Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD572 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF EURO 36.3MILLION (US$50 MILLION EQUIVALENT) TO THE REPUBLIC OF TUNISIA FOR A THIRD EXPORT DEVELOPMENT PROJECT May 20, 2014 Finance and Private Sector Development Group Maghreb Country Department Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate - Effective May 8, 2014) TND 1 = US$0.63 US$ 1 = TND 1.60 EUR 1 = US$1.39 US$ 1 = EUR 0.72 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AEO Authorized Economic Operator (Opérateur Economique Agréé) CBT Central Bank of Tunisia CEDF Competitiveness and Export Development Fund (Fonds d’Appui à la Compétitivité et au Développement des Exportations) CEPEX Center for Export Promotion (Centre de promotion des exportations) COFPRO Committee for the Facilitation of Procedures COTUNACE Tunisian Company for the Insurance of Export Credit (Compagnie Tunisienne pour l’assurance du commerce extérieur) DC Director Committee EA Executing Agency EDP Export Development Project EFG Export Finance Guarantee EMMAF Export Market Access Fund (Fonds d’Accès aux Marchés d’Exportation) EMT EMMAF Management Team EPA Export Promotion Agency FDI Foreign Direct Investment EU European Union FEDEX Federation of Private Exporters (Fédération des exportateurs privés) FOPRODEX Export Promotion Fund (Fonds de Promotion des Exportations) FSAP Financial Sector Assessment Program GDP Gross Domestic Product GoT Government of Tunisia IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IMFMM Training Institute for Ocean Related Fields (Institut Méditerranéen de Formation aux Métiers de la Mer) INNORPI National Institute of Standard and Industrial Property (Institut national de normalisation et de propriété industrielle) ITCEQ Institute of Competitiveness and Quantitative Studies MDCI Ministry of Development and International Cooperation MENA Middle East and North Africa Region MIT Ministry of Industry and Technology MOEF Ministry of Economy and Finance MRA Mutual Recognition Agreement MT Ministry of Transport MTH Ministry of Trade and Handicraft NIS National Institute for Statistics PCMU Project Coordination and Monitoring Unit PDO Project Development Objectives PEFGF Pre-Shipment Export Finance Guarantee Fund (Fonds de Garantie pour le Financement des Exportations Avant Expédition) PMS Propensity Score Matching POM Project Operation Manual PPD Public Private Dialogue SBD Standard Bidding Documents SC Steering Committee SINDA Tunisia Customs Information System SMEs Small and Medium Enterprises SSA Sub-Saharan Africa TBT Technical Barriers to Trade STAM Société Tunisienne d’Acconnage et de Manutention TC Tunisian Customs TCLF Textiles and clothing, leather and footwear TND Tunisian Dinar TTN Tunisia Trade Net TTO Technology Transfer Office WTO World Trade Organization Regional Vice President: Inger Andersen Country Director: Simon Gray Sector Director: Loic Chiquier Sector Manager: Simon C. Bell Task Team Leader: Djibrilla A. Issa TABLE OF CONTENTS I.  STRATEGIC CONTEXT ...................................................................................................... 1  A.   Country Context ............................................................................................................... 1  B.   Sectoral and Institutional Context.................................................................................... 2  C.   Higher Level Objectives to which the Project Contributes ............................................. 7  II. PROJECT DEVELOPMENT OBJECTIVE ........................................................................ 9  A.  PDO.................................................................................................................................. 9  B.  Project Beneficiaries ........................................................................................................ 9  C.  PDO Level Results Indicators ........................................................................................ 10  III. PROJECT DESCRIPTION ................................................................................................ 10  A.   Project components ........................................................................................................ 10  B.   Project Financing ........................................................................................................... 16  Project Cost and Financing..................................................................................... 16  IV. IMPLEMENTATION .......................................................................................................... 17  A.  Institutional and implementation arrangements ............................................................. 17  B.  Results Monitoring and Evaluation ............................................................................... 18  C.   Sustainability.................................................................................................................. 19  V. KEY RISKS AND MITIGATING MEASURES ................................................................ 20  VI. APPRAISAL SUMMARY ................................................................................................... 21  A.   Economic and Financial Analysis .................................................................................. 21  B.   Technical ........................................................................................................................ 23  C.   Financial Management ................................................................................................... 23  D.   Procurement ................................................................................................................... 24  E.   Social (including safeguards) ......................................................................................... 24  F.   Environment (including safeguards) .............................................................................. 24  ANNEXES ANNEX 1: RESULTS FRAMEWORK AND MONITORING ................................................... 25 ANNEX 2: DETAILED PROJECT DESCRIPTION .................................................................. 26 ANNEX 3: IMPLEMENTATION ARRANGEMENTS .............................................................. 39 ANNEX 4: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF) ......................... 58 ANNEX 5: IMPLEMENTATION SUPPORT PLAN.................................................................. 63 ANNEX 6: IMPACT EVALUALTION OF EMMAF II ............................................................. 66 ANNEX 7: LESSONS LEARNT AND REFLECTED IN PROJECT DESIGN ......................... 76 ANNEX 8: ECONOMIC AND FINANCIAL ANALYSIS ......................................................... 80 ANNEX 9: TUNISIA HIGH POTENTIAL SECTOR ANALYSIS ............................................ 84 . PAD DATA SHEET Republic of Tunisia Third Export Development Project (P132381) PROJECT APPRAISAL DOCUMENT . MIDDLE EAST AND NORTH AFRICA Finance and Private Sector Development (MNSF1) Report No.: PAD572 . Basic Information Project ID: Lending Instrument: EA Category: Team Leader: P132381 Investment Project C - Not Required Djibrilla A. Issa Financing Project Implementation Start Date Project Implementation End Date June 16, 2014 June 15, 2020 Expected Effectiveness Date Expected Closing Date October 10, 2014 December 31, 2020 Joint IFC No Regional Vice Sector Manager Sector Director Country Director President Simon C. Bell Loïc Chiquier Neil Simon M. Gray Inger Andersen . Borrower: Republic of Tunisia Responsible Agency: Ministry of Trade and Handicraft Contact: Mr. Khaled Salhi Title: Project Coordinator Tel. +21698325381 Email:Khaled.salhi@commerce.gov.tn . Project Financing Data(in USD Million) [X] Loan [ ] Grant [ ] Other [ ] Credit [ ] Guarantee Total Project Cost: 74.5 Total Bank Financing: 50.00 Total Cofinancing: 24.5 Financing Gap: 0.00 . Financing Source Amount Borrower 2.5 IBRD 50.0 i LOCAL BENEFICIARIES 22.0 Total 74.5 . Expected Disbursements (in USD Million) Fiscal Year FY15 FY16 FY17 FY18 FY19 FY20 FY21 Annual 2.9 5.3 7.7 9.7 9.7 11.9 2.8 Cumulative 2.9 8.2 15.9 25.6 35.3 47.2 50 . . Project Development Objective(s) Proposed Development Objective(s) The project development objective is to help increase and diversify exports by supported enterprises . Components Component Name Cost (USD Millions) Support to improve the business climate for trade competitiveness and the diffusion 10.1 of technology and innovation Provision of financial and non-financial services to exporting enterprises 35.8 Support to selected ministries for the coordination and management of the Project 4.1 Institutional Data Sector Board Competitive Industries Practice . Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Co- Mitigation Co- benefits % benefits % Public Administration, Law, and Central government administration 30 Justice Industry and trade General industry and trade sector 30 Industry and trade Other domestic and international trade 20 Industry and trade Other industry 15 Finance SME Finance 5 Total 100 I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. . Themes Theme (Maximum 5 and total % must equal 100) ii Major theme Theme % Trade and integration Export development and competitiveness 40 Trade and integration Trade facilitation and market access 30 Financial and private sector development Micro, Small and Medium Enterprise support 20 Financial and private sector development Other Private Sector Development 10 Total 100 Compliance Policy Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X ] . Does the project require any waivers of Bank policies? Yes [ ] No [ X ] Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ] Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] . Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X . Legal Covenants Name Recurrent Due Date Frequency Description of Covenant . iii Conditions Name Type Article V 5.01(a) Effectiveness Description of Condition The Subsidiary Agreements have been executed on behalf of the Borrower and the Project Implementing Entities and have entered into effect in accordance with their terms. Name Type Article V 5.01(b) Effectiveness Description of Condition The Project Implementing Entity (CEPEX) has established a Matching Grant Selection Committee with composition, functions and terms of reference satisfactory to the Bank. Name Type Article V 5.01(c) Effectiveness Description of Condition The Project Implementing Entity (CEPEX) has established a Fund Management Technical Team with composition, functions and terms of reference satisfactory to the Bank. Name Type Article V 5.01(d) Effectiveness Description of Condition The Borrower has recruited or appointed to the PCMU, a procurement specialist, a financial management specialist and an accountant in accordance with the provisions of Section III.C of Schedule 2 to the Loan Agreement. Name Type Article V 5.01(e) Effectiveness Description of Condition The Borrower has updated and adopted the Project Operations Manual for the Project in form and substance satisfactory to the Bank. Name Type Article V 5.01(f) Effectiveness Description of Condition The Project Implementing Entities have adopted the Matching Grant Manual and the PEFGF Manual respectively, in form and substance satisfactory to the Bank. Team Composition Bank Staff Name Title Specialization Djibrilla A. Issa Country Sector Coordinator Team Leader Randa Akeel Senior Economist Innovation Hassine Hedda Senior Finance Officer Disbursement Eric Ranjeva Finance Officer Disbursement Henri Nkuepo Associate Counsel Legal iv David V. Phan Program Assistant Logistical Arrangements from DC Steve W. Wan Yan Lun Operations Analyst Operations Abdoul-Wahab Seyni Sr. Social Development Specialist Social Safeguard Moez Makhlouf Consultant Financial Management Mehdi Benyagoub Private Sector Development Specialist Economic and Financial Analysis Gael Raballand Senior Public Sector Specialist Trade Logistics and Customs Reform Jana Malinska Economist Matching Grant Laurent Gonnet Sr. Financial Sector Specialist Export Finance Guarantee Suhail Kassim Private Sector Development Specialist Competitive Industries Narjes Jerbi Program Assistant Logistical Arrangements from Tunis Marouane El Abassi Representative Country Dialog Walid Dhouibi Procurement Specialist Procurement Shirley Foronda Financial Management Specialist Financial Management Besma Saadi Refai Team Assistant Logistical Arrangements from Tunis Ibrahima Dione Consultant Project Manuals and costing Jade Salhab Consultant Competitive Industries . v I. STRATEGIC CONTEXT A. Country Context 1. Tunisia’s economy has grown at a respectable pace in the past two decades when compared to other MENA countries. The country enjoyed a 4.8 percent average annual growth in GDP over most of the 2000s, placing it among the leading performers in the MENA region. 2. While its economic growth made Tunisia one of the best performers in the MENA region, it is significantly lower than in the high growth emerging economies in other world regions. Tunisia’s per capita growth for the least 10 years remained below average when compared to a large sample of 22 developing nations and emerging economies, including many of its regional and global competitors. Tunisia’s growth has been on par with that of the lower middle income countries (LMIC), however it is significantly lower than growth experienced by upper middle income countries (UMIC) including China, Malaysia, Turkey and Thailand. 3. Tunisia’s growth and development progress have largely been fuelled by export of goods produced in offshore sectors. The largest exporting sectors have been textiles and clothing, and mechanical and electrical engineering, making up about 60 percent of total exports of goods. Tunisia’s exports grew at an average yearly rate of about 5.3 percent between 1997 and 20101. Tunisia underwent two waves of economic structural changes in its export sectors. The first wave of transformation entailed a diversification away from oil towards light manufacturing and tourism. The Government created an “offshore” sector with generous fiscal and financial incentives to attract foreign direct investments (FDI) and boost exports. As part of the second wave, electronic and mechanical engineering emerged as important exporting sectors and became highly integrated into the global value chains. The offshore sectors particularly benefited from increasing integration with the European Union (EU) production networks following the Tunisia-EU Association Agreement. More than 90 percent of workers in these industries have been sub-contractors working in vertical integration with production networks in Europe. However, the value added of the exporting industries remained low and they are subject to stringent competition in the European markets. 4. Youth unemployment is a major challenge, with 72 percent of the unemployed under the age of 30 in 2012. Unemployment rates are also much higher for women (22.5 percent at end September 2013) and particularly for educated women (44 percent of female graduates) and in remote regions, ranging between 24 and 30 percent in the Governorates of the South West and South East. In absolute terms, the majority of the unemployed are low-skilled workers. 5. Despite the fact that women have access to education and indeed make up the majority of higher education graduates, they are less likely to be employed. Women’s participation in the labor force is estimated at around 30 percent. The Government and the new Constitution have emphasized the positive impact of women’s equal opportunities to participate in the economy and private sector development for accelerating economic development. The 1 This rate is however below the growth rate of world exports in goods and services which stood at 7 percent over the period. 1 proposed Project could serve as an instrument to engage and help the Government to further promote the status of women in the export sector. 6. A comprehensive package of reforms to promote exports and foster private investment will help Tunisia meet the favorable medium-term economic growth potential. The recovery weakened in 2013, but pace of growth can be expected to increase to approximately 3.5 percent in 2014 and 4.8 percent in 2015. This supposes a significant increase in investment and exports, and a recovery in tourism. Trade needs to play a greater role, particularly (i) by making the “onshore” sector more competitive; and (ii) by harnessing the potential in services sectors as the bulk of productivity (thus competitiveness) gains and economic expansion in the years ahead will occur in services. This requires continuation and implementation of reforms by the interim Government2. Strengthening the investment climate, making more room for private investment in services and network industries, and further improving access to finance, are key to fostering private investment and promoting export. 7. The transition process to democratic rule offers a solid basis for more private sector involvement and economic diversification. With the election in October 2011 of a Constituent Assembly, and the formation of a new Government, Tunisia has successfully completed the first phase of its political transition to a multi-party democracy. The recent adoption of a new Constitution by the Constituent Assembly lays the foundation for a new round of elections. These national elections are likely to take place at the end of 2014 and will open a new era for more private sector participation in decision making through Public Private Dialog (PPD). B. Sectoral and Institutional Context 8. Tunisia’s competitiveness is slipping due to lack of market and products diversification, low value added and little innovation in its exporting sectors. Its exports remain highly concentrated on the European market which makes the country vulnerable to the vagaries of EU growth. The EU accounted for over 70 percent of Tunisia’s exports in 2010 (France, Italy and Germany alone accounted for 56 percent of all exports in 2010). 9. Furthermore, the main exporting sectors have low value added. Tunisia’s exporting sectors are dominated by manufacturing and tourism which are labor intensive and have low value added. Textiles and clothing, leather and footwear (TCLF) and the mechanical and electrical engineering sectors combined account for about 65 percent of exports. While the ratio of exports value to GDP is 47 percent, in terms of value addition, exporting manufacturing sectors generate less than 15 percent of GDP3. This can be explained by the fact that Tunisian exporters still largely remain sub-contractors to large foreign companies and only a few of them became direct exporters. As a result, Tunisian exporters continue to produce relatively simple goods that can be easily replaced with similar products from lower cost locations like China, India, and Bangladesh. 2 The 2012 DPL estimate of the growth target for 2013 is based on the assumption of a normal year for agriculture (+2 percent annual growth); an average increase in manufacturing output (+3 percent growth); a partial recovery in exports; a further recovery in tourism (+15 percent, to reach pre-2011 levels); and a return of investors’ confidence is expected to result in a gradual increase in FDI back to 2010 levels (at 3 percent of GDP, which was low due to the global financial crisis). 3 DPR, World Bank (2010) 2 Reform Strategy Context 10. Tunisia is at a crossroads. The country may choose to tackle the distortions that have reduced incentives to invest in productive activities by creating the necessary conditions for a shift from low-skilled labor and low value addition export model to a more sustainable and diversified growth. The country could build on promising cluster initiatives4 and sectors that can then pull the rest of the economy (as has been successfully achieved in China, India, and Malaysia). Alternatively, it can ignore the reform imperatives and maintain an economy based on TCLF. The Government is determined to pursue the former. 11. To transform the economy from a low-wage, low value-added, economy to a knowledge-based and skill-intensive one5, Tunisia needs to pursue a two pronged strategy of repositioning in traditional sectors and diversification into new sectors and products. First, it needs to move up the value chain in traditional export sectors by deepening integration, products sophistication and supporting initiatives that enhance logistics, and innovation investment. The second component of such strategy is to promote investment in newer, knowledge intensive products and services. Post revolution Tunisia can offer a strong underpinning to some of its high-growth sectors such as ICT, health, education, pharmaceutical and electromechanical industries, as well as some other promising ones such as niche-tourism and finance. 12. Creating higher value-added jobs in high potential sector would allow the country to simultaneously address the unemployment problems and the complexity of the economy. When prioritizing between sectors, countries often face a trade-off between more jobs and more wealth/sophistication (higher value-added exports, which do not necessarily employ low skilled labor). The former choice responds to the priority of employment and the political pressure that comes with it. The argument in favor of the latter choice is that, while it might be slower in the creation of employment in the short term, in the long term the country’s increased wealth/sophistication has multiplier effects on both wealth and employment. Tunisia, however, might not necessarily be facing the trade-off between more jobs and better jobs: indeed, one particular characteristic of the Tunisian unemployed workforce is its increasing share of high- skilled labor (750,000 unemployed, 224,000 of who are university graduates). This means that creating higher value-added jobs in Tunisia is a way to simultaneously tackle the number of unemployed and the complexity of the economy. 13. Several sectors have been identified as most promising ones in various recent analytical studies on Tunisia. The Table 1 below lists the sectors identified under the Government’s Strategy 20166 and in a compendium of studies, and sectors identified by the private sector and other donors, including (DPR 2012, IFC’s Education for Employment) and Trade and Integration Study, AfDB, McKinsey etc.). 4 Many studies such as DPL 2012, DPR 2012, IFC 2012, E4E, and Trade and Integration Study have consistently identified the income and job enhancing export potential of products such as ICT, health, education, pharmaceutical and electromechanical industries 5 World Bank ( 2012). Development Policy Review: Creating jobs and accelerating inclusive growth. Report No. 71799-TN. The World Bank, Washington D.C. 6 Stratégie Industrielle de la Tunisie, API, 2010 3 Table 1: Priority sectors identified by the Government, private sector and other donors Gov. Agence de Promotion des McKinsey AfDB (Product Space Ernst and Young IBM Investissements (Investment Analysis for MENA) Promotion Agency) Star sectors Lens: Jobs/VA Lens Jobs/VA Lens: (Jobs/VA) Lens: Jobs/VA Electronic/ICT for cars and aeronautic Information and Textile, Apparel, ICT Automobile Communication Leather and Footwear Technology (ICT) (TALF) Biotechnology for Infrastructure Agribusiness and Telecom Aerospace environment/pharmacy/agribusiness Technology Fishing and energy Outsourcing (ITO) Plastic industry for pharmacy and Para Business Process Construction material Software development TALF pharmacy Outsourcing (BPO) Electrical industry for renewable Data storage Electronics BPO Electronics energies Computing for biology: Biocomputing Data treatment Petrochemical Service and call center Chemicals Environment services for textile R&D Knowledge Chemical R&D Knowledge Food Industrial services Embedding system Machinery Embedding system Call center / shared services Near shoring Near shoring ICT / Software ICT Business support services/Services Banking/Insurance Banking and Insurance Renewables outsourcing (BPO) Logistic Logistic Life sciences Logistical services Health and Electronics Financial services Other services for industry Pharmaceutical Emerging sectors Car and aeronautics Logistics Plastic technology Electronics industry Car and aeronautic industry Plastic technics Pharmaceutical industry and biotechnologies Historical sectors Textiles, garments, clothing and shoes Chemical industry and phosphates 14. Private sector participation is crucial in the driving reform agenda and public- private meetings and consultations helped to narrow the sector selection. The identified long list of sectors was analyzed using the following three lenses that are explained with more detail in Annex 9: (i) Sector exports profile and potential: Has the sector been producing more quantity, quality, complexity, and/or diversity of products and destinations? (ii) Sector employment profile and potential: Does the sector create significant employment in the segments of the economy, population, and/or regions where jobs are most needed in the Tunisian economy in the coming 3- 5 years? (including regional distribution); and (iii) Sector competitiveness: Is this sector competitive because of pure comparative advantages (e.g. low labor cost) or is its advantage based on a good strategic positioning, likely to durably stand the pressure of regional or international competition. 15. A few sectors were then shortlisted after the analysis by the Bank as the most promising ones, given the challenges facing Tunisia. The list depicts what are the strongest candidates to be agents of sophistication and diversification of Tunisia’s exports while also (i) responding to Tunisia’s challenges; and (ii) strategically repositioning Tunisia as a service and 4 16. knowedge based economy of North Table 2: Sectors long listed under the Project Africa. The combined priority shortlist is AGRICULTURE MANUFACTURING SERVICES called ‘five plus’ and includes the Agribusiness Automobile Tourism (niche) following: - Organic foods Aerospace ICT - Olive oil Electronics Business Processing (i) Competitive and high value-added - Fishing Mechanical Health services sectors: Garments/TALF Education Petrochemicals Logistics - Health services Pharmaceuticals Construction - ICT - (Niche) Tourism (ii). Competitive and high value-added industry sectors: - Electromechanical - Pharmaceuticals (iii). “Plus” any firm from any sector that proposes an innovative product in other sectors. 17. This shortlist does not imply a recommendation to exclude all activities in all other sectors. It intends to guide Project design and interventions especially with regards to the matching grant component. It is proposed that all innovating firms - from all sectors - will receive support by this Third Export Development Project (EDP III) via two channels: (i) the horizontal measures of the Project (logistics, customs, INNORPI etc.); and (ii) the ‘innovation window’ of the CEDF which remains open to any firm, from any sector, whose proposal responds to the following two criteria of innovation, i.e. a new high value added product that allows the firm to move up the value chain and a new destination of exports to a new market or country. Box 1: Sector Analysis for the Project Three lenses were used for analyzing the short-listed sectors: i) sector exports profile and potential; ii) sector employment profile and potential; and iii) sector competitiveness. Lens 1: Sector exports profile and potential: This lens assessed whether the sector has been producing more quantity, quality, complexity, and/or diversity of products and destinations. Lens 2: Sector employment profile and potential: This lens quantified the employment potential of the sector in the segments of the economy, population, and/or regions where these jobs are most needed in the Tunisian economy in the coming 3-5 years, including regional distribution. It also analyzed the labor force to assess the sector’s effective absorptive capacity. Lens 3: Sector Competitiveness: Competitiveness is manifested in the ability of companies operating in a country or region to compete successfully in international markets while simultaneously improving the living standards of citizens. It depends on the long-term productivity with which a nation uses its human, capital, and natural resources (Source: Porter M.E., 1998). An industry has a comparative advantage when its competitiveness is largely based on lower prices, which is mainly dependent on operational effectiveness and lower costs. It would have a competitive advantage if its competitiveness is largely based on differentiation and strategic positioning. This lens investigated whether the sector is competitive because of comparative or competitive advantages. The analysis was undertaken from a ‘cluster’ perspective to capture the entire network of firms and agents involved in the sector. Competitiveness 5 was visited from four angles: (i) Factor conditions or inputs: e.g. quality, cost and availability of infrastructure, skills, and finance; (ii) Local demand conditions: Size and quality of demand, both international and local; (iii) The strength and diversity of related and supporting industries: mapping the entire network of actors involved in the cluster (be they private or public), their size and effectiveness; and (iv) The national regulatory context for competitive strategy and rivalry among firms: how encouraging is the regulatory context to a competition based on strategic positioning and quality (not only pricing). Annex 9 presents the detailed sector analysis using the above lenses for the sectors: Health, Pharmaceutical Products, Information Communication Technology (ICT), Mechanical Electrical and Electronic Equipment (MEE), and Tourism. Sector challenges addressed under the Project 18. Financing of exports remains an issue, especially for smaller SMEs and new exporters. Available data from the 2012 World Bank’s Enterprise Survey show that Tunisian companies typically consider access to and cost of financing to be part of the greatest barriers to their growth. SMEs were particularly affected by the global financial crisis, and export diversification was made more difficult. Around 40 percent of firms consider finance as their biggest binding constraint just after political instability, macroeconomic uncertainty and employment readiness. The 2012 Financial Sector Assessment Program (FSAP) found that important share of SMEs in bank loans (23 percent) is offset by a credit to GDP ratio, which is below its potential.7 Challenges to SME finance can be anticipated with heightened risk aversion in a difficult environment, increased government financing by banks, additional loan concentration linked for instance to large investment programs.8 19. Supply chain issues still impose significant transactions costs on Tunisian firms. A 2010 study9 found that for some key exporting sectors in manufacturing and services, logistic costs account for 20 to 73 percent of gross margins. Overall, even if Tunisia’s score on the World Bank’s Logistics Performance Index 201410 is above or at par with the overall MENA average, the country still lags behind in terms of “Logistics Competence” compared to its regional peers and remains way below the best performers of MENA and of the world (such as UAE, Singapore, Malaysia etc.). In addition, in specific areas, recent requirements on export markets such as improved traceability of products (especially for those of agro-industrial origin), create additional constraints on the domestic supply chain. Finally, despite improvements at Customs, there is still room for improvement in terms of import and export control procedures and delays of clearing and releasing containers in the Radès port (the main container port of Tunisia) which is now six days on average. As a result of all the above, Tunisian exporters still suffer from lost export opportunities. 7 In 2010, private credit to GDP was 69 percent in Tunisia, but 78 percent in Morocco (which also has a more diversified financial system). 8 34 percent of loans benefited 50 largest borrowers in June 2011 versus 29 percent at the end–2009. 9 Ministère du Commerce et de l’Artisanat (2010). Compétitivité Logistique des Principales Filières Exportatrices Tunisiennes, Tunis, République de Tunisie. 