprise; total and banking debt, budgetary transfers, profits or losses. 20 Objectives Actions Taken Before Actions Before Board Actions Before Second Implementations Status or During Preparation Approval Tranche Deregulation Submission to the Chamber of Tulihed Govcoernment97 i aproed a nO.fca 97-69t, Maritime Transport and The maritime transport Deputies of the legislation published on October 31, 1997 in the Official Gazette, Ports monopoly of CTN has been modifying Articles 6 and 7 of brogating articles 6 and 7 of law 77-13 of March 1997, Increase eliminated and private ship- the Law 77-13 with the thereby abolishing the privileges granted to Tunisian ship- competitiveness of owners have been purpose of eliminating the owners i chartering. maritime transport authorized. chartering privileges given to Tunisian ship-owners. Adoption of Law 95-33 Improve concerning deregulation of Submission to the Chamber of competitiveness cargo handling in ports. As Deputies of the modifications ports. an exception, Article 10 to Article 10 of Law 95-33 allows the continuation of dated April 14, 1995 in order the monopoly situation by to eliminate the monopoly of A draft law was presented to the Chamber of Deputies. STAM in the ports of Tunis, the STAM in the ports of While the loan covenant requires only a modification of La Goulette & Rades. Tunis, La Goulete and Rades the 1949 decree "rendering the working conditions of the and put it in competition with dockers less complex, more flexible . . .", the authorities other stevedores. proposed in the draft law the abrogation in its entirety of the 1949 decree and thus removing the monopoly of dock Labor regulations on port workers in the Tunis ports. The law has neither been operations: publication in the passed nor published in the Official Gazetle Official Gazette of law modifying Decree of February 17, 1949, concerning working Completion of a study to conditions of dock labor to evaluate the CTN group. render them less complex and more flexible and adapted to Start up of the valuation the requirements of modern process of STAM ports. Ifhe restructuring plan for CTN is under implementation and progressing satisfactorily. Four cargo Starting of a study to prepare Implementation of the plan to boats have already been sold to private companies ' 300 a strategy for restructuring restructure STAM. employees have been laid off, and some of CTN's lines the CTN. Implementation of the plan to have been closed to better focus its activities. restructure CTN. Restructuring plan for STAM was delayed due to the lengthy discussions with the dock workers unions. Restructuring study started only in December 1997. Initial draft submitted end-April 1998 was considered incomplete by the Tunisian authorities and a revised report is to be submitted. 21 Objectives Actions Taken Before Actions Before Board Actions Before Second Implementations Status or During Preparation Approval Tranche Maritime Transport Completion of a study Possibility to grant Publication of the regulation Regulation, pricing, and new tariffs published in a ministerial and Ports (cont'd) concerning the fluidity of concessions (applicable to concerning port concessions bylaw maritime transport. ports, roads, handling specifying the pricing and the operations etc.) for up to 30 management system applied years (action taken with Law to the stevedores in each port 95-73 dated July 95 of the country. Ministry of Transport A ministerial bylaws (arrete) publishes a ministerial bylaws published on September 15, with the new maximum tariff 1995 (in application of the list for cargo handling. laws 95-32 & 95-33 of April Begin study on the reform of 14, 1995), indicated the port regulation reserving for Presentation to the Chamber specifics with which all OPNT the role of public of Deputies of draft legislation A law introducing new port regulations and redefining the new participants in maritime authority and specifying its on new port regulations and regime of maritime domain was submitted to the Chamber of transport should comply. attributes as manager of incorporating the redefinition Deputies along with the bill concerning OPNT. public land, guardian of of functions for OPNT and the security rules and protector new regime of maritime of the port environment, domain. Submission to the Chamber of Deputies of a draft law on Law approved by the Chamber of Deputies in 1998 multimodal transport. Publication of decree Setting up the technical introducing a "unique The Government created a national facilitation committee Trade Facilitation Preparation of a decree to Facilitation Committee document" for customs composed of all concerned groups. The committee produced the establish the composition of (Decree of February 5, declaration on imports and single trade document (liasse unique) published as decree no. 97- Ensure rapid the Facilitation Committee. 