10 http://lpi.worldbank.org/ 6 Figure 1: Logistics competence of Tunisia and comparator countries in 2014 LPI Score 5 4 Timeliness Customs 3 UAE 2 Singapore 1 Malaysia 0 Tunisia Tracking & Infrastructur tracing e MENA Logistics International competence shipments Source: World Bank: Logistics Performance Index 2014 20. Export production and business development weaknesses. The existing and potential exporters in Tunisia, typically small and medium size enterprises (SMEs) in the high potential sectors face challenges in entering new export markets, innovating, and exporting high value addition products and services. This especially applies to “onshore” firms, but also to offshore firms involved mainly in subcontracting arrangements. These firms have to: (i) identify the right target market, product segment, and selling channel; (ii) learn how to adapt their products for these markets; (iii) understand their competitors; (iv) launch marketing and selling campaign; (v) train and hire new workers to be ready for the job; and (vi) deliver the product on time and collect on sales. These activities require significant investments; not only in terms of financial resources, but also in skilled, scarce managerial resources, certification or accreditation required by new markets. They are also information intensive and often require years to understand the market. The Center for Export Promotion (CEPEX) is concerned mainly with, and structured for, public relations and general promotion, servicing official delegations, and responding to needs of controlling ministries rather than to the specific needs of buyers and sellers. Consequently, not only small and medium producers, but also some large Tunisian firms are not able to actively penetrate export markets as they move from traditional industries and promote new investments in skilled-intensive sectors to increase value addition, boost productivity and reduce unemployment. C. Higher Level Objectives to which the Project Contributes 21. The Government has prepared a medium-term socio-economic development strategy based on the following pillars: 22. First, the strategy outlines an ambitious program of economic and social reforms. It focuses on introducing the building blocks for good governance and improvements in the business environment, facilitating the restructuring of the economy, deepening economic integration and partnerships. 7 23. Second, the Government’s action will focus on the modernization of the infrastructure. To increase productivity and deepen integration into the global economy, including links between onshore and offshore sectors of the economy, the Government is working to extend logistics and transport networks. In particular, the Government has developed a Logistics Zone Strategy, an action plan to improve the Port of Radès (which is the main port of Tunisia) and will initiate the construction of a deep water port at Enfidha. The Project will provide the needed technical assistance (TA) to implement the Government pilot Logistic Zone project in Radès and to improve container management in the Port of Radès to reduce container processing time. 24. Third, to promote a more balanced development across regions, incentives will be provided to encourage investment in lagging and interior zones based on regional advantages. Improving regional competitiveness is also a priority. The Project, through the matching grants and Business Development Services (BDS) to enterprises in the regions will contribute to this effort. 25. Fourth, the Government intends to consolidate human development in terms of labor market participation. This will entail a reform of the education system to better match the labor market outlook in the short and long term, including certification and accountability in secondary school, vocational training and higher education training. Link to the World Bank Group Strategy 26. The Bank’s program in Tunisia is set out in the Interim Strategy Note (ISN) for FY13-14 (Report No. 67692-TN) prepared in consultation with the Constituent Assembly Government.11 The ISN outlines a Bank Group program focused on contributing directly and indirectly to Government’s short and medium-term employment creation objective. The program promotes private-sector led recovery and job creation, with a focus on openness, opportunity and accountability. To this end, the World Bank Group’s support is framed within three areas of engagement: (i) Laying the Foundation for Renewed Sustainable Growth and Job Creation; (ii) Promoting Social and Economic Inclusion; and (iii) Strengthening Governance. 27. The ISN is guided by four principles of engagement: (i) the Bank and IFC will seek to maintain flexibility in light of the fluid country context, to be able to adapt to the social and economic challenges of Tunisia; (ii) with a fluid and evolving political environment, the Bank Group will need to be selective in terms of the scope of its engagement in the different sectors where it will intervene, and in terms of the results it commits to help Tunisia achieve during the ISN period; (iii) integrating gender into new activities to maintain and advance women’s role in Tunisia political transition is a priority for the Bank Group; and (iv) broadening consultations to reach new stakeholders. 28. The proposed EDP III will adopt the second principle of selectivity in terms of sector interventions and the third pillar by integrating gender through their participation in private sector. Competitiveness and export development will be addressed through both horizontal investment climate reforms and a sector lens. It will (i) help policymakers and the public sector identify and seize windows of opportunity for sustained, industry-led growth; and 11 The ISN was discussed by the Board of Executive Directors on July 3, 2012. IBRD (2012), Interim Strategy Note for the Republic of Tunisia for the Period FY13-14, Report No. 67692 –TUN. 8 (ii) focus on policies specific to particular industries, with a goal to enable markets to work for the poor. Rather than an only horizontal support to all sectors, it is more effective to integrate private enterprises into local and global supply chains – hence a combined horizontal and sector approach is proposed. Further, such a sector-led approach would be reinforced with complementary strategies such as location diversification (away from Tunis) and export markets diversification. The Project will have special resources for female entrepreneurs through its competitiveness and export development matching grant scheme. 29. The Bank supports the Government’s strategy to jump-start the economy using external official financing. A series of development policy loans (DPLs) have been initiated, laying the ground for strengthening governance and focusing on measures to bolster competitiveness, promote exports and create employment. The World Bank support in FY14 includes this proposed investment project financing to complement the budget support operation, the Second Governance, Opportunities and Jobs Development Policy Loan (Report No. 87849- TN) approved by the Board on April 29, 2014. The Project will support Government in critical areas such as the provision of technical assistance to government entities for customs and logistics reforms, provision of business developments services and export credit guarantees to private sector to diversify export markets and products. II. PROJECT DEVELOPMENT OBJECTIVE A. PDO 30. The Project development objective is to help increase and diversify exports by supported enterprises. 31. The Project will achieve its objective through support to: (i) improving the investment climate, trade logistics and supporting innovation; and (ii) improving enterprise access to export markets and finance. B. Project Beneficiaries 32. The Project will benefit three main groups of stakeholders: (i) firstly, all various private sector stakeholders (primarily private enterprises and investors in export sectors); (ii) secondly, government and private sector agencies playing a key role in the business environment affecting the private sector (CEPEX, INNORPI, Customs, COTUNACE); and (iii) the workers and potential employees in private enterprises. 33. Private enterprises in the export sectors. The direct project beneficiaries are domestic private sector firms (roughly 1,500 industrial firms and 500 services enterprises), particularly firms in the identified value chains, which will benefit from improved trade logistics and support to export innovative products to new markets. The increase in transparency and predictability in customs will benefit private enterprises. In addition to benefiting from the overall improvement in the business environment, they will directly benefit from the technical assistance provided through the matching grant component which is expected to increase their performance, strengthen their managerial capacities, increase the productivity of their workers and facilitate 9 their access to new markets. The guarantee facility financed by the Project will help improve their access to export finance. 34. Government and private sector agencies: The Project will also directly support various Government entities and private sector agencies with technical assistance and training. The benefits will be the improvement in the ways of working and processes of several government agencies and ministries which are key to export development in Tunisia (CEPEX, MTH, Customs, STAM, INNORPI, and COTUNACE). 35. Workers: The Project is also expected to have indirect benefits on job creation as it will be promoting investments and facilitating enterprises development through improvements in the business environment and support to SMEs. Jobs will be generated in the various value chains supported by the Project with the development and expansion of exports by the enterprises. Additionally, workers in various enterprises and regions outside Tunis will benefit from assistance through the matching grant component, which is expected to improve their productivity. C. PDO Level Results Indicators 36. The progress towards achieving the PDO will be monitored through the following indicators12: (i) total incremental exports by the beneficiary firms and associations; (ii) 75 percent of assisted manufacturing firms accessed new markets and increased their exports to these markets during the project life; and (iii) 60 percent of service sector firms accessed new markets and increased their exports to these markets during the project life. III. PROJECT DESCRIPTION A. Project components 37. The proposed Project consists of three components. Component 1: Support to improve the business climate for export competiveness and the diffusion of technology and innovation (US$10.1 million) Component 1.1: Support for the restructuring and modernization of customs (US$5.20million) 38. Activities of this sub-component include: 39. Upgrading the Customs Information System (SINDA). The SINDA (customs IT system) developed since 1982 has reached its limits and needs to be updated. The Project will finance (i) technical assistance to conduct a diagnostic of the system (audit of its functionality, safety etc.) and compare it to international best practices; and (ii) equipment and software, including follow up assistance, services and training by the providers. 40. Introduction of a comprehensive computerized post review risk management system for 12 For more information about the definition of indicators and technical terms, refer to the results framework (Annex 1) 10 Customs. The objective of this activity is to reduce delays in goods processing, increase customs efficiency, transparency and governance by improving the risk management system, reshaping the control policy and reducing human intervention in customs activities. The Project will finance: (i) technical assistance for risk management to develop a new selectivity module including through dynamic scoring, the use of appropriate dashboards and its synchronization with the SINDA Select 2; (ii) acquisition of equipment, software and licenses for the risk management system (SINDA Select 2, SAS); (iii) training of customs officials on the new equipment and software (SAS, and SINDA Select); (iv) technical assistance to develop a post review control system; (v) training to develop a change management program for all units involved in implementing the selectivity module; and (vi) IT equipment (GPS/GPRS) for geo- localization of customs mobile units. 41. Development of the authorized economic operator (AEO) approach. The status of authorized economic operator is a recently adopted international standard. In accordance with transparent criteria, the approach can be used to test and select operators, based on the risks they pose and the quality of their past customs declarations, in order to grant a status that will qualify them for streamlined customs formalities. 42. The proposed Project will thus support the following activities: (i) finance training and expertise to help a core customs team develop methods and procedures for auditing enterprises to qualify them for AEO status; (ii) support to set up a department in customs in charge of AEO; (iii) finance experts to upgrade customs codes to international standards; (iv) finance experts to prepare computerized guidelines, procedures and approval mechanism for AEO; and (v) finance communication and outreach campaigns on the AEO approach. 43. Support for the improvement of Customs procedures manuals and guidelines. Most custom procedures are not yet fully documented and are managed through a variety of decisions which are occasionally inconsistent. 44. The Project will finance: (i) technical assistance for conducting an inventory of all procedures; (ii) consultancy for carrying out a critical analysis of processes and a subsequent streamlining; and (iii) experts to prepare and publish a manual of procedures, users’ guide and downloadable forms and documents on the Customs’ website. 45. Developing operating procedures and related computerizing system for logistic zones. The Ministry of Transport in Tunisia is now developing logistic zones. A first pilot zone will be near Radès, and a larger one is planned for 2020 at Enfidha. The Project will support customs by financing (i) technical assistance for the preparation of regulations and standardized operating procedures governing logistic zones, and the publication of these procedures and reporting guides; (ii) a special computerized control system encompassing the handling, movement, and trading of goods within logistic zones in Radès area and in transit to and from the logistic zones; and (iii) equipment for a perimeter control and tracking system in the Radès’ logistic zones. Component 1.2: Improvement of trade logistics (US$2.55 million) 46. The objective of this sub-component is to help the Government improve trade logistics to lower the cost of exports for Tunisian enterprises. The Project will finance the following 11 activities: 47. Help the Ministry of Transport (MT) better define the needs for improvements in the port of Radès. Because Radès is Tunisia’s main port of entry/exit, it will be given special priority with a view to achieving a critical mass and economies of scale. The Project will finance: (i) a detailed study to prepare a strategic plan to enhance Radès port operations and performance including through comparing the Radès port with the main competitors ports in order to identify critical bottlenecks; and (ii) support the implementation of measures recommended by such strategic plan to reduce the overall stay of goods in the port of Radès. 48. Development of a container’s management and tracking system for STAM. The average wait time of container in the Radès Port is now six days. While customs clearance time has been reduced over the years, the main difficulties reside now in the time it takes the port of Radès public operator (Société Tunisienne d’Acconnage et de Manutention (STAM)) to track containers, and/or produce them, when necessary, to customers. Another well-known factor for delay is the time taken to remove goods from the port after their release by Customs. STAM is putting in place a global management system for movements within the port, which includes container location and tracking, and rationalizing movements of goods according to different requests. The system would also help in identifying overtime containers13. 49. The Project will finance software, computer and cameras for implementing a gate in and gate out at the Radès Port. The system will reduce the queue at the gate for imports and exports containers and Roll on Roll off (RoRo) units, thus reducing administrative delays in the clearance and release of goods. 50. Support the MT in the implementation of its logistics zones development strategy. The objective of this sub-component is to facilitate the implementation of logistics zones in order to provide areas for logistics operations and develop logistic clusters in Tunisia. The MT has formulated a logistics zones development strategy and a pilot project to develop Radès as a first logistic zone. 51. The Project would specifically finance: (i) assistance to the MT and the port authority to implement its pilot logistic zone project in Radès (including updating of Specifications Book (cahier des charges) and the profitability study conducted in 2009; preparation of bidding documents, marketing, assistance in contract negotiations and control of works etc.); (ii) experts to review and update the institutional framework and regulations governing trade logistics to create logistic clusters and make Tunisia attractive for investments by domestic and foreign private logistics companies; (iii) training to a priority list of staff of the MT to develop a core list of experts/advisors in trade logistics; (iv) development of the local capacity to provide training in trade logistics including through training provided by the Training Institute for Ocean Related Fields (Centre des Métiers de la Mer) of the MT. Component 1.3: Support innovation and its dissemination (US$2.35 million) 52. Innovation can help Tunisian industries climb the value chain and penetrate new foreign 13 Containers not declared within the statutory limits to Customs, or not removed after clearance. According to latest figures, more than 40 percent of containers remain in the port after release by Customs. 12 markets. This sub-component will provide support for INNORPI (the National Standardization and Industrial Property Institute): 53. Develop and disseminate activities on Intellectual Property to exporting firms through: (i) assistance to develop a monitoring system (veille technologique) on Industrial Property and dissemination of technological information; (ii) technical assistance to implement a technology patents monitoring system (veille technologique) for exporting SMEs; (iii) good and technical assistance to upgrade INNORPI’s central database (Régistre Central du Commerce) and its integration into the global platform of trade registries and modernize its online services offered to firms; and (iv) technical assistance to expand INNORPI services to other regions of Tunisia. 54. Support to INNORPI to improve and expand quality assessments on industry and export compliance and to ensure international recognition of Tunisian national labels and brands: This will be done through (i) support to INNORPI to upgrade its current certifications and normalization methods to reach internationally recognized standards; and (ii) technical advisory services to INNORPI to join global networks of normalization and certification organizations for the label “Made in Tunisia” to be internationally accepted. (c) Support the creation of new systems of management, for traceability, certification, and accreditation of goods and services destined for export (such as agro-industrial products,14 construction materials,15 medical clinics, human resources, Halal, Organic, EPC Global etc.). The Project will finance selected sectors and products: (i) an analysis of the needs for traceability, certification and accreditation; (ii) the preparation of traceability/certification manuals; and (iii) the dissemination of these manuals. Component 2. Provision of financial and nonfinancial services to exporting enterprises (US$35.8 million) Component 2.1. Competitiveness Support and Export Development Fund (CEDF)(US$23.50 million) 55. The sub-component finances: 56. Matching grants to beneficiary enterprises (US$22 million). The matching grant fund will provide non-financial services, in the form of partial subsidies, to enterprises/groups/associations involved in the industries/sectors identified and supported by the Project. It would specifically provide non-reimbursable co-financing between 50 percent and 70 percent for individual and 14 In the field of food processing, the term traceability refers to the recording – by means of barcodes or RFID chips and other control tools – of all movements and measurements of products in the production process. One of the main reasons for this crucial point stems from cases in which the issue of contamination might arise and a recall might be necessary. Traceability in the agro-food industry is also used to identify the principal high-yield production areas and the quality of an enterprise, compared to those with low yields and in which certain points in the production process could be improved. 15 Here, traceability refers to the capacity to trace goods throughout the distribution chain using a lot number or basic serial number. Traceability is an important concept, for example, in the automotive industry, where it makes recalls possible, or in the food industry, where it contributes to food security. The international standards organization EPC Global, through GS1, ratified the EPC Global Network standards (in particular the EPC Information Services [EPCIS] standard) which codify the syntax and semantics of supply chain events and the selectively secured method of sharing supply chain events with trading partners. These standards were used in successful roll-outs in numerous sectors and a wide range of products are now certified as conforming to these standards. 13 professional associations, on a demand-driven basis. Details of eligible activities are provided in Annex 2. 57. Support for CEPEX in implementing and managing the Matching Grant scheme (US$1 million). The Project will finance technical assistance, training, equipment and the carrying out of communication and marketing campaigns (including the hiring of consultants that will work with CEPEX staff on a temporary basis to help implement the matching grant scheme and provide them with on the job training); 58. Monitoring and evaluation system of the Matching Grant (US$0.5 million). The Project will finance the provision of technical advisory services and goods to establish an M&E system of the Matching Grant scheme by following a group of enterprises throughout the project implementation period. Component 2.2. Pre-Shipment Export Finance Guarantee Facility (PEFGF-Dhamen Finance US$9.3 million) 59. One of the main obstacles to the development of Tunisian exports, particularly to new markets, is limited access to financing. The Government established, with Bank support through the EDP I, a Pre-Shipment Export Guarantee mechanism managed by COTUNACE (Tunisian Company for the Insurance of Export Credit) to provide risk mitigation guarantee for Pre shipment loans to promote the development of exports. 60. Activities under this sub-component will include: 61. Increasing the amount of the Pre-Shipment Export Finance Guarantee Fund by US$8 million with funds coming from the proceeds of the loan16. Such an increase would help PEFGF further develop its activities into identified value chains and face increases in coverage requests. This would allow raising the guarantee ceiling from TND 750,000 for goods and TND 200,000 for services to TND 1 million (goods and services) per operation. 62. Technical assistance to simplify the guarantee mechanism and procedures. At present, guaranteeing a full cycle (pre and post-export) involves 2 different contracts: the pre-shipment guarantee contract for pre-financing and the buyer’s risk coverage contract. The Project will finance legal experts to review the guarantee mechanism and contract and design a single contact and indemnity agreement covering the full export cycle in order to simplify the guarantee mechanism. 63. Technical assistance to improve the COTUNACE’s governance and risk monitoring approach of the PEFGF. The Project will finance TA to review the governance of the fund in order to incorporate a risk monitoring and management system. This assistance will help review the procedures manual and write new procedures that will govern the guarantee risk monitoring. 64. Support the creation of a Foreign Establishment Guarantee product (Garanties pour 16 This number is set after the findings of a specific study completed on the current PEFGF (Étude Économique Conseil (July 2010). Analyse des institutions de promotion des exportations et du fonds de garantie de financement des exportations avant expédition en Tunisie, Rapport Final, Montréal, Canada). 14 l’Etablissement à l'Étranger). It is proposed to create a new product for the fund on a pilot basis to help Tunisian firms to set up representation offices in their destination markets in order to actively expand their client’s base and therefore internationalize more. The proceeds of the loan would specifically finance for the PEFGF: (i) the development of a specific section in the PEFGF manual for this new guarantee product; and (ii) the operating costs and marketing campaigns cost to roll out the product. 65. Extend guarantee to exporting enterprises for securing eligible bonds from commercial banks. These guarantees will cover the risk associated with losses incurred by banks that offer signed commitments to enterprises in the form of contingent liabilities for the enterprises to be able to develop their exports. 66. Setting up of regional representatives and market the Dhamen finance in two regions outside Tunis. A pilot program is proposed, consisting of having one PEFGF/Dhamen finance representative in each of two selected underserved regions of Tunisia with high potential. The Project will finance two experts to identify SMEs with export potential, to offer them export finance guarantee services and ensure that the operations are properly carried out. 67. Staffing, operating costs. The loan proceeds would specifically finance the staffing (one expert and one assistant), basic operating costs and marketing campaigns of experts assigned to PEFGF/Dhamen finance. Component 2.3. Strengthening CEPEX to become a sustainable export development services provider (US$3.0 million) 68. National export promotion agencies are an important component of a national export strategy in many countries. Tunisia’s Export Promotion Agency (CEPEX) is a governmental institution under the Ministry of Trade and Handicrafts. Most of CEPEX’s activities are focused on strengthening the country’s image and marketing activities.17 It is almost fully funded by the Government with little private sector contribution. The objective is to support CEPEX to become a more sustainable provider of services to Tunisian export enterprises. The project will also help increase collaboration between CEPEX and the private sector, the gradual development by CEPEX of fee based services, the introduction of annual contributions from private enterprises, and the phasing in of private sector involvement in the governance and management of CEPEX. 69. The Project will finance the following activities for CEPEX: 70. An institutional audit of CEPEX to come up with an action plan and options for reforms for CEPEX and a Public Private Dialog (PPD) to agree on the way forward. The action plan will define CEPEX priorities, propose reforms (governance and operations) options to have it become an institution that is more focused on its customer base. It will also help CEPEX define a list of essential business services that it should provide directly and those that should be outsourced (based on the current best practices model, e.g. ProChile, MATRADE, etc.). Most importantly, 17 The services offered by EPAs are generally divided into four main categories: (i) building the country’s image (publicity, promotional events), (ii) export support services (training of exporters, technical assistance, capacity building), (iii) marketing (trade fairs, importer and exporter missions), and (iv) market studies and publications. 15 the Project will provide TA to organize PPD to discuss and validate the action plan by the Government in collaboration with the private sector. 71. Implementation of the action plan. The Project will then provide technical assistance, institutional support, and goods for the implementation of the action plan. To ensure the long- term viability of CEPEX, assistance to the Project will be phased out and gradually be replaced by the funds that CEPEX is expected to generate by providing services to private enterprises and the contributions/membership fees from private enterprises. 72. Technical assistance to improve current CEPEX functions, particularly in the field of market studies and information system. The Project will finance (i) a study that will map specific private sector needs and serve as a roadmap for the type of information to be generated by CEPEX; (ii) CEPEX to subscribe to international databases and digitizing the existing essential documentation available with CEPEX; (iii) technical assistance and goods to develop an appropriate IT system in CEPEX, including the possibility of online registration to enable users to access data as well as the possibility of on-site consultation. Component 3: Support to selected ministries for the coordination and management of the Project (US$4.1 million) 73. This component will finance activities designed to strengthen the capacity of the Project Coordination and Monitoring Unit (PCMU) and focal points. The Project will finance the following activities: (i) training in procurement and financial management for staff of the PCMU and the key implementing agencies; (ii) consultancy services (a financial management consultant, an accountant, and an expert to assist the coordinator with implementation of the project), to enable the PCMU to successfully perform tasks such as the coordination of implementing agencies and the monitoring of project performance indicators, the provision of information and reports to the project Steering Committee and the World Bank; (iii) support to Steering Committee meetings; and (iv) IT and office equipment for the PCMU. 74. It will also support the Government, particularly the ministries of trade and industry, in the implementation of export development studies and strategies, including in particular: (i) procurement of equipment to connect the DQPC (Directorate of Quality and Consumer Protection) to Tunisia Trade Net (TTN); (ii) expert services for the DGCE (Directorate General of Foreign Trade) for the drafting of texts governing e-trade in Tunisia; and (iii) technical assistance and software to the DGCE to update its database on trade facilitation legislations and the preparation of a trade procedures manual/guide. B. Project Financing Project Cost and Financing 75. An IBRD loan of US$50 million is proposed. The Government’s and beneficiaries’ contribution is US$24.5 million equivalent, of which US$22 million is the matching grant beneficiaries’ counterpart funding, and US$2.5 million is the Government’s contribution to the PCMU operating costs. 16 IBRD Borrower Beneficiar Total ies Component 1: Support to improve the business climate for trade 10.1 0.0 0.0 10.1 competitiveness and the diffusion of technology and innovation Component 1.1. Restructuring and modernization of Customs 5.2 0.0 0.0 5.2 Component 1.2. Improvement in trade logistics 2.55 0.0 0.0 2.6 Component 1.3: Support innovation and its dissemination 2.35 0.0 0.0 2.3 Component 2: Provision of financial and nonfinancial services to 35.8 0.0 22.0 57.8 exporting enterprises Component 2.1. Competitiveness Support and Export Development Fund 23.5 0.0 22.0 45.5 (CEDF/FAMEX) Component 2.2. Pre-Shipment Export Finance Guarantee Facility (Dhamen 9.3 0.0 0.0 9.3 finance) Component 2.3. Strengthening CEPEX to become a sustainable export 3.0 0.0 0.0 3.0 development services provider Component 3: Support to selected ministries for the coordination and 4.1 2.5 0.0 6.6 management of the Project Total Components 50.0 2.5 22.0 74.5 IV. IMPLEMENTATION A. Institutional and implementation arrangements 76. The Project will be implemented over a period of six years. 77. The Project will have three implementing agencies: (i) the Ministry of Trade and Handicraft and its PCMU (Components I and 3); (ii) CEPEX (Sub-Components 2.1 and 2.3), and COTUNACE (Sub-Component 2.2). These three institutions have extensive experience in implementing Bank-financed projects since 2000. Given their good track record and past experience in implementing Bank-financed projects, they are considered to be well-equipped to implement this project. 78. Steering Committee (SC). The Project will be implemented under the supervision of a Steering Committee. This committee will consist of representatives of the Ministry of Finance, Ministry of Industry and Technology, Ministry of Transport, the Association of Exporters from the Tunisian Union for Industry, Trade and Handicrafts (Union Tunisienne de l’Industrie, du Commerce et de l’Artisanat (UTICA)), CEPEX, COTUNACE and INNORPI. 79. Focal points. The Project beneficiaries (Customs, Ministry of Transport, INNORPI and STAM) will be individually responsible for decisions affecting their respective components. 80. The implementation arrangements and the role of each entity are detailed in Annex 3. 81. The institutional arrangements for project implementation are shown in the chart below. 17 Steering  Committee led  by the MTH CEPEX MTH/PCMU COTUNACE Sub‐ Component  2.2.  PEFGF Sub‐ Sub‐Component  Component   Componnent 2.1  2.3. CEPEX  1.Trade Logsitics  FACDE Focal point  Focal point   Focal point  Focal point MT Customs STAM Innorpi B. Results Monitoring and Evaluation 82. Institutional framework for monitoring outcomes/results. The M&E system will be based on the agreed results framework and monitoring arrangements (Annex 1). Data collection for the agreed Project indicators will be initiated by the PCMU, in collaboration with project beneficiaries’ institutions (CEPEX, INNORPI, Customs, COTUNACE and STAM). The details will be in the updated Project Operations Manual. 83. Responsibility for monitoring activities. Overall, the PCMU will be responsible for consolidating and preparing all periodic fiduciary and M&E reporting including impact and output indicators as well as the Project annual audit. In addition, the PCMU will submit to the Bank each semester, an implementation progress status report of the Project. A third party will be recruited to independently collect qualitative information from beneficiaries through surveys and focus group discussions to gather their views on the performance of the Project annually. 84. Monitoring of the PDO level indicators. PCMU, CEPEX and COTUNACE will be responsible for data collection, management and reporting on the disaggregated volume of exports, markets and product diversification data for their respective parts of the project. They will also be responsible for the data collection, management, and reporting on the gender disaggregated direct Project beneficiaries in their respective parts of the project. 85. Capacity building. The capacity for M&E will be enhanced through provision of information management systems and online services delivery. A website will be developed for the project to use a participatory approach using up-to-date and user-friendly application 18 technology allowing beneficiaries and their associations to participate interactively in the production, analysis, and exchange of data and information both generated within the Project cycle and the day-to-day operation of the executing agencies. The Project will finance TA to strengthen the capacity of the PCMU, CEPEX and COTUNACE to respond to the Government’s need for information and data. 86. Implementation support. The implementation support team will include World Bank staff, as well as consultants as needed. The Government’s implementation team will also include a deputy project coordinator funded by the Project to assist the PCMU in Project implementation. C. Sustainability 87. The sustainability of the Project’s impact will depend on several institutional and economic requirements as indicated in the section on lessons learned from the previous projects. (a) Strength of the policy and institutional framework for export development. Components I and II of the Project will support the necessary institutional reform and provide resources to set up a sustainable export develop services provider and support the project implementation team within MTH to have a long lasting capacity in the area of trade policy and export development. Broad-based buy-in through public/private dialogue is also being supported by the project through stakeholder consultations (as explained above in the section on lessons learned). (b) Long term sustainability of project support. One key lesson learned from the previous two projects (and a key message from the authorities) is the need to strike a balance between operational efficiency and long term sustainability in project design. The proposed Project recognizes the delicate balance between efficiency and sustainability. Under the current project, the matching grant implementation will be integrated into CEPEX to ensure the long-term sustainability of the function of providing services to export companies. Also, the Project will provide support to build CEPEX capacity as a sustainable institution for the provision of BDS and PPD. (c) Financial sustainability of subprojects funded by matching grants. The Project will facilitate the implementation of profitable export plans to help SME develop products, diversify their export markets to reduce vulnerability through the provision of marketing, and enterprise development services enabling them to capitalize on opportunities and respond to market needs. Lessons of experience demonstrate that the combination of technology adoption and advisory services, market facilitation, capacity building, and capital underpin financially and economically sustainable subprojects. The Project is designed to support firms to penetrate new markets and develop new products and sustain their exports to these markets during and beyond the life of the Project. In addition, the Project support will help companies open new agencies in these new markets, including by helping them raise the necessary working capital through the guarantee facility. An M&E system is designed to monitor this sustainability. Moreover, the Project will support the sustainable development of an export consulting industry for new products, markets, and professional associations that would carry on project benefits beyond the life of the Project. It is expected that a consulting industry with expertise on nontraditional 19 market and in new products will be developed. CEDF benefits are likely to be sustainable by reinforcing this export consulting industry as well as a number of professional associations. (d) Ownership and beneficiaries’ commitment. The Project has been tailored to national development needs as expressed in the Government’s medium-term socio-economic development strategy mentioned in paragraph 38 above. Consultations with local stakeholders have also influenced the design of the Project. This inclusive approach to the design and implementation of the Project helps ensure national and local ownership and continued relevance of Project interventions to beneficiary needs. V. KEY RISKS AND MITIGATING MEASURES 88. The risks and mitigation measures are detailed in the attached ORAF (Annex 4). A. Risk Ratings Summary Table Stakeholder Risk Substantial Implementing Agency Risk - Capacity High - Governance Substantial Project Risk - Design High - Social and Environmental Low - Program and Donor Moderate - Delivery Monitoring and Sustainability High Overall Implementation Risk High B. Overall Risk Rating Explanation 89. There are several risk factors to be considered for this Project, and many of them are viewed by the team as high given current country environment and despite the envisioned mitigation measures. The overall project risk is seen as High. (a) Political uncertainties: While it is reassuring that the elections for a constituent assembly and the adoption of a new Constitution were peaceful and orderly, Tunisia has little experience with parliamentary party politics. Furthermore, election may not be organized in the agreed time frame. This creates uncertainty which may detract from investment and economic performance. It is difficult to mitigate the risk of political fluidity. The understanding of the international community together with financial and policy support from international financial institutions may help mitigate this risk. (b) Delayed economic recovery affecting exports: The possibility of an economic recession is another risk notwithstanding the resilience of the Tunisian economy in the context of the global crisis. The current economic weaknesses could be exacerbated by the broader impact of a global downturn and/or civil conflict in neighboring countries or by political uncertainty within Tunisia. 20 Given current uncertainties due to the world financial crisis, external demand for Tunisian exports is still relatively weak, a fact which may affect the results of the Project. (c) Stakeholder ownership: While the Project’s objectives are in line with many of the aspirations that led to the revolution and with the objective of the new Government formed after the adoption of the new Constitution, some reforms supported under the Project such as the customs reforms have proved to be difficult to be implemented and present a risk of capture by groups within the institution. The Project preparation ensured that the project objectives and contents are in line with the Government strategic priorities. The Project is in line with the key priorities outlined by the Government in its strategy and in its request sent to the Bank in July 2012. Also, the Project was analyzed and approved by a Council of Ministers of the new Government before negotiations. In addition, the team has consulted with stakeholders during project preparation through workshops organized with the stakeholder working group put together by the Government. (d) Institutional and implementation capacity limitations: An important risk is linked to the multi-agency/multi-ministry nature of the Project which may imply coordination issues and delays in implementation. As Tunisia seeks to adopt a new social contract and establish new ways of working, such as implementing new social accountability models and working with new actors at the local level, the Bank Group will need to ensure that operations adequately anticipate the need for building institutional and implementation capacity and have realistic objectives in terms of what can be achieved within a limited time frame. Tunisians are impatient for things to change and improve more quickly and capacity limitations can pose a risk to the transition and the Bank Group’s credibility. 90. Financial management and procurement risk: Experience with EDP II shows that weaknesses appeared in FM and procurement during project implementation. While these were corrected in due course, they had a non-negligible transaction cost as project management had to focus at times only on administrative matters and much less on implementation. 91. While the first two risks are outside the control of the Borrower, the third and fourth risks are to be minimized through specific arrangements for project implementation, including the oversight of the Project by a high level Steering Committee. Also, project implementation will be done by core government entities. The fifth risk is to be mitigated inter alia by making training in financial and procurement matters mandatory at the beginning of the Project and reinforcing the PCMU. VI. APPRAISAL SUMMARY A. Economic and Financial Analysis 92. Public investment and the provision of TA, to complement budget support operation and help organize sustainable Public Private Dialogue (PPD) is an adequate tool to overcome coordination failures in the provision of public goods such as business development services, improvement in the use of public infrastructure, vocational training for youth to be employable by the private sector or improved governance mechanisms (such increased transparency in in customs). Besides decreasing the cost of doing business, public investment lowers risk for 21 private investors, which is crucial to unlock the potential of the exporting sector, particularly SMEs, startups, women-led firms and private enterprises located in other regions of Tunisia. 93. It also crowds in capital through overcoming market failures, arising when companies with few capabilities can initially experience negligible return to the accumulation of capabilities in new sectors or markets, thus hindering diversification. As such the investment of public resources is expected to spur growth by providing an improved business environment enabling local supply chains to develop as well as expanding and diversifying exports in segments of the economy, population and regions where these jobs are most needed. It helps firms to access new export markets where the initial risks are perceived high by local private sector. 94. This intervention requires an actor who can successfully address both issues facing both the public and the private sector. The World Bank Group seems well positioned to do so, being able to support public sector reform and provide the tools to support private sector development. In addition, the success of this project will be largely dependent on the creation of an entire ecosystem conducive to growth (trade logistics, innovation ecosystem, export finance, non- financial business development services and Public Private Dialog). This requires a partner able to work with the government on policy reforms, convene other development partners, crowd in the private sector and understand the local social context which underpins economic developments. All these aspects are covered by the project and the Bank involvement. 95. The project direct beneficiaries are estimated at around 6,000, of which 2,000 firms supported under the CEDF and around 3,700 jobs created under the PEFG. It is estimated that 20% of the beneficiaries are women. 96. The EDP III is a comprehensive operation, supporting institutions and markets through different channels and instruments, including direct firm assistance in the form of grants as well as supporting trade and professional associations. The Project also aims to improve access to finance though the PEFGF. The trade facilitation and logistics activities are expected to further reduce transaction cost by improving the efficiency of customs procedures and firm level logistics. 97. In addition, improvements in coordination will result in closer synergies among project components, such that assisted firms could benefit from the project activities simultaneously. Conceptually, an exporter or prospective exporter in the targeted beneficiaries’ population will realize his export potential with the help of CEDF in accessing new markets while seeking a guarantee to better access working capital finance for the firm’s export operations through the PEFGF. In addition, this new exporter can realize substantial cost reductions due to improved efficiencies in trade and logistics services. Ultimately, this would increase his competitive position. 98. The outcomes of each project’s components are likely to converge in generating additional exports. In particular, CEDF will generate quantifiable benefits, in the form of additional exports. The PEFGF is expected to reduce the information asymmetries that currently prevent SMEs exporters from accessing export finance and to generate additional exports. 22 99. The Project benefits are directly quantifiable in the form of additional export generated by both CEDF and PEFGF. In addition the Project is expected to yield “soft” benefits such as reducing informational gap for firms accessing new markets and products in new sectors as well as for access to export finance as banks will continue to receive information on exporting firms. 100. Annex 8 presents an estimate of the economic and financial benefits from CEDF and PEFGF based on the expected additional exports generated by participants. We estimate that the US$44 million investment (of which US$22 million from the loan and US$22 million of beneficiary enterprises contribution) will generate US$536 million of additional total export over a six-year period and yield a Net Present Value (NPV) of additional exports of US$407.55 million. After managerial cost and grants and cost sharing disbursement the expected NPV of CEDF flow of funds is US$370.21 million. 101. PEFGF/Dhamen finance will make a new additional investment of US$ 9.3 million for six years, including US$1.3 million in TA and capacity building of COTUNACE for simplifying the guarantee procedures. The NPV of the benefits amount should be US$ 123.5 million for the first six years; while the NPV of net social benefits represents US$43 million over the same period. B. Technical 102. The Project is expected to be technically viable. Specifically, the project design is appropriate for Tunisia, as demonstrated by the success of technology underlying Tunisia Trade Net, which will serve as platform for several sub-components of EDP III. This technology architecture of the key components (SINDA, selectivity and risk management modules etc.) conforms to best international standards (Singapore, Mauritius). C. Financial Management 103. Summary assessment: An assessment of financial arrangements including the accounting system and accounting policies and procedures, budgeting system, reporting, staffing, internal controls policies and procedures, internal auditing and external auditing arrangements of the three implementing agencies (MTH, CEPEX and COTUNACE) was carried out. MTH through the PCMU will implement all activities related to the government entities (Tunisian Customs (TC), Ministry of Transport (MT), INNORPI), i.e. Component 1 and Component 3; CEPEX will implement Sub-Component 2.1 and Sub-Component 2.3 and COTUNACE will implement the PEFG fund under Component 2.2. 104. The FM assessment reflected that these arrangements are satisfactory and meet the Bank’s minimum requirements under OP/BP10.00. These three implementing agencies have experience in implementing Bank-financed projects since 2000. Following the assessment, it is agreed to: (i) recruit an FM specialist and an accountant for the PMCU prior to effectiveness; (ii) recruit a short term FM expert to work with the existing CEPEX FM specialist assigned to the Project and provide on the job training on FM management; (iii) build the capacity of project staff members, with targeted training programs on project financial management procedures. 23 D. Procurement 105. Procurement arrangements of the EDP III will be similar to those of the two previous EDPs. There is, however, a need to simplify the administrative structure of the project, reduce the number of reporting counterparts and ensure more synergy between the PMCU and the focal points within the various beneficiaries. The objective is to simplify the administrative structure of the Project and reduce the number of reporting counterparts. This will be achieved by consolidating the procurement management responsibilities under only three executing agencies: (i) the PCMU; (ii) the CEPEX; and (iii) the COTUNACE. This is deemed to be more efficient particularly for the coordination of the project implementation – which was the weak point under the EDP II. The CEPEX as an autonomous agency will be responsible for the implementation and procurement management of Sub-components 2.1 and 2.3. The PCMU will be responsible for all procurement activities under components 1 and 3. COTUNACE will be responsible for procurement under sub-component 2.2. 106. An assessment of the capacity of the executing agencies to manage procurement was carried out during preparation and appraisal. The assessment is based on the knowledge of procurement experience under EDP II, the information provided by the various administrations, taking into account the foreseen nature of the expenditures and the likely size of the contracts to be procured by the three executing agencies (PCMU, CEPEX, COTUNACE). This evaluation took into account the entire contracting process, which encompasses: (i) planning; (ii) preparation of bidding documents; (iii) receipt and evaluation of bids or proposals; (iv) finalization and signing of the contract; (v) monitoring the execution; and (vi) filing and achieving of documents for audit and post review. The conclusion of the assessment is that, the three executing agencies have the capacity to carry out and manage project procurement provided they mobilize adequate capacity and that the actions recommended are taken timely (see Annex 3.B). E. Social (including safeguards) 107. The Project, by the nature of its development objective, brings together a diverse group of stakeholders and beneficiaries, consisting of investors, SMEs, business owners, with diverse and sometimes conflicting interests. As the Project is primarily offering technical assistance and capacity building, with no infrastructure, the social impacts of the Project are largely expected to be positive. F. Environment (including safeguards) 108. The Project is classified as a Category C as it will primarily finance technical assistance and capacity building activities. 24 ANNEX 1: RESULTS FRAMEWORK AND MONITORING Project Development Objective (PDO): The project development objective is to help increase and diversify exports by supported enterprises. Baseli Cumulative Target Values Core Unit of Data Source Responsibility for PDO Indicators ne Frequency Measure 2015 2016 2017 2018 2019 2020 Data Collection (2011) 1.Total incremental exports by the beneficiaries firms and associations Million 0 50 200 300 400 500 600 US$ Annual firms CEPEX 2. Percentage of assisted manufacturing firms accessed new markets and 75 increase their exports to these markets % 0 5 30 50 60 70 Annual firms CEPEX during the project life 3. Percentage of service sector firms accessed new markets and increase their % 0 5 15 30 40 50 60 exports to these markets during the Annual firms CEPEX/CEDF project life 4. Direct project beneficiaries (number), Number 1,000 1,500 2,000 3,000 4,000 6,000 Firms/CEPEX/ of which female (percentage) X 0 Annual PMCU % 20 20 20 20 20 20 COTUNACE INTERMEDIATE RESULTS Component I. Support to the business climate for export competitiveness and the diffusion of technology and innovation 1.1 Days to process and release containers in the port of Radès ( TRS- Custom IT Number 6 6 5 4 4 3 3 Annual Customs time release study ) system 1.2. Firms that have become OEA Number Custom IT (opérateur économique agréé) 9 10 15 20 25 30 35 Annual Customs system 1.3. Percentage of Customs declarations and payment process using new Custom IT 0 80 Annual Customs computerized system %. 10 15 30 60 80 system 1.4. Firms that obtained Firms/INNORPI/CE certification/accreditation of 0 0 25 50 75 100 150 200 Annual Firms//CEDF DF products/services Component II. Provision of financial and non-financial services to exporting enterprises 2.1. Total value of new loans allocated to the firms that benefit from the Million 0 Annual firms PEGF 50 100 150 200 250 300 guarantee US$ 2.2. New firms and associations with completed and implemented export Number 0 50 200 400 800 1500 2000 plans under CEDF (of which 20% are 10 40 80 160 300 400 Annual firms CEPEX led by women) 25 ANNEX 2: DETAILED PROJECT DESCRIPTION A. Project components 1. The proposed project consists of three components: Component 1: Support to improve the business climate for trade competitiveness and the diffusion of technology and innovation (US$10.1 million) Component 1.1: Support for the restructuring and modernization of customs (US$5.20 million) 2. Activities in this will include: 3. Upgrading the Customs Information System (SINDA). The SINDA (customs IT system) developed since 1982 has reached its limits and needs to be updated. The project will finance (i) technical assistance to conduct a diagnostic of the system (audit of its functionality, safety etc.) and compare it to international best practices; and (ii) equipment and software (including follow up assistance, services and training by the providers. 4. Introduction of a comprehensive computerized post review risk management systems for Customs. The objective of this activity is to reduce delays in goods processing, increase customs efficiency, transparency and governance by improving the risk management system, reshaping the control policy and reducing human intervention in customs activities. The Project will finance: (i) technical assistance for risk management to develop a new selectivity module including through dynamic scoring, the use of appropriate dashboards and its synchronization with the SINDA, interactive analysis of risk factors and the incorporation of external (domestic and international) data and intelligence into the customs risk management systems to promote an integrated risk management model for all international transactions; (ii) acquisition of equipment, software and licenses for the risk management system (SINDA Select 2, SAS); (iii) training of customs officials on the new equipment and software (SAS, and SINDA Select); (iv) technical assistance to develop a post review control system; (v) training to develop a change management program for all units involved in implementing the selectivity module; and (vi) IT equipment (GPS/GPRS) for geo-localization of customs mobile units. 5. Development of the authorized economic operator (AEO) approach. The status of authorized economic operator is a recently adopted international standard. In accordance with transparent criteria, the approach can be used to test and select operators, based on the risks they pose and the quality of their past customs declarations, in order to grant a status that will qualify them for streamlined customs formalities. 6. The proposed Project will thus support the following activities: (i) finance training and expertise to help a core customs team develop methods and procedures for auditing enterprises to qualify them for AEO status; (ii) support to set up a department in customs in charge of AEO; (iii) finance experts to upgrade customs code to international standards; (iv) finance experts to prepare computerized guidelines, procedures and approval mechanism for AEO; and (v) finance communication and outreach campaigns on the AEO approach.. 7. Support for the improvement of Customs procedures manuals and guidelines. Most custom procedures are not yet fully documented and are managed through a variety of decisions which are occasionally inconsistent. 26 8. The Project will finance (i) technical assistance for conducting an inventory of all procedures; (ii) consultancy for carrying out a critical analysis of processes and a subsequent streamlining; and (iii) experts to prepare and publish a manual of procedures, users’ guide and downloadable forms and documents on the Customs’ website. 9. Developing operating procedures and related computerized system for logistic zones. The Ministry of Transport in Tunisia is now developing logistic zones. A first pilot zone will be near Radès, and a larger one is planned for 2020 at Enfidha. The project will support customs by financing: (i) technical assistance for the preparation of regulations and standardized operating procedures governing logistic zones, and the publication of these procedures and reporting guides; (ii) a special computerized control system encompassing the handling, movement, and trading of goods within logistic zones in Radès area and in transit to and from the logistic zones; and (iii) equipment for a perimeter control and tracking system in the Radès’ logistic zones. 27 Republique de Tunisie Export Development Project Sub-component 1.1: Improving investment climate for export competitiveness Detailed Costs (US$ Million) Base Cost 2015 2016 2017 2018 2019 2020 2021 Total I. Investm ent Costs A. Upgrading the Custom s Inform ation (SINDA) TA to conduct a diagnostic of assess the system (audit of its functionality, safety etc.) 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 Equipment and softw are (including follow up assistance and services by the providers) 0.09 0.17 0.26 0.34 0.34 0.41 0.09 1.70 Subtotal 0.10 0.19 0.29 0.38 0.38 0.46 0.10 1.90 B. Introduction of a com prehensive com puterized risk m anagem ent system TA for risk management and to develop a new selectivity module including dynamic scoring (SINDA Select 2) 0.01 0.01 0.02 0.02 0.02 0.01 0.01 0.10 Equipment, softw are and licenses for the risk management system (SINDA Select 2, SAS,) 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 Training of custom official on the new equipment and softw are (SAS, and SINDA Select) 0.01 0.01 0.02 0.02 0.02 0.01 0.01 0.10 Training to develop a change management program for all units involved in implementing the selectivity module 0.01 0.01 0.02 0.02 0.02 0.01 0.01 0.10 TA to set up a post review system 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 IT equipment (GPS/GPRS) for geo-localization of custom mobile units 0.04 0.07 0.11 0.13 0.14 0.17 0.04 0.70 Subtotal 0.09 0.14 0.23 0.27 0.28 0.30 0.09 1.40 C. Developm ent of the authorized econom ic operator (AEO) approach Experts to develop methods for auditing enterprises to qualify them for AEO status and training for a core gro 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 Setting up a department in customs in charge of AEO 0.01 0.01 0.02 0.02 0.02 0.01 0.01 0.10 Experts to upgrade customs code to international standards 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 Preparation of computerized guidelines, procedures and approval mechanism for AEO 0.01 0.01 0.02 0.02 0.02 0.01 0.01 0.10 Communication and outreach campaigns on the AEO approach 0.01 0.01 0.02 0.02 0.02 0.01 0.01 0.10 Subtotal 0.05 0.07 0.12 0.14 0.14 0.13 0.05 0.70 D. Support for the im provem ent of procedures m anuals and guidelines. TA for conducting an inventory of all procedures 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 TA to carry out a critical analysis of processes and a subsequent streamlining 0.01 0.02 0.02 0.03 0.03 0.03 0.01 0.15 Experts to prepare and publish a manual of procedures, users’ guide and dow nloadable documents on the w 0.01 0.02 0.02 0.03 0.03 0.03 0.01 0.15 Subtotal 0.03 0.06 0.07 0.10 0.10 0.11 0.03 0.50 E. Operationalization of Logistic Zones procedures and com puterization 1. TA for the preparation of regulations and standardized operating procedures and publication guides 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 2. Equipm ent SUPPORT Equipment for a computerized control system for handling, movement, and trading of goods w ithin the Zone 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 Equipment for a perimeter control and tracking system in the Rades’s logistic zones 0.02 0.03 0.05 0.06 0.06 0.06 0.02 0.30 Subtotal 0.03 0.05 0.08 0.10 0.10 0.11 0.03 0.50 Subtotal 0.04 0.07 0.11 0.14 0.14 0.16 0.04 0.70 Total 0.31 0.53 0.82 1.03 1.04 1.16 0.31 5.20 28 Component 1.2: Improvement in trade logistics (US$ 2.55 million) 10. The objective of this sub-component is to help the Government improve trade logistics to lower the cost of exports for Tunisian enterprises. The project will finance the following activities: 11. Help the Ministry of Transport (MT) better define the needs for improvements in the port of Radès. Because Radès is Tunisia’s main port of entry/exit, it will be given special priority with a view to achieving a critical mass and economies of scale. The project will finance: (i) a detailed study to prepare a strategic plan to enhance Radès port operations and performance including through comparing the Radès port with the main competitors ports in order to identify critical bottlenecks; and (ii) support the implementation of measures recommended by such strategic plan to reduce the overall stay of goods in the port of Radès. 12. Development of a container’s management and tracking system for STAM. The average wait time of container in the Rades Port is now six days on average. While customs clearance time has been reduced over the years, the main difficulties reside now in the time it takes the port of Radès public operator (Société Tunisienne d’Acconnage et de Manutention (STAM)) to track containers, and/or produce them, when necessary, to Customs. Another well-known factor for delay is the time taken to remove goods from the port after their release by Customs. STAM is putting in place a global management system for movements within the port, which includes container location and tracking, and rationalizing movements of goods according to different requests. The system would also help in identifying overtime containers.18 13. The project will finance software, IT equipment, monitoring system and cameras to develop a container movement management system for STAM, thus reducing administrative delays in the clearance and release of goods. 14. Support the MT in the implementation of its logistics zones development strategy. The objective of this sub-component is to facilitate the implementation of logistics zones in order to provide areas for logistics operations and develop logistic clusters in Tunisia. The MT has formulated a logistics zones development strategy and a pilot project to develop Radès as a first logistic zone. 15. The project would specifically finance: (i) assistance to the MT and the port authority to implement its pilot logistic zone project in Radès (including updating of the Specifications’ Book (cahier des charges) and the profitability conducted in 2009; preparation of bidding documents, marketing, assistance in contract negotiations and control of works etc.); (ii) experts to review and update the institutional framework and regulations governing trade logistics (port code, law on logistics, status of logistic service providers etc.) to create a logistical cluster and make Tunisia attractive for investments by domestic and foreign private logistics companies; (iii) training to a priority list of staff of the MT to develop a core of experts/advisors in trade logistics; (iv) development of the local capacity to provide training in trade logistics including through training provided by the Training Institute for Ocean Related Fields (Centre des Métiers de la Mer) to the MT to develop their capacity in trade logistics. 18 - Containers not declared within the statutory limits to Customs, or not removed after clearance. According to latest figures, more than 40 percent of containers remain in the port after release by Customs. 