1996). exports according to 2470 of the Official Gazette on December 30, 1997. and cheap A representative of UTICA UNO/EEC norms (as transit of cargo has been nominated as this Issuance of a ministerial proposed by the technical in the ports. head of the Committee. decision establishing the committee). composition of the Harmonize Presentation of the terms of commission preparing the Submission to the Council of A decree was signed which simplifies the documentation and Tunisian reference for the revision of draft revisions of the Ministers of a draft law ports procedures and brings the customs code up to date and in customs the Customs Code. Customs Code. revising the Customs Code. conformity with the EU code. GOT adopted standardized regulations with formats for electronic data exchanges in external trade those of the EU. operations. 22 Objectives Actions Taken Before Actions Before Board Actions Before Implementations Status or During Preparation Approval Second Tranche Telecom Presentation of the Presentation of a strategy The authorities presented a liberalization agenda to Facilitate the orientations of the note, including proposed the Bank. The plan proposes selling 10 percent of development of Government for the measures, for the Tunisie Telecom - the public monopoly -by 2002; telecommunications development of the telecom development of the telecom liberalizing mobile telephone and paging services services and sector in the medium-term. sector in the medium-tern. in 2000. The authorities have pointed to the infrastructure to strategic character of telecommunications to justify enhance the the overly cautious approach to its liberalization. competitiveness of the economy in the future. Legal System Adapt the legal Govemment progress in (a) Submission for signature Submission to the Chamber of The authorities prepared a new draft Company framnework to reforning legislation of the decree and preparation Deputies of a draft law Code and hired an intemational consulting firm to encourage and includes the new law on of the ministerial bylaws regarding a new Company review an earlier draft prepared by Tunisian legal support economic rehabilitation of enterprises (arret) introducing legal Law. experts. The draft Company Code is a vital piece of competitiveness of in difficulty, law on national changes necessary to the legislation encompassing over 500 articles which enterprises. and intemational arbitration, structure of the "Centre will enable mergers, acquisitions, and other leasing, etc. d'ctudes judiciaires et corporate groupings, not foreseen. which under the juridiques" so that the Centre previous Tunisian Company law. The Council of Begin studies to define provides an open forum to Interministerial Ministers discussed the draft priorities concerning better establish the legal agreement in May 1998. legislative reform and franework supportive of implementation with a view competitiveness and to Submission to the Chamber of to adapting relevant laws and include measures to promote Deputies of a draft law This measure was combined with condition relating regulations to new national and publicize the work of the regarding Private intemational to adoption of a new companies code and is and intemational economic Center; (b) submission of the Law; Submit an agreed "Legal included in the new draft companies code yet to be practices. terms of reference and hiring Reform Strategic Action adopted of the consultants to prepare Program". a "Legal reform Strategic Action Program". 