29 Republique de Tunisie Export Development Project Sub-component 1.2. Improvement of trade logistics Detailed Costs (US$ Million) Base Cost 2015 2016 2017 2018 2019 2020 2021 Total I. Investm ent Costs A. Help the Ministry of Transport better define the need for im provem ents in the port of Radès Detailed study to prepare a strategic plan to enhance Rades port operations and performance 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 Support the implementation of measures designed to reduce the overall stay of goods in the port. 0.03 0.06 0.09 0.12 0.12 0.15 0.03 0.60 Subtotal 0.04 0.08 0.12 0.16 0.16 0.20 0.04 0.80 B. Support the MT to im plem ent its Logistics Zones developm ent strategy Assistance t0 the MT and the port authority to implement its pilot logistic zone project in Rades (including updating of cahier des charges and the profitability study conducted in 2009 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 Asssistance to prepare bidding documents, marketing, assistance in contract negotiations and control of w 0.02 0.03 0.05 0.06 0.06 0.06 0.02 0.30 Experts to review and update the institutional framew ork and regulations governing trade logistics (port code, law on logistics, status of logistic service providers etc.) and to create logistic clusters in Tunisia 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 Traning to develop the MT capacities for a priority list of its experts 0.01 0.01 0.02 0.02 0.02 0.01 0.01 0.10 Development of the local capacity to provide training in trade logistics 0.01 0.02 0.02 0.03 0.03 0.03 0.01 0.15 Subtotal 0.06 0.10 0.15 0.19 0.19 0.20 0.06 0.95 C. Managem ent and tracking of containers for STAM Softw are, IT equipment, monitoring system and cameras to develop a container management system 0.04 0.08 0.12 0.16 0.16 0.20 0.04 0.80 Total 0.14 0.26 0.39 0.51 0.51 0.60 0.14 2.55 30 Component 1.3: Support innovation and its dissemination (US$2.35 million) 16. Innovation can help Tunisian industries climb the value chain and penetrate new foreign markets. This sub-component will provide support for INNORPI (the National Standardization and Industrial Property Institute): (a) Develop and disseminate activities on Intellectual Property to exporting firms through: (i) assistance to develop a monitoring system (veille technologique) on Industrial Property and dissemination of technological information; (ii) technical assistance to implement a technology patents monitoring system (veille technologique) for exporting SMEs; (iii) goods and technical assistance to upgrade INNORPI’s central database (Régistre Central du Commerce) and its integration into the global platform of trade registries and modernize its online services offered to firms; and (iv) technical assistance to expand INNORPI services to other regions of Tunisia; (b) Support to INNORPI to improve and expand quality assessments on industry and export compliance and to ensure the recognition of Tunisian national labels and brands in international databases: This will be done through (i) support to INNORPI to upgrade its current certifications and normalization methods to reach internationally recognized standards; and (ii) technical advisory services to INNORPI to join global networks of normalization and certification organizations for the label “Made in Tunisia” to be internationally accepted; (c) Support the creation of new systems for traceability, certification, and accreditation of goods and services destined for export (such as agro-industrial products,19 construction materials20 and electromagnetic compatibility, medical clinics, human resources, Halal, EPC Global etc.). The Project will finance selected sectors and products: (i) an analysis of the needs for traceability, certification and accreditation; (ii) the preparation of traceability/certification manuals; and (iii) the dissemination of these manuals 19 In the field of food processing, the term traceability refers to the recording – by means of barcodes or RFID chips and other control tools – of all movements and measurements of products in the production process. One of the main reasons for this crucial point stems from cases in which the issue of contamination might arise and a recall might be necessary. Traceability in the agro-food industry is also used to identify the principal high-yield production areas and the quality of an enterprise, compared to those with low yields and in which certain points in the production process could be improved. 20 Here, traceability refers to the capacity to trace goods throughout the distribution chain using a lot number or basic serial number. Traceability is an important concept, for example, in the automotive industry, where it makes recalls possible, or in the food industry, where it contributes to food security. The international standards organization EPC Global, through GS1, ratified the EPC Global Network standards (in particular the EPC Information Services [EPCIS] standard) which codify the syntax and semantics of supply chain events and the selectively secured method of sharing supply chain events with trading partners. These standards were used in successful roll-outs in numerous sectors and a wide range of products are now certified as conforming to these standards. 31 Republique de Tunisie Export Development Project Sub-component 1.3: Diffusion of Technology and innovation Detailed Costs (US$ Million) Base Cost 2015 2016 2017 2018 2019 2020 2021 Total I. Investm ent Costs A. Support for INNORPI to develop and dissem inate activities on IPR to exporting firm s TA to develop a monitoring system (veille technologique) on Industrial Property and dissemination of technological information 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 TA to implement a technology patents monitoring system (veille technologique) for exporting SMEs 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 Equipment and TA to upgrade INNOROPI's central database (Registre Central du Commerce) and its integration into the global platform of trade registries and modernize its online services offered to firms 0.03 0.05 0.08 0.10 0.10 0.11 0.03 0.50 TA to expand INNORPI services to other regions of Tunisia 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 Subtotal 0.06 0.11 0.17 0.22 0.22 0.26 0.06 1.10 B. Capacity building of INNORPI in quality assessm ent and export com pliance for the label NT to be accepted TA to INNORPI to upgrade its certifications, normalisation etc. to reach internationaly recognized standards 0.02 0.03 0.05 0.06 0.06 0.06 0.02 0.30 TA to INNORPI to join global netw orks 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 Subtotal 0.03 0.05 0.08 0.10 0.10 0.11 0.03 0.50 C. Support for the establishm ent of a system for traceability Norm alisation, certification etc. Studies for needs for traceability, certification, accreditation and normalisation by sector/product/service 0.02 0.03 0.05 0.06 0.06 0.06 0.02 0.30 TA for the preparation of traceability/certification methods and manuals (Hallal, EPC Global, energy, skills and HR etc.) 0.02 0.04 0.05 0.07 0.07 0.08 0.02 0.35 Dissemination of manuals 0.01 0.01 0.02 0.02 0.02 0.01 0.01 0.10 Subtotal 0.05 0.08 0.12 0.15 0.15 0.15 0.05 0.75 Total 0.14 0.24 0.37 0.47 0.47 0.52 0.14 2.35 32 Component 2. Provision of financial and nonfinancial services to exporting enterprises (US$35.8million) Component 2.1. Competitiveness Support and Export Development Fund (CEDF) (US$23.5million) 17. The sub-component finances: 18. Matching grants to beneficiary enterprises (US$22 million): The matching grant fund will provide nonfinancial services, in the form of partial subsidies, to enterprises/groups/associations involved in the industries/sectors identified and supported by the project. It would specifically provide non-reimbursable co-financing between 50 to 75 percent for individual and professional associations, on a demand-driven basis. 19. Activities financed for the private sector include: (a). Support to enterprises to obtain special accreditation for exporting goods and services (electromechanical industries, medical and pharmaceutical services, ICTs, university education/training, high-value-added tourism such as medical tourism, bed and breakfasts, etc.) that are required by the importing countries; (b). Support to enterprises that have projects to open subsidiaries/agency in foreign markets (Maghreb, Middle East, Sub-Saharan Africa, etc.) with a special focus on those exporting to Sub- Saharan Africa and innovative firms; the fund will help enterprises develop strategies, demand assessment, marketing for establishing branches/subsidiaries abroad in high-priority or promising markets; (c). Support for exporting enterprises including SMEs and young enterprises (start-ups, etc.); those exporting innovative goods and services, enterprises producing organic products (appellation d’origine contrôlée, Halal, etc.); fresh and processed agriculture products with high value addition. The support will include coverage of some of the costs related to the development and marketing of new goods and services. In cooperation with chambers of commerce and private sector associations (TACT [Tunisian Association for Communication and Technology], UTICA [Tunisian Union of Industry, Trade and Handicrafts], etc.), CEPEX will organize annual business plan competitions to identify and support new enterprises or entrepreneurs proposing projects with strong innovative potential and able to respond to the new requirements of the regional or international market; (d). Support to enterprises operating in regions other than Tunis identified by the Government Tunisia Regional Development Zones initiative. The project will finance (i) an annual competition among projects originating from regions of Tunisia (outside Tunis) to identify those that are most promising; and (ii) will then provide technical assistance to enable them to develop and tap into the domestic market and then the export market; (e). Support to women entrepreneurs by financing: (i) an annual competition among projects developed by women to identify those that are most promising; and (ii) technical assistance to enable them to develop and tap into the domestic market and then the export market. At least 20% of the matching grants will be allocated to that category; (f). Support to enterprises for the hiring and capacity building of workers, particularly new graduates to be recruited; to involve them in the export process and increase their productivity 33 The project will cover 50 percent of the costs associated with training of new staff and young graduates to be hired by eligible enterprises; (g). Support to logistical operators to promote the development of partnerships between Tunisian and foreign operators (Business 2 Business meetings, training on the requirements for doing business in the logistics zones being created by the Ministry of Transport); training for domestic transport companies and consultants (transport rules and standards, so as to better manage administrative requirements, available IT systems and productivity building software – TMS [transportation management system], WMS [warehouse management system], barcodes, etc.). 20. Support CEPEX in implementing and managing the Matching Grant scheme (US$1 million). The project will finance technical assistance, training, equipment and the carrying out of communication and marketing campaigns (including the hiring of consultants that will work with CEPEX staff on a temporary basis to help implement the matching grant and provide them with on job training); 21. Monitoring and evaluation system of the Matching Grant scheme (US$0.5 million). The project will finance the provision of technical advisory services and goods to establish an M&E system of the Matching Grant scheme by following a group of enterprises throughout the project implementation period. Export Development Project Sub-component 2.1. Competitiveness and Export Development Fund Detailed Costs (US$ Million) Base Cost 2015 2016 2017 2018 2019 2020 2021 Total I. Investm ent Costs A. Capital increase for four w indow s (goods; services; innovation and regional dev.) 1.10 2.20 3.30 4.40 4.40 5.50 1.10 22.00 B. Fund m anagem ent 1. Personnel Financial management specialist 0.02 0.02 - - - - - 0.03 Procurement specialist 0.02 0.02 - - - - - 0.03 AT to support fund management - 0.05 0.05 - - - - 0.10 Subtotal 0.03 0.08 0.05 - - - - 0.16 2. Equipm ent Computer equipment 0.10 - 0.19 - - - - 0.29 Vehicles 0.10 0.10 - - - - - 0.20 Subtotal 0.20 0.10 0.19 - - - - 0.49 3. Communication plan 0.05 0.10 - - - - - 0.15 4. Training of staff - 0.04 0.04 0.04 0.04 0.04 - 0.20 Subtotal 0.28 0.32 0.28 0.04 0.04 0.04 - 1.00 C. Impact Evaluation of FIDEX 0.03 0.05 0.08 0.10 0.10 0.11 0.03 0.50 Total 1.41 2.57 3.66 4.54 4.54 5.65 1.13 23.50 Component 2.2. Pre-Shipment Export Finance Guarantee Facility (PEFGF/Dhamen Finance) (US$9.3 million) 22. One of the main obstacles to the development of Tunisian exports, particularly to new markets, is limited access to financing. The Government established with Bank support through the EDP I, a Pre-Shipment Export Guarantee fund managed by COTUNACE (Tunisian Company for the Insurance Export Credit) to provide risk mitigation guarantee for Pre shipment loans to promote the development of exports. 23. Activities under this sub-component will include: 34 24. Increasing the amount of the Pre-Shipment Export Finance Guarantee Fund by US$8 million with funds coming from the proceeds of the loan.21 Such an increase would help EFG further develop its activities into identified value chains and face increases in coverage requests. This would allow raising the guarantee ceiling from TND 750,000 for goods and TND 200,000 for services to TND 1 million (goods and services) per operation. 25. Technical assistance to simplify the guarantee mechanism and procedures. At present, guaranteeing a full cycle (pre and post-export) involves two different contracts: the pre-shipment guarantee contract for pre-financing and the buyer’s risk coverage contract. The project will finance legal experts to review the guarantee mechanism and contract and design a single contact and indemnity agreement covering the full export cycle in order to simplify the guarantee mechanism. 26. Technical assistance to improve the COTUNACE’s governance and risk monitoring approach of the PEFGF. The project will finance TA to review the governance of the fund in order to incorporate a risk monitoring/assessment and management system. This assistance will help review the procedures manual and write new procedures that will govern the guarantee risk monitoring. 27. Support the creation of a Foreign Establishment Guarantee product (Garanties pour l’Etablissement à l'Étranger). It is proposed to create a new product for the fund on a pilot basis to help Tunisian firms to set up representation offices in their destination markets in order to actively expand their client’s base and therefore internationalize more. 28. The proceeds of the loan would specifically finance for the PEFGF: (i) the development of a specific section in the PEFGF manual for this new guarantee product; and (ii) the operating costs and marketing campaigns costs to roll out the product. 29. Extend guarantee to exporting enterprises for securing eligible bonds from commercial banks. These guarantees will cover the risk associated with losses incurred by banks that offer signed commitments to enterprises in the form of contingent liabilities for the enterprises to be able to develop their exports. 30. Set up regional representatives and market the Dhamen finance in two regions outside Tunis. A pilot program is proposed, consisting of having one PEFGF/Dhamen finance representative in each of two selected underserved regions of Tunisia with high potential. The project will finance two experts to identify SMEs with export potential, to offer them export finance guarantee services and ensure that the operations are properly carried out. 31. Staffing and operating costs. The loan proceeds would specifically finance the staffing (one expert and one assistant), basic operating costs and marketing campaigns of experts assigned to PEFGF/Dhamen finance. 21 This number is set after the findings of a specific study completed on the current EFG (Étude Économique Conseil (July 2010). Analyse des institutions de promotion des exportations et du fonds de garantie de financement des exportations avant expédition en Tunisie, Rapport Final, Montréal, Canada). 35 Republique de Tunisie Export Development Project Sub-component 2.2. Pre-Shipment Export Finance Guarantee Facility (PEFGF-Dhamen Finance) Detailed Costs (US$ Million) Base Cost 2015 2016 2017 2018 2019 2020 2021 Total I. Investm ent Costs A. Capital increase 0.40 0.80 1.20 1.60 1.60 2.00 0.40 8.00 B. Technical assistance to simplify the guarantee mechanism and procedures 0.01 0.02 0.02 0.03 0.03 0.04 0.01 0.16 C. Technical assistance to improve the governance and risk monitoring approach 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 D. TA to design a Foreign Establishment Guarantee product 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 E. Setting up of regional representatives and market the Dhamen finance in tw o regions outside Tun 0.01 0.03 0.04 0.05 0.05 0.06 0.01 0.25 F. Fund m anagem ent 1. Personnel Expert assigned to Dhamen Finance 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.14 Assistant 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.07 Subtotal 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.21 2. Marketing campaigns 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.14 Subtotal 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.35 Total Investm ent Costs 0.49 0.94 1.37 1.81 1.81 2.25 0.49 9.16 II. Recurrent Costs A. Basic operating costs 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.14 Total Recurrent Costs 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.14 Total 0.51 0.96 1.39 1.83 1.83 2.27 0.51 9.30 Component 2.3. Strengthening CEPEX to become a more sustainable export development services provider (US$3 million) 32. National export promotion agencies are an important component of a national export strategy in many countries. Tunisia’s Export Promotion Agency (CEPEX) is a governmental institution under the Ministry of Trade and Handicrafts. Most of CEPEX’s activities are focused on strengthening the country’s image and marketing activities.22 It is almost fully funded by the Government with little private sector contribution. The objective is to support CEPEX to become a more sustainable provider of services to Tunisian export enterprises. CEPEX will be in charge of the management of the Matching Grant scheme CEDF earmarked for the provision of non- financial services to enterprises. The project will also help increase collaboration between CEPEX and the private sector, the gradual development by CEPEX of fee based services, the introduction of annual contributions from private enterprises, and the phasing in of private sector involvement in the governance and management of CEPEX. 33. The project will finance the following activities for CEPEX: 34. An institutional audit of CEPEX to come up with an action plan and options for reforms for CEPEX and a Public Private Dialogue (PPD) to agree on the way forward. The action plan will define CEPEX priorities and propose reforms (governance and operations) options to have it become an institution that is more focused on its customer base. It will also help CEPEX define a list of essential business services that it should provide directly and those that should be outsourced (based on the current best practices model, e.g. ProChile, MATRADE, etc.). Most importantly, the project will provide TA to organize PPD to discuss and validate the action plan by the Government in collaboration with the private sector. 35. Implementation of the action plan. The project will then provide technical assistance, institutional support, and goods for the implementation of the action plan. To ensure the long- 22 The services offered by EPAs are generally divided into four main categories: (i) building the country’s image (publicity, promotional events), (ii) export support services (training of exporters, technical assistance, capacity building), (iii) marketing (trade fairs, importer and exporter missions), and (iv) market studies and publications. 36 term viability of CEPEX, assistance to the project will be phased out and gradually be replaced by the funds that CEPEX is expected to generate by providing services to private enterprises and the contributions/membership fees from private enterprises. 36. Technical assistance to improve current CEPEX functions, particularly in the field of market studies and information system. The project will finance (i) a study that will map specific private sector needs and serve as a roadmap for the type of information to be generated by CEPEX; (ii) CEPEX to subscribe to international databases and digitizing the existing essential documentation available with CEPEX; and (iii) technical assistance and goods to develop an appropriate IT system in CEPEX, including the possibility of online registration to enable users to access data as well as the possibility of on-site consultation. Republic of Tunisia Export Development Project Sub-component 2.3. Strengthening CEPEX as an sustainable export development services provide Detailed Costs (US$ Million) Base Cost 2015 2016 2017 2018 2019 2020 2021 Total I. Investm ent Costs A. Institutional audit to update the tw o studies and to design an action plan 0.01 0.02 0.03 0.04 0.04 0.05 0.01 0.20 B. Public Private Dialog (PPD) to agree on reforms measures 0.02 0.03 0.05 0.06 0.06 0.06 0.02 0.30 C. TA, institutional support for the implementation of the action plan 0.04 0.07 0.11 0.14 0.14 0.16 0.04 0.70 D. TA to develop a client-focused results and M&E framew ork 0.02 0.03 0.05 0.06 0.06 0.06 0.02 0.30 E. TA to improve current CEPEX functions, particularly in the field of market studies 0.02 0.03 0.05 0.06 0.06 0.06 0.02 0.30 F. CEPEX to subscribe to international databases and digitizing the existing essent 0.03 0.05 0.08 0.10 0.10 0.11 0.03 0.50 G. TA and equipment develop an appropriate IT system in CEPEX 0.04 0.07 0.11 0.14 0.14 0.16 0.04 0.70 Total 0.18 0.30 0.48 0.60 0.60 0.66 0.18 3.00 Component 3: Support to selected ministries for the coordination and management of the Project (US$4.1 million) 37. This component will finance activities designed to strengthen the capacity of the Project Coordination and Monitoring Unit (PCMU). The project will finance the following activities: (i) training in procurement and financial management for staff of the PCMU and the key implementing agencies; (ii) consultancy services (a financial management consultant, an accountant, and an expert to assist the coordinator with implementation of the project) to enable the PCMU to successfully perform tasks such as the coordination of implementing agencies and the monitoring of project performance indicators, the provision of information and reports to the project Steering Committee and the World Bank; (iii) support to Steering Committee meetings; and (iv) IT and office equipment for the PCMU. 38. It will also support the Government, particularly the ministries of trade and industry, in the implementation of export development studies and strategies, including in particular: (i) procurement of equipment to connect the DQPC (Directorate of Quality and Consumer Protection) to Tunisia Trade Net (TTN); (ii) expert services for the DGCE (Directorate General of Foreign Trade) for the drafting of texts governing e-trade in Tunisia; and (iii) technical assistance and software to the DGCE to update its database on trade facilitation legislations and the preparation of a trade procedures manual/guide. 37 Republic of Tunisia Export Development Project Sub-component 3.1: Project coordination and monitoring Detailed Costs (US$ Million) Base Cost 2015 2016 2017 2018 2019 2020 2021 Total I. Investm ent Costs A. Project Staff Financial management specialist 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.12 Procurement specialist 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.12 Accountant 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.09 Subtotal 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.33 B. Equipments 0.05 0.17 - - - - - 0.22 C. Training of project staff 0.04 0.04 0.04 0.04 0.04 - - 0.20 D. Communication campagn 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.35 E. Steering Committee Meetings 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.28 F. Audit and other studies 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.28 G. Mid term review - - - 0.10 - - - 0.10 H. Gov. ICR - - - - - - 0.10 0.10 I. Monotoring and evaluation 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.35 J. Support to project implementation 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.70 K. TA to the DGCE and DQPC 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.91 Total Investm ent Costs 0.55 0.67 0.50 0.60 0.50 0.46 0.56 3.82 II. Recurrent Costs A. Basic operation costs for PIU 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.28 Total Recurrent Costs 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.28 Total 0.59 0.71 0.54 0.64 0.54 0.50 0.60 4.10 B. Project Financing 39. The lending instrument is an Investment Project Financing. 40. An IBRD loan of US$50 million equivalent is proposed. The Government’s and beneficiaries’ contribution is US$24.5 million equivalent, of which US$22 million is the matching grants beneficiary counterpart funding, and US$2.5 million is the Government’s contribution to the PCMU operating costs. 38 ANNEX 3: IMPLEMENTATION ARRANGEMENTS A. FINANCIAL MANAGEMENT Summary 1. The Third Export Development Project (EDP III) will be implemented by three agencies. (i) The MTH through a Project Coordination and Monitoring Unit (PCMU) will implement all activities related to Government entities (Tunisian Customs (TC), Ministry of Transport (MT), the National Institute of Standard and Intellectual Property (Institut national de normalisation et de propriété intellectuelle – INNORPI), i.e. Component 1 and Component 3; (ii) CEPEX will implement Sub-Component 2.1 and Sub-Component 2.3; and (iii) the Tunisian Company for the Insurance of Export Credit (Compagnie Tunisienne pour l’Assurance du Commerce Extérieur – COTUNACE) will implement the Pre-shipment Export Finance Guarantee Fund (PEFGF) under Sub-component 2.2. 2. During project preparation, a financial management (FM) capacity assessment of the three implementing agencies (MTH, CEPEX, and COTUNACE was carried out to determine if they comply with the Bank’s requirements under OP/BP10.00 for the project management. This involved: (i) field visits and work sessions with the three implementing agencies’ staff to have an understanding of their current FM systems and to discuss and agree on the FM arrangements to be in place during project implementation; and (ii) their response to the Bank FM questionnaire. 3. The FM assessment covered the human resources, the accounting system, the internal control mechanism, the external audit, the information system, and the capacities of the project reporting system. 4. The capacity assessment focused on ensuring that procedures and criteria are in place to ensure satisfactory financial management before any expenditure could take place and that mechanisms are in place to ensure adequate financial reporting as well as ex-post review after expenditures. The objective is to ensure that the funds will be used for their intended purposes. 5. The FM assessment concluded that financial management arrangements as set out for this Project satisfy the Bank’s minimum requirements and that financial management arrangements in place can provide, with reasonable assurance, an accurate and timely information on the progress of project implementation. 6. However, the following were the primary risks identified during the assessment: (i) matching grants financed under CEDF may be used by private companies for purposes other than those for which they are intended for; (ii) sub-loans financed and guaranteed by the PEFGF may be used for purposes other than those for which they are intended for; (iii) staff of CEPEX/CEDF and the PCMU accountant of EDP II are all consultants. Their contracts have been stopped with the closing of EDP II and they have therefore left with the knowledge they have accumulated in implementing matching grant schemes. These two entities will need to be reinforced with staff dedicated to the project; (iv) limited capacity of some financial staff in some beneficiary’s agencies; (v) institutional and organizational aspects due to number of entities may result in coordination problems, flow of information bottlenecks and reporting delays; and (vi) possible delays to produce and transmit financial statements and audit reports, due to the large number of beneficiaries involved in the project. 39 7. Several actions have been planned to mitigate these risks, in particular: (a) The Competitiveness and Export Development Fund will be executed under the overall supervision of a Director Committee, which would ensure (i) proper execution of the CEDF according to its operational manual; and (ii) approve grant requests; (b) The recruitment of a number of accounting consultants is deemed necessary. Their contracts will cover four months after the closing date to allow them to prepare the project financial report during the grace period; (c) Reinforce the Project Coordination and Monitoring Unit (PCMU) by selecting experienced FM Specialist and an accountant; (d) Build capacity of project staff members, with qualified executives and targeted training programs on project financial management procedures; (e) The operational manual for the project will be updated and adopted before effectiveness. It will clearly describe the interrelationships and the responsibilities of each party; and specific transmission of financial reporting procedures between the executing agencies and PCMU. The main control points should be: (i) eligibility criteria for companies to get matching grants from CEDF; (ii) follow-up of the reimbursement of expenses paid by companies under CEDF; (iii) eligibility criteria for companies to benefit of sub-loans financed under the Guarantee component and (iv) transmission of documents and periodic financial reporting from the executing agencies to the PCMU; (f) Close monitoring by the PCMU of transmission dates of financial statements and audit reports and entrust to the external auditor of CEPEX to audit CEPEX/CEDF component; (g) The PEFGF will be implemented by COTUNACE staff with the help of a selection committee [Risk Agreement Committee (Comité d'agrément des risques (CAR)) which is already functional in COTUNACE and has been used to implement the previous Bank-funded project (LN7239-TN). The project will finance the recruitment of international and local experts to assist and provide on the job training to COTUNACE staff to implement the PEFG Fund. Resources have been allocated in the project under Sub-Component 2.2. 8. Given the set of measures that will be taken to mitigate identified risks and weaknesses, the financial management residual risk at this stage is deemed moderate. Country and Project Issues 9. The country's overall system. The 2010 PEFA concluded that the legal and administrative framework for public financial management (PFM) is sound and offers a solid level of assurance regarding the reliability of information and a strong control environment; however, the report also identified transparency and accountability failures notably in the preparation of the budget, as well as in the execution reporting. Good progress has been made in improving transparency since the January 2011 revolution. . 10. Governance problems have been a key factor preventing higher growth and employment. Corruption, cronyism and anti-competitive practices helped to foment popular discontent that led to the overthrow of the previous regime, as well as lack of adequate participation, transparency and accountability. Redressing these issues is at the heart of the political transition and the current Government’s reform program. 40 11. Past Experience in the sector. This project is the third one financed by the World Bank in the sector and implemented by the Ministry of Trade and Handicraft. The Ministry of Transport, which has executed two projects financed by the Bank (Transport Sector Investment 1 and 2). Thus, the executing agencies and beneficiaries have acquired significant experience in managing projects implemented using external financing. Therefore, this Project can capitalize upon the experience acquired by them. DETAILED ASSESSMENT 12. The evaluation confirmed that the Project will be implemented in Tunisia using partially the country-based systems governed by the budgetary legislation, and will use the existing skills and human resources within the implementing agencies. The Project expenditures will be part of each agency’s budget. A financial management capacity assessment of the three implementing agencies has identified the following main characteristics: Ministry of Trade and Handicraft 13. The financial management system in place at MTH is based on the principles and procedures defined by the legal framework applicable to the public sector and, more specifically, to the Government institutions. The primary characteristics of this system are as follows: 14. Budgeting System. MTH presents an annual budget for financial commitments. In terms of funding sources, the overall budget relies on contributions from the National Government as well as on funds made available to them by various donors in order to carry out specific projects. The budget is submitted to the Ministry of Finance for approval and should be approved by the National Parliament by December 31 each year and passed as an appropriation bill. Budgetary control is implemented through an IT system (ADEB). 15. Internal control. The internal control system in place within the MTH complies with the Government system and is deemed satisfactory by the World Bank. Indeed, the MTH guarantees the separation of the functions through several controls. 16. External audit. The project will be annually audited by the General auditor of the Ministry of Finance. For the last project implemented by the MTH, the audit reports of the last three years resulted in the certification of the financial statements. 17. Information system. The information system which relies upon public accounting and based upon retracing the execution of the public expenditures, does not allow for the production of the project financial reports required by the Bank. A separate accounting system has therefore been set up for EDP II at PCMU. This same accounting system will be used for the EDP III. CEPEX 18. CEPEX is a public enterprise (Etablissement Public à Caractère non-Administratif (EPNA)), that is financially autonomous. It operates under the tutelage of the MTH. As the previous Bank-financed projects have been well managed by CEPEX, this Project will have the same institutional arrangements. The Project expenditures will be part of CEPEX budget. 19. The primary characteristics of this system are as follows: 20. Staffing. The project implementation will use the existing skills and human resources within CEPEX. However, CEPEX will hire local experts to assist with the implementation of the matching grant scheme. 41 21. Accounting system. CEPEX uses an accrual accounting method as required by the Accounting System for Enterprises promulgated by Law 96-112 of December 1, 1996. Its financial statements are reconciled by December 31 of each fiscal year as follows: a balance sheet statement; an income statement; a statement of treasury flows; and financial statement notes. The required data and information to produce Interim Unaudited Financial Reports (IUFRs) of the project, which needs a cumulative statement since the beginning of the implementation, will be prepared by the CEPEX, and then sent to the PCMU for the consolidation of the IUFRs. 22. Management information system. The management information system of CEPEX is well developed, with an adequate level of computerization. The financial management aspects are integrated into its information system. The accounting system used for a previous Bank- financed project (EDP II) will be used to produce the IUFR. 23. Internal Control. The internal control system set within CEPEX guarantees the separation of the functions through several levels of independent controls: (i) formal organizational structure of the three entities, which clearly separates specific functions from independent control mechanisms; (ii) the authorization by their General Managers, who are the signatories of all payment orders; (iii) the control performed by the state controller; (iv) the Central Bank of Tunisia as payment department; and (v) the tutelage of the Ministry of Trade, and Ministry of Finance, in accordance with the legislation and regulations. This internal control system is deemed satisfactory by the Bank. 24. In addition, CEPEX has an internal audit department, and the financed project-related transactions will be subject to its regular reviews. The audit department has a well-established statement of mission objectives which include, inter-alia, ensuring that procedures set in the operational manual are enforced, conducting internal audit missions, and reinforcing the coordination among the various operating aspects of this entity. 25. External audit. The financial statements of CEPEX are subject to an annual external audit by a member of the Tunisian Institute of Certified Public Accountants. The audit reports of the last three fiscal years did not reveal significant issues. Also, the project audit reports of the last three years did not reveal significant issues. 26. Assessment of financial arrangements including the accounting system and accounting policies and procedures, budgeting system, reporting, staffing, internal controls policies and procedures, internal auditing and external auditing arrangements of the three implementing agencies reflected that these arrangements are satisfactory and meet the Bank’s minimum requirements. These procedures are well known by the Bank since this is the third project with the three implementing agencies. COTUNACE 27. The Tunisian Company for the Insurance of Export Credit (Compagnie Tunisienne pour l'Assurance du Commerce Extérieur) is a limited liability company with almost 50 percent of its capital held directly and indirectly by the Tunisian Government and the remaining capital held by Tunisian banks and insurance companies. It operates under the supervision of the Ministry of Finance and is thus subject to the regulations applicable to public participation companies. It is also subject to supervision that applies to insurance companies. Its accounting system was upgraded in 1997 and 2000 through the adoption of the new accounting system for companies promulgated by Law and is certified ISO 9001, and is thus in conformity with generally accepted 42 international accounting standards. The management information system is quite developed, with an adequate level of computerization. The downstream control system is operational and is materialized through the General Secretary, the Internal Auditor, and the management committees. In addition to these controls ensured by the internal structures, there are controls performed by external organs such as Government Auditor, Government Accounting Office, High Control Committee, Ministry of Finance, and Ministry of Commerce. Every three years an auditor who belongs to the Tunisian Institute of Certified Public Accountants is designated, in conformity with the procedures decreed by the regulations in force. The audit reports of the last three fiscal years have been issued without any qualification on the financial statements. Given these characteristics, the financial management system can be considered generally satisfactory even if some improvements should be introduced to reach the required efficiency. Also, for the previous Bank-financed project it implemented, COTUNACE has (a) developed a procedure manual for the PEFGF; (b) computerized its budgeting system and its integration into the accounting application in order to set up an efficient management control system; (c) developed a system of global integration of computer applications aimed at eliminating redundancies and generating automatic control panels for executive management. 28. As the previous Bank-financed projects have been well managed by COTUNACE, this new project will assume the same institutional arrangements. The Project expenditures will be part of COTUNACE budget. However COTUNACE will need (i) to update the Project Procedures Manual in order to take into account new changes to the PEFGF; (ii) train its staff that will be implementing the PEFGF as the previous project relied on consultants who left as the project closed. The updating and adoption of the project manual is an effectiveness condition and the project has allocated resources to provide capacity building to COTUNACE and experts to improve the risk monitoring system of the PEFGF. 29. In addition, COTUNACE audit reports reflecting its annual financial statements and operating results will be remitted to the Bank within six months from the end of each fiscal year. Implementing Entities Institutional and implementation arrangements 30. The following institutions are the beneficiaries of the project activities: CEPEX, COTUNACE, INNORPI, MTH, MT, STAM and TC. The project will be implemented over a period of six years starting in June 2014. Regarding project management, implementation and coordination, the three following structures are foreseen: 31. Steering Committee. The Project will be implemented under the supervision of a Steering Committee chaired by the MTH. This committee will consist of representatives of the Ministry of Finance, Ministry of Industry and Technology, Ministry of Transport, the Association of Exporters from UTICA, CEPEX, COTUNACE, and INNORPI. The secretariat of the Steering Committee will be the MTH through the PCMU. The Steering Committee will meet twice a year or more often if necessary. The project will finance the committee’s activities and meetings. The Steering Committee will facilitate implementation of the project by approving its annual report, implementation plans and budget. Implementation of Project components 32. Project Coordination and Monitoring Unit (PCMU). The Project Coordination and Monitoring Unit (PCMU) of the Ministry of Trade and Handicrafts will have the overall 43 responsibility for coordinating the project. The PCMU will have a specific responsibility in implementing all activities related to Government entities (Customs, MT, INNORPI) under Component 1, and Component 3 of the project. The PCMU will have the following staff: (i) a project coordinator appointed by the MTH; (ii) a procurement specialist; (iii) a financial management specialist; (iv) an accountant; and (v) a monitoring and evaluation specialist. The project coordinator and the procurement specialist are in place and they have worked on the previous project and have also been working on this project preparation. The financial management specialist and the accountant will be hired prior to effectiveness. 33. The PCMU will have the following fiduciary responsibilities: i. It will be responsible for managing the project funds and related financial transactions, except CEPEX/CEDF and PEFGF components that will be managed by CEPEX and COTUNACE, respectively. The PCMU accounting and financial department will be in charge of following on the project finances, including the project accounting functions and reporting. In general, this unit is responsible for maintaining a financial management system acceptable to the Bank, fulfilling the World Bank procedures with respect to procurement, disbursements and financial monitoring. ii. It will prepare consolidated annual financial statements of the project and will be responsible to prepare and furnish to the Bank not later than forty five (45) days after the end of each calendar quarter, consolidated interim unaudited financial reports (IUFR) for the Project covering the quarter, in form and substance satisfactory to the Bank. The PCMU will also submit the audit report to the Bank, via the Ministry of International Cooperation and Investment, no later than six months following the closing of the fiscal year subject to the audit. The audit’s TOR will be prepared and submitted to the Bank for its no objection. 34. CEPEX and CEDF. CEPEX will be responsible for implementing Project Sub- Component 2.1. Competitiveness and Export Development Fund (CEDF) and Sub-Component 2.3 Strengthening the Export Promotion Center (CEPEX). CEPEX will implement CEDF with the necessary autonomy in financial management, procurement, and monitoring and evaluation. 35. The fiduciary functions of CEPEX including accounting, auditing and procurement are deemed adequate. They have been used to implement part of the previous Bank-financed project. However, CEPEX will hire local experts to assist with the implementation of the matching grant scheme. The fund will be implemented under the supervision of a Selection Committee chaired by the Director of CEPEX and made up of representatives of the MTH, the ministries of finance and industry, COTUNACE and representatives of private sector associations (UTICA, TACT, FIPA [Foreign Investment Promotion Agency]. This Committee will be responsible for ensuring: (i) proper implementation of the fund in accordance with its operations manual; (ii) approving grant and program requests submitted by the fund management technical team; (iii) analyzing annual reports, implementation plans and budget before they are submitted to the CEPEX Board of Directors for adoption. CEPEX, through the fund’s technical team, will be primarily responsible for promotion of the program, support for enterprises and professional associations, supervision and monitoring the results of these plans. 36. COTUNACE. COTUNACE will implement PEFGF under Sub-Component 2.2. It already has substantial capacity in providing export insurance and post-shipment guarantees. Its capacity to successfully manage the PEFGF will also be strengthened under the project. The fiduciary functions of COTUNACE including accounting, auditing and procurement are deemed 44 adequate. They have been used to implement the PEFG under two previous Bank-funded projects. 37. Focal points. The project beneficiaries (Customs, Ministry of Transport, INNORPI and STAM) will be individually responsible for decisions affecting their respective components. Each will designate a focal point who will work directly with the PCMU for the implementation of activities and for the preparation of consolidated Project reports by the PCMU, particularly for the World Bank and the Steering Committee. The work of the focal points will be evaluated on the basis of terms of reference. They will receive technical assistance from the project, training as well as the equipment required for their work. Flow of information: 38. The flow of accounting transactions will take place as follows: i. The PCMU is responsible for maintaining the accounting and all supporting documents related to the centralization and the consolidation of the financial and accounting data of the project except those implemented under CEPEX sub-components. ii. CEPEX will keep the relevant documents for different expenses under the project sub- components. This includes supporting documents related to funds received for the financing of these expenses. iii. COTUNACE will be responsible for information pertaining to the PEFGF. 39. The project operational manual will provide a detailed description of the flow of information. Project Accounting System 40. The project general accounting principles are as follows: i. The project accounting will cover all the project sources and uses of funds, including payments made and incurred expenditures. All project-related transactions (whether they imply cash expenditures or not) will be included in the accounting system and reports. The disbursements made through the three designated accounts will also be included in the project accounting system. The counterpart funds will be indicated separately. ii. The project transactions and activities will be distinguished from executing agencies’ other activities. Each of the executing agencies will undertake the accounts bookkeeping for the components under their responsibilities. Financial statements summing up the project commitments, receipts and expenditures will be settled biannually by each implementing agency, according to relevant patterns and forwarded to the PCMU, supported by documentary evidence. The PCMU will consolidate all data using the computerized accounting system bought for the previous Bank-funded project implemented by the same PCMU (Loan no. 7239-TUN dated July 2, 2004). iii. The project chart of accounts will be compliant with the expenditure classification and sources of funds indicated in the project documents (project procedures manual, project evaluation document, COSTAB) and general budget breakdown. The chart of accounts should allow data entry in order to facilitate the project expenditures financial monitoring by component and sub-component, expenditures allocation and category of 45 disbursement. Funds Flow and Disbursement Arrangements 41. The proceeds of the loan will be disbursed in accordance with the World Bank guidelines and will be used to finance project activities through the disbursement procedures currently in use: i.e. withdrawal application for direct payment, for special commitments and/or reimbursement accompanied by appropriate supporting documentation or using Statement of Expenditures (SOEs) for amounts less than predefined thresholds for each expenditure category, in accordance with the procedures described in the Disbursement Letter and the World Bank's disbursement manual. Following World Bank standard disbursement procedures, disbursements will end four months after the project closing date. Interim Unaudited Financial Reports and Annual Financial Statements will be used as a financial reporting mechanism and not for disbursement purposes. The minimum value for reimbursement, special commitment and direct payment withdrawal applications would be the equivalent of 20% of the ceiling advance of the designated accounts. The Bank will honor eligible expenditures completed, services rendered and delivered by the Project closing date. A four-month grace period will be granted to allow for the payment of any eligible expenditure incurred before the Loan Closing Date. 42. Each implementing agency (PCMU, CEPEX and COTUNACE) will be responsible for submitting the appropriate supporting documentation for services rendered under the components and sub-components they are responsible for, either to the Central Bank of Tunisia (CBT), so that payments can be made from the Designated Account (DA) opened for that purpose, or submitting applications for direct payment to the Bank. 43. Designated Account (DA). To ensure that funds are readily available for project implementation, the Government will have to operate three designated accounts within the CBT. The first DA (A) will cover expenditures under Category 1 of the Project. The second DA (B) will finance CEPEX activities under Category 2 and 3. The third DA (C) will finance COTUNACE expenditures under Category 4a and 4b. Payments on the first DA will be conducted by the CBT upon a joint instruction from the beneficiary focal point and the PCMU for activities implemented under its components; payments on the second DA will be made by the CBT on the instructions of CEPEX; and payment on the third DA will be made upon instruction from COTUNACE. 44. The Ceiling of the Advance to the Designated Accounts A, B and C (PCMU, CEPEX and COTUNACE), will be Euro 2 million for each one. The CBT will be responsible for submitting replenishment requests on a monthly basis, accompanied by appropriate supporting documentation for expenditures made and reconciled bank statements. 45. Statements of expenditures. All requests for withdrawal of the loan funds will be fully documented, except for: (i) expenditures under contracts with an estimated value of US$500,000 or less for goods; (ii) US$100,000 or less for consulting firms; and (iii) US$50,000 or less for individual consultants or training programs, and matching grant, which will be claimed on the basis of statement of expenditures. 46. With regard to the PEFGF component, the IBRD loan proceeds, equivalent to four months of expected guarantee coverage, would be disbursed into a special account in the Central Bank. These proceeds would be transferred into an escrow account against the issuance of guarantee certificates by COTUNACE. The special account would be replenished (up to the 46 US$8 million equivalent allocated for the PEFGF Fund) upon issuance by COTUNACE of guarantee certificate equivalent to the initial balance of the special account. 47. Documentation of the expenditures listed above will be maintained and will be made available for review by Bank implementation support missions and by project auditors. 48. Counterpart funds will be available from the Government budget or autonomous executing agencies budget. Payments from the budget will be made under the responsibility of the executing agencies in accordance with the applicable Tunisian procedures and legislation; and in a timely manner so as to ensure the good execution of the project. Allocation of IBRD Loan Proceeds Category Amount of the Loan Percentage of Expenditures to Allocated be financed (expressed in EURO) (inclusive of Taxes) (1) Goods, non-consulting 10,209,250 100% services, and consultants’ services, Training, and Operating Costs under Part 1 and Part 3 of the Project. (2) Goods, non-consulting 2,200,000 100% services, and consultants’ services, including Training, under Part 2.C of the Project. (3) Matching Grants under Part 17,000,000 100% 2.A of the Project (4.a) Contribution to the Export 6,000,000 100% Finance Guarantee facility under Part 2.B of the Project (4.b.). Goods, non-consulting 800,000 100% services, and consultants’ services, Training, and Operating Costs under Part 2.C of the Project (5) Front-end Fees 90,750 Amount payable pursuant to Section 2.03 of the Loan Agreement in accordance with Section 2.07 (b) of the General Conditions TOTAL AMOUNT 36,300,000 47 Summary of Funds Flow Diagram IBRD Loan PCMU CEPEX/CEDF Designated COTUNACE/PEFGF Designated Account A in CBT (for Account B in CBT for CEDF and Designated Account C in CBT for activities for MT, TC, INNORPI, One CEPEX (CEPEX FM and PS) PEFGF FM and one PS Payment of Contractors, Service Providers or Financial Institutions for PEFG Legends:         Application for withdrawal      IBRD transfer to DAs      PCMU payment to Providers Providers Request for payment 48 Financial Reporting 49. The PCMU will be in charge of preparing the following financial reports: (i). Interim Unaudited Financial Reports (IUFRs). The project interim unaudited financial reports should include data on financial position. The reports will include: (i) statement on sources and uses of funds for the reporting period, and with a cumulative figures including a statement on project balances of accounts; (ii) a statement on use of funds by component and expenditure category; (iii) reconciliation statement of designated account, and (iv) budget analysis indicating execution forecasts and discrepancies. These reports will be produced by PCMU accounting system relying upon the consolidation of the accounting and financial data emanating from the execution agencies. They will be prepared each quarter and transmitted to the Bank 45 days after the end of each quarter. The table templates are included in the project manual of procedures annex. (ii). Project financial statements (PFS). The project financial statements will be annually produced by the PCMU. The PFSs should include (i) cash flow statement, (ii) closing financial position, (iii) status of on-going commitments, and (iv) analysis of payments and withdrawals of loan funds. (iii). Accounting system. PCMU uses Excel sheets to prepare these reports by extracting the information from the accounting system. External Audit 50. The Project’s financial statements, including the reconciliation of the three designated accounts (DA) will be audited annually by an auditor, acceptable to the Bank, in accordance with internationally accepted auditing standards. The audit will cover all project aspects, all operations implemented under the EDP III and sources and uses of funds. It will also relate to financial operations and internal control, and financial management system. 51. The auditor will produce: a) an annual audit report including his opinion on the project annual financial statements, and b) a report on internal control weaknesses checked while performing his task. The reports will be addressed by the MICI to the Bank within six months starting from closing date of each fiscal year subject to the audit. The auditors’ terms of reference (TORs) will be prepared by PCMU and cleared by the Bank before the engagement of the auditor. TORs will include both the audit of the financial transactions and an assessment of the internal control. The external auditor of CEPEX could be appointed as the project auditor. In addition, CEPEX and COTUNACE audit reports (entity) reflecting their annual financial statements and operating results will be remitted to the Bank within six months from the end of each fiscal year. Implementation Support Plan 52. The frequency and scope of World Bank implementation support missions will be adapted to the needs of the Project. These missions will take place every six months, but may be more frequent, if needed. 49 Actions for implementation Actions to be Taken By when Update and adopt the current project operations manual Effectiveness Recruitment of a procurement, FM specialist, and accountant for the Effectiveness PCMU Establishment of a Matching Grant Selection Committee by CEPEX Effectiveness Establishment of a Fund Management Technical Team by CEPEX Effectiveness Adoption of the Matching Grant Manual and PEFGF manual by the Effectiveness project implementing entities Building the capacities of project staff members, with qualified First year of executives and targeted training programs on project financial project management procedures implementation B. PROCUREMENT 53. Procurement arrangements of the EDP III23 will be similar from those of the previous Bank-financed Export Development Project. There was, however, a need to simplify the administrative structure of the project, reduce the number of reporting counterparts and ensure more synergy between the PCMU and the focal points within the various beneficiaries. This has been achieved by consolidating the procurement management responsibilities under only three executing agencies: (i) the PCMU at the Ministry of Trade and Handicraft; (ii) the CEPEX; and (iii) the COTUNACE. This is deemed to be more efficient particularly for the coordination of the project implementation – which was the weak point under the previous project. The role of each stakeholder will be detailed in the project manual. 54. The PCMU will be responsible for all procurement activities under Component 1 (three sub-components), and Component 3. The CEPEX as an autonomous agency will be responsible for the implementation and procurement management Sub-components 2.1 (Competitiveness and Export Development Fund, capitalization and management) and 2.3 (Strengthening of CEPEX). It will also ensure that procedures are consistent with the provisions of the Loan Agreement for the whole project. 55. COTUNACE will be responsible for procurement related to Sub-component 2.2. Procurement activities under this Sub-component are very limited. COTUNACE has only four 23 All goods and non-consulting services will be procured in accordance with the “Guidelines: Procurement of Goods, Works and Non-consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 2011 and the provisions of the Loan Agreement. All consultants’ services will be procured in accordance with the “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 2011 and the provisions of the Loan Agreement. The Borrower shall ensure that the Project is carried out with the provisions of the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants” dated October 15, 2006 and revised in January 2011. 50 procurement activities under the project which are: (i) the recruitment of legal experts to review the guarantee mechanism contract and to design a single contract and indemnity agreement covering the full export cycle in order to simplify the guarantee mechanism; (ii) the recruitment of a consultant to review the governance of the PEFGF in order to incorporate a risk assessment, monitoring and management system; (iii) the recruitment of consultants for the development of a specific section in the PEFGF manual for a new Foreign Establishment Guarantee product; and (iv) the hiring of two experts to prepare the business plan for the extension of PEFG finance into two selected regions of Tunisia. 56. Since 2010, COTUNACE is no longer subject to public procurement code and has been following commercial practices. COTUNACE is annually audited by an independent auditor. Since COTUNACE's foreseen activities will only consist in hiring consultants to be providing TA to COTUNACE (as indicated in the paragraph above), it is expected that COTUNACE would have the capacity to carry out and manage properly the procurement under this financing, provided that COTUNACE staff is trained on the 2011 consultants relevant procedures (selection of Individual Consultants, Quality and Cost Based Selection and Consultants' Qualifications Base Selection). 57. Within COTUNACE, the Sous-direction de Moyens Généraux is the service in charge of procurement for COTUNACE with the TA of relevant COTUNACE's services if needed. For the Project, COTUNACE will establish an ad hoc committee chaired by the CEO that will be handling the consultant's selection process. In conclusion, for COTUNACE the procurement risk is rated "Moderate". 58. Beneficiaries entities (INNORPI, Customs, MT and STAM), will be involved in the implementation of specific project activities and will have designated focal point to interact with the PCMU. They will be required to provide all the necessary technical inputs, prepare bidding documents and requests for proposals in coordination with the PCMU. This includes technical specifications for goods and terms of references of consultants, cost estimates for the procurement planning. They will be required to do technical evaluations of bids and proposals, as well as certify that goods were delivered and services rendered properly, in coordination with the PCMU and its procurement specialist. 59. The evaluation undertaken during appraisal covered: (i) the structure and procedures of the PCMU within the MTH and CEPEX; (ii) the qualifications and experience of staff who will potentially be in charge or involved in procurement; (iii) the flows of information between PCMU and beneficiary agencies; and (iv) the status/capabilities of the executing agencies. The diagnostic includes all the procurement processes (planning; preparation of tender and consultation documents; reception and evaluation of bids; finalization and signature of contracts; archival of all documentation in order to check the compliance of procedures with the loan agreement). 60. Overall, the assessment conclusion is that the three executing agencies, PCMU/MCH, COTUNACE and CEPEX, have the capacity to carry out and manage project procurement provided they mobilize adequate capacity and that the recommended actions are taken. This does not apply to the Procurement Plan which has been provided and approved at negotiations. The overall procurement risk has been rated as Substantial. 61. The detailed capacity assessment report is available in project records. The summary assessment and recommendations are shown in the table below. 51 Analysis of Procurement Capacity Issues/Risks Mitigation Measures 1. Organization. Stakeholders should have their An updated Project Operations Manual Management of the project involves respective responsibilities will be adopted by project effectiveness. three Executing Agencies: clearly defined. The POM will clearly (i) define the role of (i) the Project Coordination and each Executing Agency, and (ii) the Monitoring Unit (PCMU) at the requirement that Beneficiary entities Ministry of Trade and Handicraft; designate focal points to provide the (ii) CEPEX; (iii) COTUNACE. necessary support during the procurement processing and data for ease of consolidation of the reporting by the PCMU. 2. Facilities, Support Capacity and There are concerns about: For the PCMU, it is agreed to (i) have an Staffing/Professional Experience. (i) The full availability of the additional procurement specialist - PCMU has only one (civil servant) staff and capacity to cope alone recruited by Effectiveness and (ii) ensure procurement specialist who worked with the new workload that the that there is adequate office space and on previous project but lacking consolidation of implementing equipment to accommodate the staff. motivation. agencies implies. These new staff will have to attend a (ii) Capacity to comply with specific training on Bank procedures. - CEPEX staff lack experience in Bank procedures and to produce procurement under multilateral adequate procurement (ii) by effectiveness, CEPEX will financing and particularly the World documentation and in a timely establish a matching grant management Bank. manner. technical team, including by designating (iii) The implementation will be staff members who will be in charge of seriously delayed. procurement management and ensure that the staff will have time devoted in priority to the project. The existing staff will need to attend a specific training on Bank procedures. (iii) Ensure close involvement of procurement staff based in Tunis to provide day to day advice to the project unit and individual components. 3. Record Keeping and Filing The EAs will not have all the Ensure that instructions are included in System. necessary and mandatory the Operation Manual and training is Procurement records will be kept documentation to present for given to ensure that project specific files under the custody of the units each contract during post are kept for all procurement and related responsible within each of the three reviews. transactions and recorded contract by Executing Agencies’ activities. The contract. documentation is not always filed in an adequate manner to allow verification of the compliance with agreed procedures. 4. Monitoring/Control Systems. Procedures used are not fully Have the Procurement section of the Departmental Tender Boards are not compliant with the Bank ones. Operation Manual, describing in a clear always familiar with procurement manner the adequate procedures to follow provisions of the loan agreement and for the implementation of the project. their decisions are often based on the sole interpretation of national regulations. 5. Capacity to meet Bank’s Reporting Report not provided timely and Confirm in each EA who is the Requirements. in adequate format. person/staff responsible for the reporting as well as to define clearly the content of the report and the contribution of the components managers. 