23 Objectives Actions Taken Before Actions Before Board Actions Before Second Implementations Status or During Preparation Approval Tranche Labor Market Flexibility Increase flexibility Revision of the Labor Code Agreement on revision to the of the labor market. (February 1994) in the areas Labor Code in order to of collective agreements, reduce the time frame representation of workers in conceming lay-off the enterprise, regulatory procedures for economic frame-work for conflicts, reasons. fixation of fines (dommages et interes). Social Charges Decrease the cost of Increase of the contribution Carry out quantitative Submission to the Chamber of Bylaw 97-1925 of September 29, 1997 introduced social labor while rates paid by workers for analysis of costs and Deputies of a draft law measures for laid off workers improving workers' both the private and public required contribution for a conceming a limited protection. sectors to contain the guaranteed fund to finance severance scheme to cover the financial deterioration of the the separation packages paid separation packages paid to social security system. to workers laid off for workers laid of for economic economic reasons. reasons. Tighter controls on early Presentation of measures to retirement for the public create limited system to Agreement to contain the Bylaw 97-4 of February 3, 1997 on social security sector; merging the schemes cover these separation social security contribution fulfilled the condition by fixing the rate of social security for self-employed workers in packages. rates for the non-agricultural contribution for the employer at 13 per cent of the wage the non agricultural and private sector of the general bill. agricultural sectors; revision scheme, over 1997-1999, in of the validation system for the context of the ongoing both the private and public social security reform (the sectors and revision of the non-agricultural private sector contribution base. represent 25.75% of the wage bill) 24 Table 6: Key Indicators for Project Operation Key Operations Indicators in President 's Report Rating Comments Macroeconomic indicators: - Budget deficit Satisfactory - International reserves Satisfactory - Exports growth Satisfactory - Current account Satisfactory Trade liberalization: - Ratification of Free Trade Agreement with EU Satisfactory - Reduction of tariff surcharges Satisfactory Privatization - Privatization of agreed share of public Satisfactory enterprises Deregulation/privatization of Maritime transport and Trade Facilitation: Deregulation of maritime transport Unsatisfactory Report prepared by first consulting firm was deemed incomplete by government. A new plan will be prepared. Deregulation of ports handling Unsatisfactory Negotiations with dockers union was protracted. Chamber of Deputies requires time to discuss and approve draft laws before publication in Official Gazette. New customs regulation Satisfactory Liasse unique Satisfactory Code des Socidtes Unsatisfactory Government adopted a consultative and therefore lengthy process to draft the new code. The draft new code is now before the . Chamber of Deputies. 25 Table 7: Studies Included in Project Study Purpose Status Impact of Study Draft company code To replace old company code Draft submitted to, and improve the legal and discussion in, the incentive structure for firms Chambers of Deputy Review and evaluation To evaluate draft code against Completed Recommendations helped of the draft company international best practice. revise the draft new company code. code. Telecommunications To lay down plan to liberalize Completed Minimal impact so far; as plan sector reform strategy telecom sector is slow Labor market study To propose measures to make Completed Helped design reforms the labor market more flexible included in policy matrix of and reduce labor cost while program. protecting workers rights. Study of port handling To propose measures to Completed Laws have been submitted to introduce flexibility in port Chamber of Deputies based o and maritime activities and study's recommendations improve incentive structure of dock workers. Study on private To introduce more Completed Laws have been submitted to commercial activities competition. Chamber of Deputies based on in port. study's recommendations. Revised Customs Code To revise customs laws so as Completed Approved Implemented to make them more flexible. Restructuring plan of To propose measures to Complete Plan has been partially CTN restructure CTN with view to implemented. privatization at a future date. Restructuring plan of To propose measures to First study prepared by Study to be completed and STAM restructure STAM with view consulting firm was implemented. to privatization at a future deemed incomplete by date. government. Another study to be prepared. Privatization in To provide a picture on the Completed Informed policy measures in Tunisia status of privatization