52 62. The applicable Thresholds by methods and for prior review are detailed in the Table below. These thresholds are meant to be used for the procurement planning at the beginning of the project implementation. They could be revised after each Procurement Post Review depending on the findings and recommendations of the reviewer in view of the improvement (or otherwise) of the procurement implementation and the subsequent risk assessment. Prior Review Thresholds (in USD) Procurement Type  Substantial Risk Implementing Agency  Goods  1 million  Non‐consulting Services  1 million  Consulting Firms  0.5 million  Individual Consultants  0.2 million  Procurement Method Thresholds (in USD) Goods and non‐consulting services ICB * NCB Shopping Tunisia  > 3 million  ≤ 3 million  ≤ 200,000  Summary Procurement Plan for the first 18 months of project implementation Goods and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting: Goods 1 2 3 4 5 6 7 8 9 10 11 Estimat Domesti Prior Estimate Packa Pre-or Estimated ed c or d Ref Contract ge Procureme Post- Contract Comm Amount Preferen Post Contract N° Description Numb nt Method Qualificati Signature ents in 000 ce Revie Completi er on Date US $ (yes/no) w on Date Component I. Support to improve the business climate for trade competiveness and the diffusion of technology and innovation Sub-component I.1. Restructuring and modernization of customs Equipment, software and licenses for the risk a 2 1,700 ICB Non 1/30/2016 5/29/2016 management priori system (SINDA Select 2, SAS,) IT equipment (GPS/GPRS) for Direct a 3 geo-localization of 700.0 Non 1/15/2015 5/15/2015 Contracting priori custom mobile units Acquisition of SAS 4 300.0 AOI Non post 9/15/2015 3/13/2016 Platform Acquisition of Gate A 5 In/ Gate Out for 800.0 AOI Non 6/15/2015 1/15/2016 priori Rades Port 53 2. Consulting Services (a) List of consulting assignments with short-list of international firms. 1 2 3 4 5 6 7 8 Estimated Estimated Estimated Ref Procureme Review by Bank Contract Com Contract Description Amount in Contract N° nt Method (prior/Post Completion ments US$ '000 Signature Date Date Component I. Support to improve the business climate for trade competiveness and the diffusion of technology and innovation Sub-component I.1. Restructuring and modernization of customs Upgrading the Customs Information (SINDA) TA to conduct a diagnostic to 1 assess the system (audit of its SFQC 200.0 Prior Review 8/20/2015 12/18/2015 functionality, safety etc.) Introduction of a comprehensive computerized risk management system TA for risk management and to develop a new selectivity 2 SFQC 300.0 Post Review 4/30/2016 10/27/2016 module including dynamic scoring Development of the authorized economic operator (AEO) approach Experts to develop methods for auditing enterprises to qualify 3 them for AEO status and SFQC 600.0 Prior Review 4/30/2016 10/27/2016 training for a core group of customs officials Support for the improvement of procedures manuals and guidelines. TA for conducting an inventory 4 SFQC 500.0 Prior Review 4/30/2016 10/27/2016 of all procedures Operationalization of Logistic Zones procedures and computerization TA for the preparation of regulations and standardized 5 SFQC 700.0 Prior Review 15/12/2016 15/6/2017 operating procedures and publication guides Sub-component 1.2. Improvement of trade logistics Support the MT to implement its Logistics Zones development strategy TA to the MT and the port authority to implement its pilot logistic zone project in Rades 6 SFQC 400.0 Prior Review 6/20/2015 30/6/2016 (including updating of cahier des charges and the profitability conducted in 2009 TA to the MT for the implementation of measures 7 recommended by the its SFQC 400.0 Post Review 6/20/2015 30/6/2016 Logistics Zones development strategy TA to the MT and the port 8 authority to implement its pilot SFQC 600.0 Prior Review 1/30/2016 30/1/2017 logistic zone project in Rades Elaboration et mise en œuvre 9 d'un plan pour la promotion de SFQC 350 Post Review 12/2/2015 31/12/2016 la logistique internationale Sub-component 1.3: Support innovation and its dissemination Support for INNORPI for the dissemination of innovation, IPR and the assessment of export compliance TA to develop a monitoring system (veille technologique) 10 on Industrial Property and SFQC 200.0 Post Review 2/1/2016 3/31/2016 dissemination of technological information 54 1 2 3 4 5 6 7 8 Estimated Estimated Estimated Ref Procureme Review by Bank Contract Com Contract Description Amount in Contract N° nt Method (prior/Post Completion ments US$ '000 Signature Date Date TA to implement a technology patents monitoring system 11 QC 200.0 Post Review 2/1/2016 3/31/2016 (veille technologique) for exporting SMEs Capacity building of INNORPI in quality assessment and export compliance for the label NT to be accepted internationally Experts to support to INNORPI to improve and expand quality 12 SFQC 230.0 Post Review 2/12/2015 12/31/2016 assessments on industry and export compliance Component 2: Provision of financial and nonfinancial services to exporting enterprises Sub-component 2.1. Competitiveness and Export Development Fund 13 500.0 End of the Impact Evaluation of CEDF SFQC Prior Review 15/12/2015 Project Sub-component 2.3. Strengthening CEPEX to become a more sustainable export development services provider Institutional audit and to design 14 SFQC 300.0 Prior Review 1/4/2015 6/30/2015 an action plan Component 3. Support to selected ministries for the coordination and management of the Project Multi ple Consultant to develop a indivi 15 Monitoring and Evaluation SFQC 450.0 Prior Review 3/30/2016 Project End dual system for the project contra cts 1 2 3 4 5 6 7 8 Expected Estimated Expected Ref Procureme Review by Bank Contract Com Contract Description Amount in Submission/Ope N° nt Method (prior/Post Signature ments US$ '000 ning Date Date Component I. Support to improve the business climate for trade competiveness and the diffusion of technology and innovation Sub-component I.1. Restructuring and modernization of customs Upgrading the Customs Information (SINDA) TA to conduct a diagnostic to 1 assess the system (audit of its SFQC 200.0 Post Review 4/8/2015 6/6/2015 functionality, safety etc.) Introduction of a comprehensive computerized risk management system TA for risk management and to develop a new selectivity 2 SFQC 100.0 Post Review 6/8/2015 8/6/2015 module including dynamic scoring TA to set up a post review 3 SFQC 200.0 Post Review 7/8/2015 9/6/2015 system Development of the authorized economic operator (AEO) approach Experts to develop methods for auditing enterprises to qualify 4 them for AEO status and SFQC 200.0 Post Review 6/8/2015 8/6/2015 training for a core group of customs officials Setting up a department in 5 SFQC 100.0 Post Review 7/8/2015 9/6/2015 customs in charge of AEO Experts to upgrade customs 6 SFQC 200.0 Post Review 7/8/2015 9/6/2015 code to international standards Support for the improvement of procedures manuals and guidelines. TA for conducting an inventory 7 SFQC 200.0 Post Review 8/9/2015 10/7/2015 of all procedures TA to carry out a critical 8 analysis of processes and a SFQC 150.0 Post Review 9/1/2015 10/30/2015 subsequent streamlining 55 1 2 3 4 5 6 7 8 Estimated Estimated Estimated Ref Procureme Review by Bank Contract Com Contract Description Amount in Contract N° nt Method (prior/Post Completion ments US$ '000 Signature Date Date Experts to prepare and publish a manual of procedures, users’ 9 guide and downloadable SFQC 150.0 Post Review 10/2/2015 11/30/2015 documents on the website Operationalization of Logistic Zones procedures and computerization TA for the preparation of regulations and standardized 10 SFQC 200.0 Post Review 12/2/2015 1/30/2016 operating procedures and publication guides Sub-component 1.2. Improvement of trade logistics Support the MT to implement its Logistics Zones development strategy TA to the MT and the port authority to implement its pilot logistic zone project in Rades 11 SFQC 200.0 Post Review 12/22/2015 2/19/2016 (including updating of cahier des charges and the profitability conducted in 2009 TA to prepare bidding documents, marketing, 12 assistance in contract SFQC 200.0 Post Review 1/6/2016 3/5/2016 negotiations and control of works Experts to review and update the institutional framework and regulations governing trade 13 SFQC 200.0 Post Review 1/6/2016 3/5/2016 logistics (port code, law on logistics, status of logistic service providers etc. Support the Ministry of Transport better define the need for improvements in the port of Radès Detailed study to prepare a 14 strategic plan to enhance Rades SFQC 200.0 Post Review 1/21/2016 3/20/2016 port operations and performance Sub-component 1.3: Support innovation and its dissemination Support for INNORPI for the dissemination of innovation, IPR and the assessment of export compliance TA to develop a monitoring system (veille technologique) 15 on Industrial Property and SFQC 200.0 Post Review 2/1/2016 3/31/2016 dissemination of technological information TA to implement a technology patents monitoring system 16 QC 200.0 Post Review 2/1/2016 3/31/2016 (veille technologique) for exporting SMEs Capacity building of INNORPI in quality assessment and export compliance for the label NT to be accepted internationally TA to INNORPI to upgrade its certifications, normalization etc. 17 SFQC 300.0 Post Review 6/21/2015 11/12/2015 to reach internationally recognized standards TA to INNORPI to join global 18 SFQC 200.0 Post Review 6/21/2015 11/12/2015 networks Support for the establishment of a system for traceability Normalization, certification etc. Studies for needs for traceability, certification, 19 SFQC 300.0 Post Review 2/12/2015 4/12/2015 accreditation and normalization by sector/product/service TA for the preparation of traceability/certification 20 SFQC 350.0 Post Review 2/12/2015 4/12/2015 methods and manuals (Halal, EPC Global, energy, skills and 56 1 2 3 4 5 6 7 8 Estimated Estimated Estimated Ref Procureme Review by Bank Contract Com Contract Description Amount in Contract N° nt Method (prior/Post Completion ments US$ '000 Signature Date Date HR etc.) Component 2: Provision of financial and nonfinancial services to exporting enterprises Sub-component 2.1. Export Development and Innovation Fund TA to support implementation 21 QC 100.0 Post Review 3/15/2015 5/13/2015 of funds management 22 Impact Evaluation of CEDF SFQC 500.0 Post Review 3/15/2015 5/13/2015 Sub-component 2.2. Export Finance Guarantee (EFG-Dhamen Finance) Technical assistance to simplify 23 the guarantee mechanism and QC 160.0 Post Review 3/24/2015 5/22/2015 procedures Technical assistance to improve 24 the governance and risk SFQC 200.0 Post Review 3/24/2015 5/22/2015 monitoring approach Setting-up of regional 25 SFQC 250.0 Post Review 5/13/2015 10/7/2015 representation offices Expert assigned to Dhamen 26 QC 140.0 Post Review 3/24/2015 5/22/2015 Finance Sub-component 2.3. Strengthening CEPEX as an sustainable export development services provider Institutional audit and to design 27 Post Review 4823/2015 6/21/2015 an action plan SFQC 200.0 TA, institutional support for the 28 implementation of the action SFQC 700.0 Post Review 5/16/2015 10/7/2015 plan 29 TA to develop a client-focused SFQC 300.0 Post Review 4823/2015 6/21/2015 results and M&E framework 30 TA to strengthen market SFQC 300.0 Post Review 4823/2015 6/21/2015 research and publications TA to improve current CEPEX 31 functions, particularly in the SFQC 300.0 Post Review 4823/2015 6/21/2015 field of market studies Component 3. Support to selected ministries for the coordination and management of the Project 32 Accountant CI 90.0 Post Review 1/27/2015 3/27/2015 Financial Management 33 1/27/2015 3/27/2015 Specialist CI 120.0 Post Review 34 Procurement Specialist CI 120.0 Post Review 1/27/2015 3/27/2015 Multi ple indivi 35 TA to the DGCE and DQPC QC 910.0 Post Review 1/27/2015 3/27/2015 dual contra cts 36 Audit and other studies QC 280.0 Post Review 1/27/2015 3/27/2015 (b) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants. Training, Workshop, Study Tours 63. At the beginning of each year, each beneficiary will submit their proposed staff development plans in the form of an annual training plan for the coming year, to be reviewed by IBRD. The plan would indicate the persons or groups to be trained, the type of training to be provided, indicative learning outcomes, the provider or location of the training, and its estimated cost. Selection of training institutions for workshops/training should be based on a competitive process, using the consultant’s qualification method of selection. 57 ANNEX 4: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF) Tunisia Third Export Development Project III (P132381) Stage: Board . Risks . Project Stakeholder Risks Stakeholder Risk Rating Substantial Risk Description: Risk Management: While the project’s objectives are in line The Project is in line with the key priorities outlined by the Government in its strategy and in its request with many of the aspirations that led to the for the new project sent to the Bank in July 2012. The project objectives and contents are in line with the revolution, it will be important to ensure Government strategic priorities. In addition the team has consulted with stakeholders throughout project their ownership by the private sector, and preparation. current and new Governments. There is a risk that the priority of developing the In addition, as Tunisia seeks to adopt a new social contract and establish new ways of working, such as private sector shifts as a result of new implementing new social accountability models and working with new actors at the local level, the elections. project design ensures that the operation adequately anticipates the need for building institutional and implementation capacity and has realistic objectives in terms of what can be achieved within a limited Also, based on experience from the time frame. The PPD process as project implementation progresses will allow flexibility to take into previous projects, customs reforms have account capacity and consensus building. proved to be difficult to implement. Resp: Bank Status: Not Yet Stage: Imple Recurrent: Due Frequency CON Due menta Date: : TIN Tunisians are impatient for things to tion UO change and improve more quickly and US capacity limitations can pose a risk to the transition Government and the Bank Group credibility. 58 Implementing Agency (IA) Risks (including Fiduciary Risks) Capacity Rating High Risk Description: Risk Management: The implementing agencies have been reduced from six in the previous project to three in the current An important risk is linked to the multi- project (MTH/PCMU, CEPEX and COTUNACE). To ensure better coordination, the MTH (in charge agency/multi-Ministry nature of the project with trade policy in Tunisia) and its PCMU will have an overall role of coordinating project activities that which may imply coordination issues and benefit the Government entities. CEPEX will implement activities related to business developments delays in implementation. Also, this risk is services to exporting enterprises. COTUNACE will implement activities related to the Pre-Shipment linked to the financial management and Export Finance Guarantee Fund. All these entities have experience in implementing Bank-funded projects procurement aspects of the project. since 2000. Administrative staffs of the Ministry of Trade are now used to Bank’s procedures and have proven able to handle these procedures. Nevertheless, the second and third components of the Project will Procurement risk: Issues in the support the necessary institutional reform and provide resources to set up a sustainable export procurement area involve potential development services provider and support the project implementation team within MTH to have a long mistakes by implementing agencies in lasting capacity in the area of trade policy and export development. applying proper procedures or preparing appropriate documents. Resp: Client Status: Not Yet Stage: Imple Recurrent: Due Frequency CON Due menta Date: : TIN FM risk: Past experience has shown issues tion UO in: (i) the timely delivery of financial US reporting documents - which are however Risk Management: of good quality; and (ii) lack of coordination inside the PCMU. During project implementation, financial management and procurement training will be made mandatory for PCMU staff. The PCMU will be reinforced in those two areas by selecting experienced staff. The project operations manual will be updated and adopted before effectiveness. There will be a close involvement of the Bank FM and procurement staff based in Tunis to provide day to day advice during project implementation. Resp: Client Status: Not Yet Stage: Imple Recurrent: Due Frequency CON Due menta Date: : TIN tion UO US Governance Rating Substantial Risk Description: Risk Management: The roles and responsibilities of the PCMU The proposed governance structure of the project has been simplified compared to the previous project 59 and of each implementing agency need to with the reduction of the number of implementing agencies. Their roles have now been clearly defined be clearly defined with adequate with three implementing agencies and two project agreements are to be signed with CEPEX and coordination at both the public and private COTUNACE and the updated project manual is to be adopted by effectiveness. sector. Resp: Client Status: Not Yet Stage: Imple Recurrent: Due Frequency CON Due menta Date: : TIN tion UO US Project Risks Design Rating High Risk Description: Risk Management: The project complexity could delay its The project design has been improved to take into account lessons learned from the two previous Bank- implementation. financed Export Development Projects. In particular, the matching grant component of the previous project was subjected to two impact evaluations which proved that it had a significant impact at the firm The project includes a value chain and level in terms of exports growth. Lessons learned have been reflected in the current project design. sector selection dimension/approach which Also, the project’s new component/activities have been thoroughly discussed with the counterparts during might be new to the private sector and the preparation. A broad-based public/private dialogue will be supported with a US$788,000 Trust Fund project implementing agencies and should mobilized in September 2013 through the FPD Competitive Industries Program. The grant is supporting a involve dynamic Public Private Dialogue PPD process involving major private sector association (UTICA), trade unions (UGTT) and private (PPD). sector. Resp: Client Status: In Stage: Both Recurrent: Due Frequency CON Progress Date: : TIN UO US Social and Environmental Rating Low Risk Description: Risk Management: The project is a capacity building project Social and Environment staff confirmed this rating. with installation of IT equipment. It is Resp: Client Status: Not Yet Stage: Imple Recurrent: Due Frequency CON therefore not expected that the project will Due menta Date: : TIN have any kind of detrimental environmental tion UO impact and should have a positive social US impact by contributing to increased exports and employment opportunities. 60 No significant risks were identified for the short to medium term. Program and Donor Rating Moderate Risk Description: Risk Management: Ensuring the consistency of approach with The Government is highly committed to private sector development and development of trade/exports. the involvement of an increasing number of The Bank and counterparts held discussions with other projects and initiatives to ensure effective donors in the sector and in Tunisia since complementarities between the various interventions. The Government has prepared a socio-economic the revolution. development strategy which serves as basis for donor intervention. Also, the project team has worked with the EU involved in complementary logistics reforms. The EU supported reforms are based on a diagnostic study financed by the Bank. Resp: Bank Status: In Stage: Both Recurrent: Due Frequency CON Progress Date: : TIN UO US Delivery Monitoring and Rating High Sustainability Risk Description: Risk Management: Delivery Monitoring. Projects that contain Delivery Monitoring. The proposed Project incorporates an impact evaluation explicitly into its design. matching grants can benefit significantly The impact evaluation will be to follow actual firms comparing their performance over the project cycle, from impact evaluation studies built into at the outset, at midterm and at project end. The project has budget allocated to finance the impact the project’s design. Previous export evaluation. development impact evaluations pointed to the need for generating information early Sustainability. To ensure sustainability, the matching component is integrated into CEPEX, the on through surveys that include real control Government export promotion agency. This will ensure that CEPEX will be able to develop this business groups as opposed to simulated control line and can continue to provide business development services after project closure. Experience from the groups (for an ex post impact evaluation). previous Export Development Projects has shown commitment by the private sector and all technical Otherwise, this ex post impact evaluation staff of the various ministries involved. The matching grant nature of the project (i.e. private sector does not guarantee the quality of contribution to be matched with Bank funds) ensures private sector commitment. information collected and includes some Resp: Client Status: Not Yet Stage: Both Recurrent: Due Frequency CON statistical bias. Due Date: : TIN UO Sustainability. The previous projects relied US extensively on consultants throughout 61 implementation, particularly for management of the matching grant. While this helped ensure efficiency in the short- run, it placed much less emphasis on overall sustainability. Consultants and structures independent of permanent government functions may help achieve outcome results efficiently, although long- term sustainability outcomes may not be achieved, given that activities risk stopping once the project is closed. Overall Risk Overall Implementation Risk: High Risk Description: The overall risk is rated High due to the country environment, complex design and implementation arrangements, and high delivery monitoring and sustainability risks. 62 ANNEX 5: IMPLEMENTATION SUPPORT PLAN I. Strategy and approach for implementation support 1. The Implementation Support Strategy (ISS) design is built on the following key considerations:  The project is a continuation of a prior, successful project, but represents a significant scale- up of some existing components and adds new components in its support to identified value chains, logistics/transport and innovation;  Based on lessons learned from previous projects, the implementation arrangements have been revised by limiting the number of executing agencies to three, namely, the PCMU at the Ministry of Trade and Handicrafts (MTH) and the Tunisian Export Promotion Agency (CEPEX). These three institutions have long experience in implementing Bank-financed projects since 2000. 2. As a result, the proposed ISS is the following:  The project will be supervised by a HQ-based team which will coordinate with the local Country Office and decentralized fiduciary staff as necessary. In addition to the sector, safeguard and fiduciary staff, the team will also include a small number of high-level international consultants who have been involved in project preparation and will continue to assist the Borrower during project implementation.  Frequency of implementation support missions is expected to be two missions per year.  Staff to be in charge of procurement and financial management, in the PMCU must be designated before project effectiveness. Mandatory fiduciary (procurement and financial management) and safeguards trainings will be offered early on to participating agencies’ staff and the Bank fiduciary and safeguards staff will initially be providing support and advice to their counterparts in addition to their supervision function. 3. The Implementation Support Plan will be revised regularly during implementation on the basis of project progress and continuous risk assessment. II. Implementation Support Plan Technical Support 4. Sub-Component 1.1 and Sub-Component 1.2 will be implemented by the MTH and the beneficiaries are the MT and Customs. These sub-components’ activities are technically relatively complex. Based on the experience of previous operations, all these institutions have the necessary technical capacity to implement those activities but are also interested in obtaining the Bank’s technical advice on specific issues (such as traceability). Therefore, appropriate implementation support (via a high level international consultant and Bank staff) will be needed to ensure that activities are implemented in a satisfactory manner.  Sub-Component 1.3 will be implemented by the PCMU for INNORPI. Based on the experience with EDP II, this institution has the necessary technical capacity to implement those activities. Therefore, minimal implementation support will be needed to ensure that the activities 63 are implemented in a satisfactory manner.  Component 2 will entail some policy discussions as well as more detailed technical support in order to properly supervise the activities implemented by CEPEX (CEDF) and COTUNACE (PEGF). These institutions have the necessary technical capacity to implement those activities but are also interested in obtaining the Bank’s technical advice on specific issues. Fiduciary support 5. The three implementing agencies have experience with implementation of World Bank- funded projects. Specifically:  Procurement: Prior Review thresholds are established in the Procurement Plan, the scope of prior review should be not less than 15 percent of the contracts not subject to prior review by the Bank. Given the differences in the procurement capacity of participating agencies, each agency will have mandatory prior review of the first contract. Frequency of post review should be not less than once a year as part of regular Bank fiduciary supervision.  Financial Management: FM implementation support will consist of a mission at the time of effectiveness (to ensure successful implementation of FM arrangements), review of annual audit reports (to provide assurance regarding the proper use of funds), review of semi-annual financial reports (to monitor the implementation of the project) and at least two FM implementation support missions, at least at the beginning of project implementation (to review the continuing acceptability of FM arrangements). Safeguards support  None needed on a regular basis, as this is a category C project. However, safeguard specialists will be involved at mid-term review to assess the implementation of the project. Implementation main focus The following table summarized the main focus of implementation during the life of the project. Time Focus Resource Estimate Partner Role Getting the project underway, ensuring all activities 20 percent of supervision budget Year 1 n/a are functioning well. Ensuring activities funded contribute to the project’s Standard supervision Year 2-6 n/a PDO. budget Drawing lessons learned, mainstreaming good Standard supervision Closing n/a practices, implementing policy recommendations. budget + ICR budget III. Skills Mix Required 6. The following table summarizes the proposed skill mix and number of staff weeks. It is expected that demand may change with time, which would translate into a reduced number of missions for some specialists and an eventual change in skills. This would be done on a pragmatic basis, as a function of project needs. 64 Table 1: Skills mix required (per year) Number of Number of Skills Needed Comments Staff Weeks Trips Team Leader (TTL) 15 2 Coordination Competitive Industries Specialist 8 2 PPD Procurement Specialist 10 CO based Financial Management Specialist 10 CO based Financial Sector Specialist 6 CO based. Guarantee component PSD specialist 6 2 HQ based SME and matching grant Disbursement Specialist 2 Trade Logistics specialist 5 2 Customs and Internal Logistics Team Assistant 5 CO based Operations Specialist 4 M&E Co based Communications Specialist 2 CO based IV. Partners 7. No external partners are identified under this project. 65 ANNEX 6: IMPACT EVALUALTION OF EMMAF II 1. Tunisia’s matching grant program (EMMAF II) ran from 2005 to 2010. The objective of this EMMAF evaluation is to estimate the impact the export promotion program on firms’ exporting activity and general performance over 2005-08. EMMAF II had been financed under the World Bank’s Export development Program (EDP II). 2. As of December 2009, out of 1710 firms’ applications, the program had accepted 1231 firms, or 72% of applicants. Of all the firms benefitting from EMMAF II, a third had already been in the previous EMMAF I. 167 firms dropped out of the program without disbursement, either because they were deemed by EMMAF experts to make insufficient progress, or because they voluntarily changed their plans. Among the 1231 accepted applications, 450 were still ongoing at the end of 2009, so they were not selected for this evaluation. Once we exclude those with ongoing plans at the end of 2008 and those who dropped their plan we are left with an EMMAF sample of 606 firms to be evaluated. 3. We can evaluate EMMAF by comparing changes in relevant outcomes (such as exporting) before and after EMMAF across firms that got EMMAF support (the “Treatment” group) and firms that are similar but did not get EMMAF support (the “Control” group). Ideally, these groups should have been ‘identical’ prior to EMMAF, so that it can be safely assumed that changes in the relevant outcomes during this period would have been the same across the treatment and control groups, had it not been for EMMAF. 4. One way to ensure that such ideal treatment and control groups existed would have been a randomized acceptance of applicants to EMMAF. This best-case strategy is ruled out in this case, since we know that acceptance into the program was not random, and that the most promising applicants are systematically more likely to have been accepted. Keeping this is mind, our objective is to design a strategy that comes as close to the idealized approach as possible. Thus, we want to identify a control group which is the most similar to the treatment group, so that it can be argued that changes in outcomes across this control group is a good measure of what would have happened to EMMAF firms during this period had they not received EMMAF support. 5. Given that we do not have an ideal ex-ante identical control group, we propose that the best evaluation strategy under the circumstances is to randomly select similar Tunisian firms as a control group, and then compare the ‘treatment’ and the ‘control’ groups after controlling for differences along observable dimensions such as size, age, sector, and prior exporting status. We can control for observable differences using standard techniques such as OLS, or Propensity Score Matching (PSM). The logic behind this approach is that once these observables are controlled for, all other differences across these two groups of firms in outcomes before and after EMMAF are due to their different EMMAF status. I. SAMPLING STRATEGY FOR THE SURVEY 6. EMMAF recipients appear dissimilar to the average Tunisian firms. They are larger and more likely to have been exporting prior to EMMAF, and their distribution across industries (sectors) is somewhat different from that of most Tunisian firms. This implies that a simple random sample of firms will not look similar to EMMAF recipient. A more efficient sampling design for PSM should take this into account and aim to sample firms that have a similar profile to the recipients. 66 7. We did so by implementing a stratified random sampling procedure. Hence, when sampling the control group, we exhaustively grouped the universe of non-recipient firms into cells (strata) based on three key observable characteristics: size (employment), prior exporting status and sector. Then, we assigned to each stratum a total sample size which was proportional to the number of EMMAF recipients in the corresponding stratum, and then sampled randomly within each stratum. This ensured that the distribution of treatment and control groups across the strata was identical. Each stratum is defined by one of 13 possible sectors, one of 3 possible employment size categories, and by export status (exporter or non-exporter). 8. To draw a sample of control firms, we asked the Tunisian NIS to randomly sample from their sample frame within each of these stratums, excluding EMMAF recipients. The aim for each stratum was a sample size which was equal to the number of EMMAF recipients in that particular stratum. To ensure that we would achieve this final sample size despite non- participation by some of the sampled firms, we asked INS to randomly pick for each stratum double of the number of EMMAF firms in that stratum (for a total of 662 firms in manufacturing and 196 in services). In addition to this randomly selected group of non-recipients, we also decided to explicitly survey i) firms having applied to EMMAF and that were rejected, and ii) those that received EMMAF grant but did not use it. Since we decided to sample 40 firms of each category, we did not use a classification by sector to draw the sample we used the classification by number of employees and exporter status. 