in the area of privatization. Tunisia since 1986; as well as information on existing public enterprises. Review of private To re-evaluate existing law Completed Conclusions informed the international law in and incentive structures. drafting of the new company Tunisia. code. Study of the impact of To quantify the potential Completed Helped design reform the free trade impacts of the FTA measures included in the agreement with the EU policy matrix (on trade reform and fiscal measures). Harmonization of trade To provide ground for trade Completed Helped reach agreements on tariff regimes with non negotiations with non EU tariff harmonization with a EU countries countries number of non EU countries Liasse Unique To propose a single document Completed Implemented normalisee a for import and exports l'importation et formalities. 1'exportation des marchandises 26 Table 8A: Project Costs (US$ millions) -Appraisal Estimate ActualULatest Estimate Local Foreign Total Local Foreign Total Costs Costs Costs Costs Item Balance of Payments 75 75 75 75 Support TOTAL 75 75 75 75 Table 8B: Project Finalncing (US$ millions) Appraisal Estimate Actual/Latest Estimate Local Foreign Total Local Foreign Total Costs Costs Costs Costs Source IBRD 75 75 75 75 Parallel Financing Institutions European Union 1 20 120 120 120 TOTAL 195 195 195 195 Table 9: Economic Costs and Benefits Not applicable 27 Table 10: Status of Legal Covenants Agreeme Section Covenant Present Description of covenant Comments nt type status l Loan 4069 3.01(a) 9 C l The Borrower and the Bank shall from time to time, at No Comment - TUN the request of either party, exchange views on the progress achieved in carrying out the Program and the actions specified in Schedule 3 to this Agreement Loan 4069 3.01(b) 9 C Prior to each such exchange of views, the Borrower No Comment - TUN shall furnish to the Bank for its review and comment a report on the progress achieved in carrying out the Program, in such detail as the Bank shall reasonably request. Loan 4069 3.01 (c) 9 C Without limitation upon the provisions of paragraph (a) No Comment - TUN of this Section, the Borrower shall exchange views with the Bank on any proposed action to be taken after the disbursement of the Loan which would have the effect of materially reversing the objectives of the Program, or any action taken under the Program, including any action specified in Schedule 3 to this Agreement Loan 4069 3.02(a) I C Upon the Bank's request, the Borrower shall have the No Comment - TUN Deposit Accounts audited in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank. Loan 4069 3.02(b) I C Upon the Bank's request, the Borrower shall furnish to No Comment - TUN the Bank as soon as available, but in any case not later than six (6) months after the date of the Bank's request for such audit, a certified copy of the report of such audit by said auditors, of such scope and in such detail as the Bank shall have reasonably requested. Loan 4069 3.02(c) I C Upon the Bank's request, the Borrower shall furnish to No Comment - TIUN the Bank such other information concerning the Deposit Accounts and the audit thereof as the Bank shall have reasonably requested. Loan 4069 2.02(d-1) 9 C Continued maintenance of a satisfactory See Table 5 on - TUN macroeconomic framework, consistent with the Implementation objectives of the Progran, as determined on the basis of Status macroeconomic indicators acceptable to the Borrower and the Bank. Loan 4069 2.02(d-2) 12 C Publication in the Official gazette of the law ratifying See Table 5 on - TUN the Free Trade Agreement. Implementation Status Covenant Type Covenant Type (contd.) Present Status 1= Accounts/audits 8 = Indigenous people C = Covenant complied with 2= Financial performance/ revenue generation from 9 = Monitoring, review, and reporting CD = Complied with after beneficiaries 10 = Project implementation not covered by delay 3 = Flow and utilization of project funds categories 1-9 CP = Complied with partially 4= Counterpart funding 11 = Sectoral or cross-sectoral budgetary or NC = not complied with 5= Management aspects of the project or executing other resource allocation agency 12 = Sectora] or cross-sectoral 6= Environmental covenants Policy/regulatory/institutional action 7= Involuntary resettlement 13 = Other 28 Table 10 (cont'd): Status of Legal Covenants Agreement Section Covenant Present Description of covenant Comments type status Loan 4069 2.02(d-3) 12 C Publication in the Official Gazette of the Borrower's See Table 5 on - TUN 1997 finance Law including satisfactory provisions on Implementation tariff reductions scheduled up to the second year of Status application of the Free Trade Agreement and the related scheduled reductions in surcharges. Loan 4069 2.02(d-4) 12 CD Bringing to the point of sale at least fifty-one percent See Table 5 on - TUN (51 %) of the capital of a number of enterprises Implementation corresponding to fifty percent (50%) of the net assets of Status public enterprises producing goods and services established in a list agreed upon between the Borrower and the Bank. Loan 4069 2.02(d-5) 120 C Submission to the Chamber of Deputies of a draft law See Table 5 on - TUN amending Articles 6 and 7 of the Borrower's law No. Implementation 77-13 dated March 7, 1977, so as to abrogate existing Status chartering privileges extended to Tunisian ship-owners. Loan 4069 2.02(d-6) 12 CP Publication in the Official Gazette of a Law modifying See Table 5 on - TUN the Borrower's Decree dated February 17, 1949 Implementation concerning working conditions of dock labor so as to Status render them less complex, and more flexible and adapted to the requirements of modem ports. Loan 4069 2.02(d-7) 12 CP Submission to the Chamber of Deputies of a draft law See Table 5 on - TUN introducing new port regulations, and incorporating the Implementation redefinition of the functions of the Office des Ports Status Nationaux Tunisiens and the new regime of maritime domain. Loan 4069 2.02(d-8) 12 CP Implementation of the plan satisfactory to the Bank to See Table 5 on - TUN restructure the Borrower's Societe d' Acconage et de Implementation Manutention and the Compagnie Tunisienne de Status Navigation. ________ Loan 4069 2.02(d-9) 12 C Publication in the Official gazette of a Decree See Table 5 on - TUN mandating the use of, and setting forth the standard Implementation format for, an unique document (document unique) for Status customs declaration on imports and exports. Loan 4069 2.02(d-10) 12 C Submission to the Chamber of Deputies of a draft law See Table 5 on - TUN introducing a Company Code. Implementation Status Covenant Type Covenant Type (contd.) Present Status 1= Accounts/audits 8 = Indigenous people C = Covenant complied with 2= Financial performance/ revenue generation from 9 = Monitoring, review, and reporting CD = Complied with after beneficiaries 10 = Project implementation not covered by delay 3 = Flow and utilization of project funds categories 1-9 CP Complied with partially 4= Counterpart funding 11 = Sectoral or cross-sectoral budgetary or NC = not complied with 5= Management aspects of the project or executing other resource allocation agency 12 = Sectoral or cross-sectoral 6= Environmental covenants Policy/regulatory/institutional action 7= Involuntary resettlement 13 = Other 29 Table 11: Compliance with Operational Manual Statements Statement Number and Title Description and comment on lack of compliance No significant lack of compliance with applicable Bank Statements in Operational Manual was observed under the project Table 12: Bank Resources: Staff Inputs Stage of Project Cycle [ Planned | Revised Actual Weeks US$ (Thousands) Weeks US$ (Thousands) Weeks US$ (Thousands) Preparation to appraisal 578.4 Appraisal-to Board 20.7 70.8 Negotiations through 6.0 16.0 Board Approval Supervision 20.0 101.5 2.4 115.2 74.3 248.5 Completion 6.0 29.0 6.0 29.0 6.0 29.0 TOTAL _ _ __ _ __ 259.5 942.7 Source: World Bank Management Information System. Note: (*) Preparation time and cost reflected here include work done before September 1995 but not incorporated in the ECAL. Table 13: Bank Resources: Missions Stage of Month/ No. of Days in Specialized Staff Skills Performance Rating Type of Project year Persons the Field Represented Problems Cycle Implementa- Development tion Status Objectives Pre- 11/95 11 110 Economists (3) Appraisal Privatization Specialists (1) Financial Sector Spec. (2) Maritime Transport Spec. (2) Labor Market Specialist (1) Legal Reformn Specialist (2) Appraisal 2/96 8 56 Economists (2) Privatization Specialists (2) Financial Sector Spec. (2) Telecom Specialist (1) Maritime Transport Spec. (1) Supervision 5/97 2 22 Economists (2) S 5 11/97 4 20 Economists (2) S S Financial Sector Spec. (1) Maritime Transport Spec. (1) 12/97 2 8 Maritime Transport Spec. (1) S S Privatization Specialist (1) 5/98 1 5 Economist (1) S S