9. We decided to focus our impact evaluation over 2004-2008 to have a full dataset of firm level data, so we excluded from the initial EMMAF firms the ones that did not finish their EMMAF plan at the end of 2008. Furthermore, we checked data consistency across sources and eliminated errors as much as possible (for instance, EMMAF’s sector attributions were sometimes wrong and had to be corrected using NIS data). After merging and cleaning data from all sources, we were left with a sample of 336 EMMAF firms, 87 dropped firms, 283 rejected firms and 648 Non EMMAF firms. 10. We needed then to draw the samples of firms to be surveyed for EMMAF firms (210), Non EMMAF Firms (210), Rejected EMMAF (40) and Quitter EMMAF (40). The firms left would serve as backup in case the firms did not exist anymore at the time of the survey in 2010 or did not want to respond. Sample of firms to be surveyed. G1: EMMAF G2: Dropped G3: Rejected G4:Non EMMAF Total Initial Sample 210 40 40 210 500 Backup 126 47 243 428 854 Total 336 87 283 648 1354 II. DESCRIPTIVE STATISTICS 11. The related firm level survey, undertaken by a specialized Tunisian survey company, started in May 2010 and was fully completed by December 1, 2010. However, some questionnaires were not fully completed. Hence, for the main variables used to estimate the propensity for a firm to get EMMAF grant (location, sector, number of employees, value of sales, date of creation, exportation in 2004) we had responses for 435 firms and after running the PSM we had to drop 7 EMMAF firms for which we did not have common support, so we are left 67 with 428 firms (195 EMMAF and 202 untreated) for which we present selected descriptive statistics below. Characteristics of treated and untreated firms 12. We note that the sectoral distributions of treated and untreated firms are very close (see data next page). The only slight discrepancies which emerge concern a lower representation of chemical industry for EMMAF sample, and a higher representation of other services. There is some difference in the distribution of firms per location, though not very large. EMMAF firms are more concentrated in Tunis than the control group and less represented in the Eastern region compared to this control group. EMMAF Control Sector Freq Per Freq Per Agro Industry 18 9.2 23 11.4 Textile & Apparels/ 48 24.6 51 25.2 Leather & Shoes Wood and Furniture 14 7.2 15 7.4 Chemicals 18 9.2 26 12.9 Metals 11 5.6 13 6.4 Machine & Equipment 25 12.8 26 12.9 Electric 4 2.1 9 4.5 Retail-Hotel-Transport 13 6.7 12 5.9 IT services 14 7.2 10 4.9 Other Services 30 15.4 17 8.4 195 100 202 100 EMMAF Control Location Freq. Percent Freq. Percent Tunis 52 26.7 26 12.9 Grand Tunis 76 39.0 67 33.2 East 63 32.3 95 47.0 Rest of Tunisia 4 2.1 14 6.9 195 100 202 100 EMMAF Control Employment in 2004 Freq. Percent Freq. Percent Employees: <10 24 12.3 25 12.4 Employees: [10-49] 66 33.9 82 40.6 Employees: [50-99] 34 17.4 37 18.3 Employees: [100-199] 24 12.3 28 13.9 Employees: >200 47 24.1 30 14.9 195 100 202 100 68 EMMAF Control Sales in 2004 Freq. Percent Freq. Percent Sales: <500m 46 23.6 46 22.8 Sales: [500m-1M] 19 9.7 32 15.8 Sales: [1M-2M] 18 9.2 22 10.9 Sales: [2M-5M] 36 18.5 33 16.3 Sales: [5M-10M] 25 12.8 9 4.5 Sales:>10M 51 26.2 60 29.7 195 100 202 100 Distributions of the number of employees (in cluster) are roughly similar, along with the distribution across sales’ clusters. Other characteristics such as the date of creation, the years since the owner is managing the firm, the number of new exporter over the period, the number of totally exporter firm and the years of first export flow are similar across the two samples. However, there are more non-exporters in the control group, which should be kept in mind when interpreting the results. Another difference is on the share of domestic capital vs. foreign capital. EMMAF firm have less foreign capital and this might explain why they came to EMMAF: because they have less financing and a lower ability to explore/develop new export opportunities. 13. Overall, the distributions are similar and we can therefore expect to get for each EMMAF firm a set of control firms that match its characteristics and are comparable. Differences in performance across samples 14. First, we look at results on export performance for both 2004 and 2008, not using the matching technique but solely comparing EMMAF and control sample. We observe that EMMAF firms had on average a higher growth (in log) in value of exports (rate of growth of export is 11.8 percentage points higher) as well as in number of product and number of destination (the extensive margin). In order to control for firms that start exporting or stop exporting over the period we also show export performance solely for firms that exported in years 2004 and 2008. This reduces the sample, but we observe the same trend. One must add that only the difference in growth of destinations for the all sample is statistically significant (at 10 percent). 69 Export performance for EMMAF and Control firms over 2004-2008 Average annual Growth Constant exporters 30.0 28.2 35.0 30.4 25.0 30.0 EMAF EMAF 25.0 20.0 Control 20.7 Control 16.6 20.0 15.0 15.0 10.0 10.0 5.1 5.0 5.6 5.5 5.0 3.2 4.1 2.4 5.0 3.1 0.0 0.0 Exports Countries Products Exports Countries Products III. RESULTS OF IMPACT EVALUATION BASED ON THE SURVEY DATA 15. We now want to compare each treated firm with firms from the control group that are similar, here similar means that would have the same probability of getting EMMAF support based on observables characteristics. Matching treated firms with untreated firms 16. First, we need to calculate the propensity score to receive EMMAF support based on firms characteristics that matter such as the location, the age of the firm, the sector, the number of employees , sales, if the firms was exporting in 2004 , share of domestic capital, and number of years the current owner has run the firm. The Probit estimation generates propensity score for each firm; distribution of these score as shown below. Distribution of propensity score for EMMAF (Treated) and Control (Untreated) firms. 2 1.5 1 .5 0 0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1 Propensity Score x Untreated Treated: On support kdensity untreated kdensity treated Treated: Off support 17. We observe that, as expected (since on average they are more likely to be in the EMMAF), the PS (propensity scores) of firms in our treated group PS are more on the right side of the graph. Critically, the figures show us that we will have common support (i.e. we will be 70 able to compare a treated firms with an identical firm in the untreated group) for a large part of our distribution. Specifically, 404 firms (191 untreated vs. 183 treated) have common support. However, we will not be able to compare treated firms with very high propensity score (higher than 0.98) since we do not have untreated group with the same score. Finally we must note that with the matching process, the untreated group with high propensity score will be more used for comparison than those with low propensity score so in sense we will give more weight to the firms that were “targeted” by EMMAF, or at least those who benefited the most from EMMAF support. Hence, we should see if the firms especially targeted by EMMAF would have done better or worse without the support. Growth in exports: 2004-2008 18. Using a Kernel estimation to assess the impact of EMMAF, we first look at the results on the outcome of interest from the survey: growth in exports over 2004-2008. 19. Compared to the raw sample-by-sample comparison, matching gives higher and statistically significant differences for growth in export volume and growth in number of destinations. This indicates that EMMAF made a real difference among firms with high propensity score (the targeted firms), which suggests that EMMAF successfully targeted firms that really needed support. 20. The estimates clearly suggest that participation in EMMAF is associated with an increased growth of firm’s total export. The annual growth of export is 20.1 percent higher for firms assisted by EMMAF compared to controls firm with similar propensity score24. Impact of EMMAF on annual growth over 2004-2008 (in percentage) Source: Staff estimates based on data from the survey 21. We were also able to assess the impact of EMMAF on another output that captures the extensive margins in exports: the number of products. Our estimates indicate a significant positive impact on growth in number of products (+4.6 growths in growth rate). Interestingly, these estimates are high compared to those found in other studies using similar techniques to study the impact of Export Promotion Agencies in Latin America (around +17 percent in the rate 24 - For instance, this means that for a sample average annual growth rate of exports of 16.6, treated firm would have a rate of 40.1 (1.166*1.201). 71 of growth, meaning + 7 percentage point on annual rate of growth in export volume). This could be because EMMAF offer more activities and support than standard EPAs, and because there is also a substantial grant component in EMMAF. Besides, the aforementioned studies assess performance in manufacturing only, while EMMAF worked a lot with firms in services (30 percent of EMMAF beneficiaries) and new exporters. 22. Impacts on other measured outcome, such as growth in sales or growth in employees are less clear in our data. Though positive, the measured impact on growth in employees is not always significant, and depends on the estimation technique25. IV. IMPACT EVALUATION BASED ON CUSTOMS DATA 23. In order to get a better grasp of the effect of EMMAF, another ex-post impact evaluation based on a larger sample of firms was also undertaken. From Custom’s General Directorate, we got transaction-level export data with exporter ID, transaction value, country of destination, and product code, for all years between 2000 and 2008 for 3000 firms (including 400 EMMAF firms). For those, we got from the National Statistic Office and the Industrial Promotion Agencies, important observables such as location, sector, date of creation, status (totally exporter or not) and number of employees. Our sample represents roughly 55 percent of export of goods (excluding oil) in Tunisia. 24. By following this procedure, we exclude firms in services (30 percent of EMMAF firms and which are not reported in custom’s data) and we will not be able to assess the impact on other outcomes than export performance. This procedure however allows for more observations for PSM, and a more robust matching and disaggregation of results by types of treated firms (those who came as new exporter, to export new product or reach new destination). Finally we will able to test the impact the years of treatment and years after (i.e. what happen next after EMMAF, after firms got the treatment). Here we consider that the impact of EMMAF for a firm starting an export plan in 2005 should be measurable on export transactions in 2005 and 2006. Without using the matching process we observe that export growth was higher in 2005 and 2006 for firms that followed an EMMAF plan over those years. However those differences are not statistically significant. Yearly export growth over 2004-2005 Export growth 2004 2005 2006 2007 2008 EMMAF 2005 13% 26% 11% 14% -5% Control 24% 6% 7% 19% 4% Tunisia 17% 10% 13% 20% 20% Source: Staff estimates based on Customs data and Comtrade 25. We recalculate the probability of getting EMMAF support based on location, date of creation, sector, size (employment), exporter status, exports total value, number countries and number of products in 2004. The propensity distribution is different from the previous one based on survey data because of the larger sample of control firm (the probability among the entire 25 - This may come from the fact that i) we do not have sales and employment data for all firms in the dataset, and ii) that recall data on sales and employment data are often less precise. 72 sample to be treated is smaller). Distribution of propensity score 0 .2 .4 .6 .8 Propensity Score Untreated Treated Source: Staff estimates based on Customs data and Comtrade 26. Using PSM, we observe now a significant impact of EMMAF over the two years of treatment. Positive results remain since receiving EMMAF support seems to have increased the difference in growth rate over the 2 years of treatment for all export outcomes (volume, number of destinations and number of products). Increase in growth is slightly higher than with the survey, but here impact concerns two years instead of four previously, and the impact on extensive margins seems higher. The exclusion of services can also explain those slight differences in results, since dropping services firms in the survey showed also lower impact on export volume but higher impact on number of destinations or products. Impact of EMMAF on annual growth over 2004-2006 (%) Staff estimates based on Customs data and Comtrade 27. However, the estimated impact varies widely among types of firms that came to EMMAF: the ones who came to become exporters benefited the most (30 percent), so one might say that EMMAF really made a difference in helping new exporters. Then, the majority of EMMAF firms, those who came to expand their market (50 percent) also got positive results. 73 However, those who came to expand their product (20 percent) did not do better than control firms. 28. Over the long run, if we look at firms that got EMMAF plans in 2005, it appears that the impact on the export growth is significant in years of treatment, 2005 and 2006 but after, firms are not on a path that will give them a higher rate of growth than another random firm. This may be explained by the fact that i) one year of support might not have been sufficient to train managers to reproduce a similar export plan by themselves, ii) there are physical constraints to expand production that might have been reached after a first huge increase and finally iii) one might consider possible spillovers to other firms (in same sectors/location than EMMAF firms) that would also start to access those new market/products after EMMAF firms paved the way. Impact of EMMAF by firms’ objectives (left) and year (right) V. CONCLUSION 29. Overall, results from the PSM based on different data sources suggest that EMMAF had a statistically significant, positive impact on the performance of Tunisian firms along all three targeted dimensions of exporting: total exports, number of export products and export destinations, but only over the years of treatment. 30. The estimates imply that relative to matched control firms, EMMAF participation is associated with an average annual growth in total exports roughly 20 to 30 percent higher during 2004 and 2008. Compared to matched control firms, the annual growth in the total number of export destinations reached by recipients was 5 to 7 percent higher and the number of products exported by recipients was 5 points higher though not always significant. These results hold even when we restrict attention to firms which were exporting in 2004 and in 2008. 74 31. Despite some limitations of the previous type of analysis26, these findings confirm the relevance of an EMMAF for the proposed project and underline the need for improving its design in order to make its impact more durable, most notably through a better tailoring of the scheme and a reinforcement of the export consultants as underlined in Annex 2 of this document. 26 - It is important to reiterate the limitations of an ex-post evaluation strategy such as the Propensity Score Matching Technique employed in this preliminary evaluation. Techniques such as PSM essentially enable a comparison of EMAF beneficiaries with observably similar non-beneficiaries by controlling for differences in observable characteristics between beneficiaries (‘treated’) and non-beneficiaries (‘controls’). It is assumed that once these observables are taken into account, the difference in the outcomes of beneficiaries and non- beneficiaries’ measures how EMAF affected the outcome of the beneficiaries compared to what it would have been in the absence of EMAF. However, it is possible that even after accounting for observable differences, non-beneficiaries’ outcome is not a good proxy for what would have happened to beneficiaries in the absence of EMAF. For example, consider the not-unlikely possibility that firms which applied to and were accepted into EMAF were those which had better export prospects than observably similar firms even in the absence of EMAF assistance. Then, any ex-post evaluation technique would overstate the impact of EMAF. But one also cannot rule out the possibility that firms which were going to do well in exporting even without EMAF were less likely to apply to EMAF than other observably similar firms. In this contrasting case, ex-post evaluation would understate the impact of EMAF on its beneficiaries. 75 ANNEX 7: LESSONS LEARNT AND REFLECTED IN PROJECT DESIGN 1. Past portfolio experience and knowledge base. Over the past decade, the World Bank funded two projects in Tunisia dealing with export development. Export Development Project I (L4475-TUN dated June 3, 1999) addressed two key issues: (i) the simplification of export procedures and the setting-up of an electronic window for faster processing of trade documents (TTN); and (ii) the easing of access to mostly traditional markets for firms through a matching grant scheme. EDP II (L7239-TUN dated July 2, 2004) further (i) tackled issues of simplification of export procedures; (ii) eased the access for pilot firms to some nontraditional markets and products; and (iii) digitalization of import technical control procedures and setting up of an information point to allow Tunisia to meet WTO requirements. EDP II underwent two impact evaluations27 and an ICR has been completed. Box 2. Impact evaluation of the matching grant scheme (FAMEX) under EDP II Ex-Post Impact Evaluations of an Export Promotion Matching Grant: Tunisia’s FAMEX II  Ex-post impact evaluation of an active export promotion matching grants FAMEX II on firms’ exporting performance compared to a control group of firms over 2004-08  1,231 firms (mostly small and medium enterprises) applied between 2004-2008  31 percent had little or no export experience while 69 percent of the beneficiaries were already exporters and wanted to diversify either by expanding into new destination markets (49 percent) or into new products (20 percent)  The annual growth of export is 20.1 % higher for firms assisted by FAMEX II compared to control firm with similar propensity score over the 2004-2008 period  The annual growth in destination markets reached is 4.6 % higher for firms assisted by FAMEX  Employment in FAMEX II firms grew annually by 5.5 % between 2004 and 2008 while it grew annually by 4.6 % for firms in the control group.  New exporters benefited the most (30 % of FAMEX II beneficiaries); one might say that EMAF II was key in helping a new emerging class of exporters.  Firms which came to expand their market (50 %) also got positive results but those which came to expand their product line (20 %) did not do better than control firms, in other words FAMEX III additionally was limited. Are the Benefits of Export Support Durable? Evidence from Tunisia. The paper evaluates the effects of the FAMEX export promotion program in Tunisia on the performance of beneficiary firms.  FAMEX had a large and positive effect on total exports of beneficiary firms. FAMEX beneficiaries had 66.7 percentage points higher export growth than control firms over the first 3 years  Beneficiaries initially see greater diversification across destination markets and products.  Exports of beneficiaries remain more diversified, but the diversification does not translate into lower volatility of exports.  There is no evidence that the program produced spillover benefits for non-beneficiary firms  As the implementation had relied exclusively on external consultants with little connection with any Government entity, the project did not build the long term sustainability of the export development services provision. Lessons directly relevant to the proposed Project 2. Reduce program complexity and ensure better coordination. Due to the multiplicity of implementing and government agencies, the previous projects encountered serious weaknesses. Almost all implementing agencies reported administrative delays and difficulties because of the 27 Cadot, Olivier, Ana M. Fernandes, Julien Gourdon, and Aaditya Mattoo. Are the Benefits of Export Support Durable? Evidence from Tunisia. Report. Policy Research Working Paper. Washington: World Bank, 2012 and Gourdon, J., JM Marchat, S. Sharma, and T. Vishwanath. Ex-Post Impact Evaluation of an Export Promotion Matching Grant: Tunisia's EMAF II. Rep. No. 40. Washington: World Bank, 2011. Print. MENA Knowledge and Learning 76 need to directly correspond with the World Bank through the PCMU. Also, the lack of information sharing between implementing agencies undermined effective integration and coordination of the various project components. The main lesson learnt is to find a balance between the need to improve synergies among project components and coordination particularly with regards to the flow of information and administrative duties between project components and the coordination unit. 3. Also, EDP II had five major components and six different implementing agencies. Effectively supervising, tracking progress, and identifying problem areas were made more difficult because of this complexity. These projects demonstrated that simplifying project’s implementation arrangements and focus on core deliverables should be further considered, particularly given Tunisia current volatility. 4. The proposed Project has three components and three implementing agencies (MTH/PCMU, CEPEX and COTUNACE). To ensure better coordination, the MTH (in charge of trade policy in Tunisia) and its PCMU will have an overall role of coordinating project activities that benefit government entities. CEPEX will implement activities related to business developments services to exporting enterprises. And COTUNACE will implement activities related to the Pre-Shipment Export Finance Guarantee Fund. 5. Developing synergies between components to ensure maximum development impact. Lack of integration between project components despite the significant cross-over in the work being pursued was detrimental to efficiency and sustainability. In particular, while there should be natural synergies in the firms receiving the matching grant and the export finance guarantee, there were no direct integrated efforts to cross-market in the previous projects. The previous projects design did not have sufficient elements to integrate these components to truly leverage synergies. 6. The new Project will have a Steering Committee consisting of a representative from each beneficiary institution. The Steering Committee will have a greater role in project implementation. In particular, the PCMU will be required to prepare and furnish to the Bank on an annual basis a proposed program of activities approved by the Steering Committee, to be financed by the Project during the following calendar semester. 7. Also, the proposed Project will ensure a heightened focus on component integration to help increase development impact. In particular, it incorporates in its design a cross membership for both the selection committees of the matching grant CEDF and of the Export Finance Guarantee scheme to ensure synergies between exporting firms. 8. Strike a balance between operational efficiency and long term sustainability in project design. Within the project design, there is a trade-off between efficiency and sustainability. The previous projects relied extensively on consultants throughout implementation, particularly for management of the matching grant, as well as systems development and capacity building for the trade facilitation components. While this helped ensure efficiency in the short-run, it placed much less emphasis on overall sustainability. Consultants and structures independent of permanent government functions may help achieve results efficiently, although long-term 77 sustainability outcomes may not be achieved, given that activities will stop once the project is closed. 9. The current Project streamlines project implementation into core government entities and includes TA to build their capacity to become sustainable providers of export development services. 10. Importance of strong and complete Monitoring and Evaluation: Projects that contain matching grants can benefit significantly from impact evaluation studies built into the project’s design. Both impact evaluations of EDP II mentioned above pointed to the need for generating information early on through surveys that include real control groups as opposed to simulated control groups. 11. The proposed Project incorporates an impact evaluation explicitly into its design. The impact evaluation will be to follow actual firms comparing their performance over the project cycle, at the outset, at midterm and at project end. The Project has budget allocated to finance the impact evaluation. 12. Gender. The previous projects did not have adequate assessment of gender outcomes because indicators were not included in the result framework and subsequently not tracked during project implementation. 13. The proposed Project is designed to track gender-disaggregated indicators and has targets for women entrepreneurs. It includes activities to identify, support and emulate promising women-led enterprises and projects. 14. Create a forum for dialogue. Experience with export development projects and private sector development project in general indicates that success depends on establishing an institutional platform to foster regular dialogue and a working and collaborative partnership among various stakeholders, including different ministries, the public and private sectors and civil society organizations. This is particularly relevant for the Tunisian post-revolutionary context where civil society organizations and private sector associations have more say in the definition of public policies. Such an institutional platform requires a high-level oversight and direction at the level of the key implementing ministry and a continuous PPD throughout the project implementation. 15. The proposed Project through the CEPEX reform component will finance and build a sustainable PPD process in Tunisia. 16. Also, a US$788,000 grant has been mobilized from the Competitive Industries and Innovation Program (CIIP) to finance PPD mechanisms to help Government and stakeholders identify major constraints in specific industries, and then engage all stakeholders to support analysis and design of proper reform programs. The CIIP funding will help the Government (a) validate the clusters recommended by a compendium of studies conducted between 2010 and 2012, under the Government strategy and/or by the private sector and other donors (e.g. Bank DPR 2012, IFC, AfDB, IBM and McKinsey etc.) through a structured PPD. This will consist of some analytical work that will focus only on narrowing down high potential industries and sectors (identified in the various studies), moving from broader industry comparisons (as did 78 most of the studies mentioned) to increasingly detailed market analytics work; and most importantly forming a platform for PPD mechanisms to validate the recommended clusters; (b) design a reform program for identified clusters through a structured PPD. This could include reforms in policy, infrastructure, skills, access to finance, and technology, some of which will be supported by the proposed Project and a DPL series financed by the Bank in Tunisia; and (c) set up the implementation framework for the reform program. 17. Design the project and the matching grant scheme to respond to challenges facing Tunisia. During project preparation, the Government stressed the need for the new Project and matching grant scheme to be designed with the goal to maximize economic benefits rather than only financial benefits of private firms. 18. The new CEDF has been designed to primarily provide support to companies/sectors based on: (i) the potential to diversify and increase exports to new markets, new products and services to reduce Tunisia dependence on Europe; (ii) the potential to create high skills employment in the segments of the economy, population, and/or regions where these jobs are most needed in the Tunisian economy; (iii) the potential to address the regional inequalities by helping to create jobs in the regions outside Tunis (e.g. via business plan competitions to identify, coach and support regional firms); and (iv) the innovation potential by supporting voluntary innovative firms to develop new products and market innovation including certification, traceability and accreditation (e.g. accreditation of healthcare companies for European health insurance, Halal certification), support to start ups. 79 ANNEX 8: ECONOMIC AND FINANCIAL ANALYSIS I. Economic benefits from CEDF 1. Public investment and the provision of TA, to complement budget support operation and help organize sustainable Public Private Dialog (PPD) is an adequate tool to overcome coordination failures in the provision of public goods such as business development services, improvement in the use of public infrastructure, vocational training for youth to be employable by the private sector or improved governance mechanisms (such increased transparency in in customs). Besides decreasing the cost of doing business, public investment lowers risk for private investors, which is crucial to unlock the potential of the exporting sector, particularly SMEs, startups, women led firms and private enterprises located in other regions of Tunisia. 2. It also crowds in capital through overcoming market failures, arising when companies with few capabilities can initially experience negligible return to the accumulation of capabilities in new sectors or markets, thus hindering diversification. As such the investment of public resources is expected to spur growth by providing an improved business environment enabling local supply chains to develop as well expanding and diversifying export s in areas to be able to create in segments of the economy, population and regions where these jobs are most needed. It helps firms to access new export markets where the initial risks are perceived high by local private sector. 3. This intervention requires an actor who can successfully address both issues facing both the public and the private sector. The World Bank Group seems well positioned to do so, being able to support public sector reform and provide the tools to support private sector development. In addition, the success of this project will be largely dependent on the creation of an entire ecosystem conducive to growth (trade logistics, innovation ecosystem, export finance, non- financial business development services and Public Private Dialog). This requires a partner able to work with government on policy reforms, convene other development partners, crowd in the private sector and understand the local social context which underpins economic developments. All these aspects are covered by the project and the Bank involvement. 4. The project beneficiaries are estimated at around 6,000, of which 2,000 firms supported under the CEDF and around 3,700 jobs created under the PEFG. It is estimated that 20% of the beneficiaries are women. 5. CEDF will target approximately 2,000 beneficiaries firms including 100 trade organizations (export associations, chambers of commerce, and professional). Assisted firms and trade organizations will acquire knowledge of international markets in the selected value chains and increase their internal capacity thereby building up competitive positions in new markets and value chains. Improvement in firms’ performance abroad will enable Tunisian exporters to react quicker to international markets conditions, access growing markets and opportunities and therefore increase substantially their exports. 6. The economic evaluation of CEDF is based on a total grant of US$40 million for 2000 firms. The allocation period will span four years plus one year to finalize disbursement and processing of applications. The model is based on EMMAF II rate of growth which showed decreasing benefits until year 6. It is likely that demand will begin slowly the first year but will 80 pick up the second year and continue to build up steadily throughout the six years year during which the grant will be allocated. EMAF II demonstrated that the benefit is immediately felt for firms and less so for trade organizations as support for trade organizations will not result in immediate increases in export. The trade ratio multiplier will therefore remain the same for both trade organizations and beneficiaries firms due to the small number of trade organizations. ECONOMIC IMPACT OF CEDF (Figures in US$ million) CEDF # Firms 2000 Amount 40.0 U.S Million Period 4 Years year 1 year 2 year 3 year 4 year 5 year 6 Assumed ratio of additional exports to one US$ of grant 6 4 2 2 Number of exporters assisted by CEDF 220 560 720 480 Total matching grant 6.00 9.00 13.00 12.00 Exports generated by exporters assisted in year 1 36.0 24.0 12.0 12.0 Exports generated by exporters assisted in year 2 54.0 36.0 18.0 18.0 Exports generated by exporters assisted in year 3 78.0 52.0 26.0 26.0 Exports generated by exporters assisted in year 4 72.0 48.0 24.0 Additional annual exports generated by CEDF 36.0 78.0 126.0 154.0 92.0 50.0 Cumulated exports 36.0 114.0 240.0 394.0 486.0 536.0 NPV of additional exports $407.55 Investment (matching grant) -6.00 -9.00 -13.00 -12.00 Mgmt. & Operating costs -1.1 -1.65 -1.8 -1.45 Additional annual exports 36.0 78.0 126.0 154.0 92.0 50.0 Flow of Funds 28.9 67.4 111.2 140.6 92.0 50.0 NPV of flow of funds $370.21 Total Value Added generated by incremental exports ( salaries and tax revenues) NPV of exports 407.55 Salaries 62.97 15.45% 15.45% 15.45% Financing costs 82.65 20.28% 20.28% 20.28% Depreciation 32.60 8.00% 8.00% 8.00% Profits 60.60 14.87% 14.87% 14.87% Total value added 238.82 Employers contribution ( exporters) Social Security Benefits 11.02 17.50% 17.50% 17.50% 17.50% Corporate Income Tax 81.51 20.00% 20.00% 20.00% 20.00% Total contribution 92.53 Tax Revenues ( Employees) Income Tax 5.89 9.35% 9.35% 9.35% 9.35% VAT 1.90 3.02% 3.02% 3.02% 3.02% Total 7.79 Total contribution 100.32 81 7. The model is based upon results from EMMAF II export growth in which it was estimated that every dollar of grant would yield on average 9.5 dollar of export for the first two years. We choose to adjust this figure to reflect the increased number of beneficiaries and different market conditions and destinations. The trade ratio is therefore 6 for the first year and respectively 4 for the third and 2 for the last two year. 8. Other assumptions include the following (i) The export generated and other flows are discounted at 8%; (ii) the value added distribution of the export stream was based on observations from exporting countries with similar trade structure as Tunisia (i.e. Ecuador, Mauritius) similarly to EDP I and EDP II; and (iii) all export taxes include 17.5% for social security, 20% for income tax. 9. In addition to the gains shown in the table below, the project will yield additional benefits through employment and worker s income and taxes on additional exports. The analysis takes accounts these benefits and translates them into increased exports, a higher overall value added form salaries and firm profits. Therefore US$40 million investment can generate US$536 million of additional total export over a six-year period and yield a Net Present Value (NPV) of additional exports of US$407.55 million. After managerial cost and grants and cost sharing disbursement the expected NPV of CEDF flow of funds is US$370.21 million. Economic impact from PEFG 10. The next table shows an estimate based on a possible additional investment of US$9.3 million for six years (in addition to US$5 million of capital currently available), including US$1.3 million in TA and capacity building of COTUNACE for simplifying the guarantee procedures. Based on PEGF past performance we make the following assumptions: 11. The average annual turnover of pre-shipment export finance is equal to 2, with a maximum maturity of 180 days. The average loan maturity was between 147 days and 196 in 2009. We keep the initial benchmark of 180 days used for EDP II. EDP II shows that this figure is lower for manufacturing (120/130 days roughly) but longer for firms operating in services EFG (350 days). 12. For each US$1 of export the PEFGF covers US$0.31, which is 90 percent loan share times 90 percent maximum guarantee share. 13. The net default rate is steady at 3% for the first year and subsequently decreases to 2% over the next two years and 1% for the remaining. These rates reflect COTUNACE’ experience and the technical assistance supplied to SMEs. 14. Additional annual exports of US$1 million generate 100 jobs. The administrative costs are based on budget forecasts of COTUNACE.  The annual premium applied to the guarantee outstanding is 1.8% (0.15 times 12 months).  The fund’s annual interest earnings are 4%. The NPV of the benefits amount should be US$123.5 million for the first six years; while the NPV of net social benefits represents US$43 million over the same period. 82 ECONOMIC IMPACT OF PEFG (Figures in US$ million) Assumptions : Premium paid into PEFG 0.15% Average loan maturity (days) 180 Rate of coverage 90% Initial size of the PEFGF ($ million) 10 PFI pre-shipment finance at % of L/C value 90% Year 1 Year 2 Year 3 Year 4 Year 5 PEFGF guarantee coverage ratio 1 1.5 2 2.5 3 Annual rate of default 3.0% 2.0% 2% 1.0% 1% Administrative costs as % of outstanding guarantees 0.8% 0.80% 0.80% 0.80% 0.80% Interest rate on investment income 4% 4% 4% 4% 4% Recovery 0.15 0.18 0.18 0.15 0.18 Size of the PEFGF that can be invested 12.59 12.64 12.70 12.75 12.80 Guarantee outstanding 10 15 20 25 30 Premium income 0.015 0.0225 0.03 0.0375 0.045 Interest income 0.50 0.51 0.51 0.51 0.51 Total income 0.52 0.53 0.54 0.55 0.56 Net guarantee payment 0.3 0.3 0.3 0.25 0.3 Administrative costs 0.08 0.12 0.16 0.2 0.24 Total expenditure 0.38 0.42 0.46 0.45 0.54 Profits 0.14 0.11 0.08 0.10 0.02 Additional exports generated 12.3 18.5 24.7 30.9 37.0 Net Flow 12.5 18.6 24.8 31.0 37.1 NPV 6%, net flow excluding exports 0.366 NPV of additional exports $94.80 NPV of net flow $95.17 Total export credit covered by PEFGF ($m) 100.000 Total export credit covered by PEFGF (Yearly- $m) 10.000 15.000 20.000 25.000 30.000 Value added generated 55.6 Salaries 14.6 Financing costs 19.2 profits 14.1 Taxes collected from exporters 21.52 Taxes collected from employees 1.81 Additional employment generated (thousands) 1.23 1.85 2.47 3.09 3.70 Social benefits (50% of additional exports) 6.17 9.26 12.35 15.43 18.52 Financial costs ( total expenditure) -0.38 -0.42 -0.46 -0.45 -0.54 Opportunity costs (5% of invested PEFGF ) -0.63 -0.63 -0.64 -0.64 -0.64 Total social cost -1.01 -1.05 -1.10 -1.09 -1.18 Net Social Benefits 5.16 8.21 11.25 14.34 17.34 NPV $43.09 83 ANNEX 9: TUNISIA HIGH POTENTIAL SECTOR ANALYSIS I. Introduction 1. The purpose of this note is three pronged: i) double check the pertinence of the preliminary analysis; ii) balance the relevance of the sector to the objectives of the project, and its relevance in addressing the challenges of the Tunisian economy; and iii) fine-tune the understanding of the sector in order to propose sector-tailored support mechanisms in later stages. II. Sector analysis methodology 2. Three lenses were used for the detailed analysis: i) sector exports profile and potential; ii) sector employment profile and potential; and iii) sector competitiveness. Lens 1: Sector exports profile and potential 3. Key Question: has the sector been producing more quantity, quality, complexity, and/or diversity of products and destinations? (Past decade and available forecasts) 4. This lens compares the growth performance of sectors to the world trend; assesses the share of the sector in the total value of Tunisian export-basket and GDP; evaluates the diversification of export markets; and tries to address the complexity of the products and workforce engaged. Lens 2: Sector employment profile and potential 5. Key question: Does the sector create significant employment in the segments where these are most needed in the Tunisian economy in the coming 3-5 years? (including regional distribution) This lens will analyze the labor force in order to assess the sector’s effective absorptive capacity. Lens 3: Sector Competitiveness 6. Key question: Is this sector competitive because of comparative advantages (e.g. low labor cost) or is its competitiveness sustainable, being based on differentiation and strategic positioning? The analysis is undertaken from a ‘cluster’ perspective in order to capture the entire network of firms and agents involved in the sector. Competitiveness is visited from four angles: 1- Factor Conditions or inputs: such as the quality, cost and availability of its infrastructure, human resources, and financial resources. 2- Local Demand Conditions: Size and quality of demand, while bearing in mind that a cluster is more likely to be globally competitive if it is based on a strong local demand. 3- The strength and diversity of Related and Supporting Industries: mapping the entire network of actors involved in the cluster (be they private or public), their size and effectiveness. The aim is to identify the gaps and strengths in the value chain. 4- The national regulatory Context for Competitive Strategy and Rivalry among firms: a look at how encouraging is the regulatory context to a competition based on strategic 84 positioning and quality (not only pricing). The more competitive the regulatory context is, the more fit local firms will be to engage the global market.28 Sector analysis (agriculture, industry, services) WITS Comtrade; World Bank team calculation  28 On competition. Porter, M.E. 1998. 85 III- Detailed Sector Analysis 1- Health Tourism (HS Code: 241, Personal travel/ health related expenditure) a) Lens 1: Sector exports profile and potential 7. Exports of Tunisian health-travel services have significantly increased over the last decade. Total export-oriented expenditure in these services increased eight folds from 2001 to 2010 (Exhibit 1). While the value share of health-tourism in the total export basket of Tunisia is very small, estimated at 0.37 percent in 2010, and its share in national exports of services is limited to 1.4 percent, the growth trend of the business is notable, especially when compared to the world’s growth trend. The market demand is currently mainly focused on Europe and Libya, but there is a strong potential for diversification towards “Maghreb” and “Sub-Saharan African” countries.29 Exports of Health Tourism‐ Tunisia 100,000 82,650 80,000 81,880 68,580 US$ Thousand 60,000 52,290 40,000 41,320 34,680 28,100 20,000 10,430 21,730 10,550 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Years Exhibit 1: Exports of health tourism – Tunisia Health Tourism Rating (Lens 1): b) Lens 2: Sector employment profile and potential 8. The health sector constitutes 4 percent of total employment in Tunisia30 and accounts for 3.8 percent of total jobs created in 2008-201131. 43 percent of were in the top wage category, with roughly half in the tourism sector (hotels, etc.) and half in the health sector (hospitals, etc.). 9. Health tourism represents a quarter of Tunisia’s private health sector output32. The industry’s growth could help address employment challenges: with approximately 6300 new graduates each year, the health sector faces a very high unemployment rate of 42 percent. 55 29 Researchers calculations based on ITC database “trade map” 30 Labor Market in Tunisia in 2011. Selected Results of the Labor Force Survey Statistical Bulletin. INS and the World Bank (2011). 31 IBM Global Location Trends: Facts & Figures. IBM (2012). 32 Export of health services from developing countries: The case of Tunisia. Lautier, Marc (2008). Social Science & Medicine 67 (2008) 101e110. 86 percent of all jobs are HE.33 While some supply-demand mismatch exists34, overall, team analysis does indicate that this sector has large numbers of employment-ready workforce. Health Tourism Rating (Lens 2): c) Lens 3: Sector Competitiveness 10. A synthesis of the Diamond analysis re-distributed in a SWOT format gives the following: 11. Strengths: a) Tunisia enjoys excellent human resources in the field, particularly doctors b) It has very strong demand conditions (locally and regionally; consolidated by a historical positive trend of medical services to Libyans and Algerians) c) Tunisia’s strong Tourism sector is a good platform for the medical tourism cluster d) The comparative advantage (low price of services) is only a factor for a small proportion of the market (Europeans visiting for cosmetic surgery – circa 10 percent), and could remain of marginal relevance if Tunisia consolidates its reputation as a medical destination of choice 12. Weaknesses: a) The sector is not organized as a cluster, both from the public and private side: it remains a patchwork of tourism and health services, with different sets of standards and organizations in every branch. The lack of common vision and organization makes it difficult to consolidate the performance and image of the cluster b) Tour operators are not regulated or trained for the specificities of this niche c) Private hospitals do not have enough international accreditations from their target markets, and thus miss out on a larger pool of potential clients (those who do not come today). This lack of accreditation also means the forgoing of the important UK market d) There is a lack of qualified nurses, which is imposing a major constraint to growth 13. Threats: a) The main threat faced by the cluster is the loss of quality since its private hospitals are poorly regulated, while being increasingly under the pressure of growing demand b) The midterm solvency of the CNAM is at stake if no reform is implemented soon c) There is a real risk for a brain drain from the public to the private medical sector if this activity is not regulated soon. Note that a loss of quality of public hospitals implies a loss of quality of medical students, which eventually sets back the whole industry 14. Opportunities: a) There is a growing opportunity of new markets in Sub-Saharan Africa 33 Education for Employment for Youth in the Arab World: Tunisia Deep Dive. McKinsey & Company commissioned by IFC (2011). 34 Source: Team interviews. 87 b) The UK market of ‘waiting-list’ patients; as well as the German (or other) in vitro fertility patients; represent opportunities for a high-end category of services c) There remains a larger share of the Algerian and even Moroccan markets to be tapped Health Tourism Rating (Lens 3): d) Conclusion 15. Tunisia’s Health Services sector is one of its most promising ones from an export diversification and sophistication perspective. 16. Other than being on an upward export curve, both nationally and internationally, medical services also offer employment to an available pool of workers and a large flow of graduating students, thus alleviating (and/or preventing the increase of) unemployment. In addition, this sector also has the quality of being resistant to times of social unrest and macroeconomic uncertainty since i) the greater number of clients come from neighboring countries with a higher tolerance to uncertainties portrayed in the media; ii) by nature, medical services are very inelastic and will always be needed; and iii) medical services in Tunisia have flourished, and continue to flourish with little FDI: in times of uncertainty and global crisis this independence is a plus. 17. As for actions to be undertaken, the analysis reveals that more (appropriate) regulations are necessary for this sector to be sustainably and increasingly competitive. “Liberalizing and opening professional services is not about suppressing domestic regulations: on the contrary, the maintenance of high-quality service and the protection of consumers against malpractice are essential to the reputation and trade success of a country”.35 An example from this sector is given by Thailand, in 2004, when the ministries of commerce and health collaborated to design a successful five-year strategic plan for medical tourism.36 35 Trade Competitiveness of the Middle East and North Africa Policies for Export Diversification. Lopez-Calix et al, WBG 2010. 36 Trade Competitiveness of the Middle East and North Africa Policies for Export Diversification. Lopez-Calix et al, WBG 2010. 88 Exhibit 2: Cluster Map for Health Tourism (Source: Team analysis) 89 2- Pharmaceutical Products (HS code: 30) a) Lens 1- Export Profile: growth, diversity, sophistication, and opportunities 18. Pharmaceutical exports in Tunisia are limited today to 5-7 percent of total production.37 However, consistent to global growth trends in the pharmaceutical exports, Tunisian pharmaceutical exports increased by four and a half times in the last decade (Exhibit 3). Exports of generics (which constitute the major concentration in the sector) have grown by 92 percent.38 Despite its focus on the local market, trends suggest that Tunisian pharmaceutical products have significant diversification opportunities: North African countries are already targeted with 45 percent of exports; France with 18 and Switzerland 7 percent; Iraq 5 percent and Côte d'Ivoire 4 percent39. Finally, based on the complexity calculations of pharmaceutical products, PRODY,40 pharmaceutical products mark the highest complexity level among industrial sectors. However, the average complexity level of the Tunisian industrial sector remains below that average. Exhibit 3: Exports of pharmaceutical products – Tunisia Exports of Pharmaceutical Products ‐ Tunisia 40,000 30,543 31,762 30,000 24,305 26,749 US$ Thousand 20,000 15,578 20,423 13,928 10,000 7,041 13,338 7,859 6,587 0 Years Pharmaceutical Products Rating (Lens 1): b) Lens 2- Sector employment profile and potential 19. The chemicals sector employs 28000 people, 3800 of which in the pharmaceutical industry 41. Pharmaceuticals and health accounted for 3.8 percent of total jobs created in 2008- 2011.42 Most employees of pharmaceutical firms are highly qualified pharmacists and engineers (37 percent pharmacists). About half of all pharmacists work for the private sector (including founding their own pharmacies) while the other half are distributed across hospitals, public and private biology centers, teaching, administration, and the pharmaceutical industry. The number 37 Finpro, MOH, interviews. 38 “The Tunisian pharmaceutical sector in transformation: Inventory of fixtures and innovation prospects” , PhD Nejla Yacoub, 2008. 39 Researchers calculations based on ITC database “trade map” 40 Ratio of the share of the product in a country’s export basket to the aggregate of all shares across all countries exporting the product. 41 “Tunisia’s pharmaceutical market seeing strong growth”, The Pharma Letter, December 2009. 42 IBM Global Location Trends: Facts & Figures. IBM (2012) 90 of pharmacy graduates waiting to get an agreement by the ministry of public health to establish their own pharmacies is continuously increasing due to market saturationi. The growth of the sector (through exports) is a way to expand the absorption capacity of this skilled labor. Pharmaceutical Products Rating (Lens 2): c) Lens 3- Sector Competitiveness 20. Tunisia is one of the Arab World’s most competitive producers of pharmaceutical products. Beside the competitiveness in labor costs, strong factor conditions include the quality of educational institutions and human resources, and Tunisia’s good transport and logistics services. 21. The cluster also benefits from healthy demand conditions building on: i) a developed healthcare system with a dense network of public and private hospitals; ii) reasonably high standards of medical practice and expectations43; and iii) an advanced social security system that covers most pharmaceutical expenses of patients. 22. Tunisian pharmaceutical cluster is quite developed on the production side of the supply chain (manufacturing, marketing, distribution and sales) with over 41 firms, but has significant lacks in the R&D side of the chain (Preliminary research, clinical trials and drug approval). 23. Tunisia’s pharmaceutical industry suffers from four major constraints, which partly explain why its exports are limited to 5-7 percent of total market value: 1- The general lack of international certification, which would have allowed its manufacturing firms to export to the European market. Tunisia’s pharmaceutical industry is well positioned to respond to a demand for small series of generic products there 2- A reduced ability to market its products in international markets, in part because of the fragmented nature of the cluster and the limited role of its Institutions For Collaboration (National Chamber of Pharmaceutical Industry and Sephire) 3- The price-fixing practice by the PCT puts tremendous downward pressure on exported drugs, reducing the incentive for firms to engage in new markets as well as their ability to cope with the negative effects of the constant devaluation of the Tunisian Dinar 4- Regulatory protectionisms and an unleveled playing field (in different ways) reduces the ability of local firms to grow, and multinational firms to compete fairly, thus introducing enough distortions in the market place to reduce the overall competitiveness of the cluster 24. In terms of sophistication and innovation, the pharmaceutical cluster is quite advanced in the manufacturing of most sorts of generic and licensed chemical medicine, but innovation within Tunisian pharmaceutical enterprises remains primitive.44 The cluster could choose three major lines of action to increase its complexity -in order of difficulty45: 43 95% of the population has access to local health services. Total expenditure on health is 6% of GDP. Per 10,000 people, Tunisia has 12. 3 doctors, 3.1 pharmacists, 32.5 nurses and midwives, 20.9 hospital beds, and 2 primary health care units or centers. As a result: Life expectancy is 75 years. Source: WHO – Global Health Observatory 44 “The Tunisian pharmaceutical sector in transformation: Inventory of fixtures and innovation prospects” , PhD Nejla Yacoub, 2008. 45 According to interviews with stakeholders. 91 1- Engage further in the Clinical trial and New Drug Approval phase of the supply chain, probably as a service provider for international pharmaceutical firms. 2- Directly engage in local R&D and Clinical Trials for the type of generic products that it already produces – instead of importing designed and developed formulas. 5- Engage in the biotech line of manufacturing, and potentially its related R&D, Clinical Trials and Drug Approval processes, particularly for “bio-similar” products. Pharmaceutical Products Rating (Lens 3): d) Conclusions 25. The pharmaceutical industry is one of the strongest candidates to be an export success story in Tunisia, provided some significant reforms on both the private and the public sector sides. 26. It is one of the exports that are not easily impacted by the social and political turmoil since its demand does not depend on stability. Global demand is also predicted to remain on the rise for many decades to come, with improvements in living conditions; this is also true for Africa and Tunisia itself. Tunisia is well positioned geographically and culturally to access the many surging and sophisticated markets surrounding it, namely Europe, Sub-Saharan and North Africa. 27. Further, product space analysis (R. Hausmann) shows that an expansion of Tunisia’s products to pharmaceuticals can bring significant opportunity gains in terms of sophistication and complexity of the economy and skill sets of the country. 28. On another note, the pharmaceutical sector is strategic when dealing with Tunisia’s macroeconomic ails. Although it is not a big employer, it does correspond to an existing, directly relevant and employment-ready, unemployed workforce. It also creates a very high added value and helps significantly bring the trade balance to equilibrium. Manufacturing firms can also have multiple production sites in many geographic locations inside Tunisia. 29. Finally, the pharmaceutical industry is also closely related to another cluster of choice in Tunisia: Health services sector and its medical tourism. Positive synergies can also be found with the ICT sector with data processing and management being crucial for this complex supply chain. 30. However, the sector suffers from some structural weaknesses that prevent it from achieving its potential, namely: ‐ Like many produced goods, it is sensitive to macroeconomic risks and attention should be given to prevent negative effects resulting from changes in the value of the local currency ‐ The local demand conditions of the industry are threatened on the midterm by the shaking solvency of the CNAM on that timeframe. Indeed, urgent reforms should be enacted in order to protect the CNAM’s good standing and the quality of the local Health sector (the Industry’s main local client – see section on Health Services) ‐ The capacity of the sector to compete internationally is currently weakened by a distorted local market regulatory framework and unlevelled playing field. 92 Exhibit 4: Pharmaceutical Cluster Map (Source: Team analysis) 93 3- Information Communication Technology, ICT (HS Code: 263, computer services) a) Lens 1- Export Profile: growth, diversity, sophistication, and opportunities 31. Although exports of computer and information services doubled in the last decade (Exhibit 5), the growth trend of Tunisian exports stood at 50 percent of the world’s trend in the same period. In 2012, 23 percent of ICT firms’ sales were from exports to international markets46, however, the contribution of information services exports was negligible to the Tunisian export basket - estimated at 0.19 percent in 2010.47 Nonetheless, due to the process and type of workforce engaged in its activities, the ICT sector is considered a high complexity one. To achieve its full potential, however, the sector needs to move away from basic offshoring services. Exhibit 5: Exports of ICT – Tunisia Exports of Computer and Info Services ‐ Tunisia 50,000 40,510 40,000 42,550 35,390 US$ Thousand 30,000 20,850 26,530 20,000 18,470 24,040 18,290 19,400 19,270 10,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Years ICT Rating (Lens 1): b) Lens 2- Sector employment profile and potential 32. The ICT sector in Tunisia currently employs 39000 people, 90 percent of which are for Highly Educated (HE) workers and 10 percent for Vocationally Trained (VT) employees48. ICT accounted for 8.3 percent of total jobs created in 2008-2011.49 And yet, only about 1.8 percent of the economically active population worked in the sector. Hence, while a continuing strong expansion would provide opportunities for underemployed graduates of technical schools and universities, it may have only a modest effect on the overall unemployment rate. Nevertheless, strong growth of ICT jobs could make an indirect contribution to poverty reduction, as the value added per ICT employee is about four times the national average. 2.2 percent of all high-paying 46 World Bank, Tunisia Investment Climate Assessment, 2012 47 Researchers calculations based on ITC database “trade map” 48 Education for Employment for Youth in the Arab World: Tunisia Deep Dive. McKinsey & Company commissioned by International Finance Corporation (2011). 49 IBM Global Location Trends: Facts & Figures. IBM (2012). 94 jobs are in this sector and the average wage is 2.5 times higher than in agriculture.50 33. In 2008, offshoring accounted for 25,000 new jobs in Tunisia; with employment growing at a CAGR of 37 percent between 2003 and 2008. These new jobs were created in 4-5 years despite the absence of an explicit sector strategy, specific incentive schemes, or active government support. A large part of these offshoring jobs constitutes the ITO industry (applications development, software integration, application maintenance, and infrastructure), which could potentially create 20,000 new jobs by 2016. 100 percent of these jobs will require higher graduates. The high unemployment rates in ICT in 2008 (24 percent)51 underscore the significant skill gap in the sector, which is estimated to reach 13,000 “offshoring-ready” individuals by 2016. ICT Rating (Lens 2): c) Lens 3 – competitiveness of the cluster 34. The lack of adapted finance and shortage of employment-ready human resources are the biggest binding constraints on the Tunisian ICT sector today. Infrastructure is only a problem to the extent that it does not provide an encouraging context for growth (though not an impediment for it): high prices and low quality of internet service reduces the attractiveness of digital commerce (thus reducing demand); and the inadequate quality and location of office space for ICT firms fails to provide an inspiring context for employees in the field (to quote a CEO in the field: “there is no Silicon-Valley effect to be found around here”). 35. Demand conditions in Tunisia are also suboptimal: often dependent on the EU market, which in turn is dependent on the unpredictable macroeconomic and political context. However, a determined move by the government to digitalize and modernize its services could provide a major ‘pull’ to the sector and allow it to develop its sophistication and thrive. 36. These reforms are sometimes to be found outside the ICT sector itself: reforms in ‘output clusters’ such as healthcare (going into e-health and digitalized medical data processing) or the banking sector can have a major effect on the development of the ICT cluster and its readiness to compete on the global market. At a more basic level, regulations about payment on-line need to be reformed because they seriously impede growth in the sector today. 37. Finally, the sector benefits from a relatively mature cluster, with most types of firms and institutions necessary for the cluster to succeed in place. Two strong institutions for collaboration (Infotica and TACT) are dynamic and provide a solid partner on the private sector side to discuss these reforms, but also to develop and promote the image of Tunisia as a destination for ICT investment (develop the ‘Tunisia brand’). ICT Rating (Lens 3): 50 Labor Market in Tunisia in 2011. Selected Results of the Labor Force Survey Statistical Bulletin. Institut National de la Statistique and the World Bank (2011). 51 Ministry of Higher Education; ANETI. 95 d) Conclusions 38. Tunisia has inherent potential for ICT and many of the key success factors are in place. There is a relatively mature and consolidated cluster, as well as fairly evolved related and supporting clusters. There is abundant availability of relatively cheap and qualified labor, as well as a large and successful diaspora. IT penetration has increased steadily 39. However, while many of the elements for success are in place, the sector faces some major structural weaknesses. Foremost among these are lack of soft skills among the available pool of unemployed and graduating students. Access to adequate finance is also a problem, particularly equity finance and foreign venture capital. These constraints are compounded by the fact that local demand remains weak and firms remain reliant on international demand 40. Firms face other issues. They suffer from limited access to international markets, in part due to a weak “Brand Tunisia”. The legal framework does not fully promote either competition or competitiveness, as seen by restrictions on capital flows (e-payments) and phone banking, and limited competition between telecoms leading to high prices for internet and communications. There is poor infrastructure: grade A buildings are virtually non-existent; office space market is sub-optimal; and ICT firms are spread-out resulting in few vibrant and connected clusters. A determined policy push by the government, with strong support from the private sector, could be instrumental in helping unlock the sector’s latent potential. Exhibit 6: Cluster Map for ICT (Source: Team analysis) 96 4- Electrical and Electronic Equipment (HS Code: 85) a) Lens 1- Export Profile 41. Mechanical-electrical-electronic equipment (MEE) exports are relatively large in Tunisia. Exports value has increased by more than five times in the last decade; going from US$828 million in 2001 to US$4.48 billion in 2011 (Exhibit 7). Over the last decade, the Tunisian export growth doubled the world export growth, which was estimated at 245 percent between 2001 and 2011. The world exports of electrical and electronic equipment went from US$869 billion in 2001 to US$2,132 billion in 2011 (Exhibit 8). The sector’s share in the total export basket of Tunisia was estimated at 20 percent in 2011, and its share in the Tunisian GDP was estimated at 10 percent in the same year. While the exports value is relatively high in Tunisia, its share in the world exports of electrical and electronic equipment is very small, estimated at 0.21 percent in 2011. In 2012, 52 percent of MEE firms’ sales were from exports to international markets.52 Tunisian exports are concentrated in three major European markets: France imports 46.6 percent of the Tunisian equipment, and had an increasing demand trend over the last decade; Germany imports 18.9 percent of Tunisian equipment, but had a decreasing demand trend; and Italy imports 8.9 percent of the equipment, but had a fluctuating demand trend over the last decade. 53 It takes MEE firms on average 4 days to clear customs for exports, and 23 percent of surveyed firms in the ICA were required to make informal payments to clear customs in 2012.While the sector lacks diversification in the marketplace, it is considered a key export sector in Tunisia, with a growing demand in sophisticated markets. The sector has promising opportunities for growth in higher-added value industries. Exhibit 7: Exports of MEE – Tunisia 52 World Bank, Tunisia Investment Climate Assessment, 2012 53 Researchers calculations based on ITC database “trade map” 97 Exhibit 8: Exports of MEE – World Exports of Electrical and Electronic Equipment ‐ World  2,500,000,000 2,132,939,441   2,000,000,000 1,809,031,335  1,919,767,031  1,971,289,337  US$ Thousand  1,500,000,000 1,253,118,415  1,633,244,334  1,605,522,628  1,401,998,982   1,000,000,000 869,777,278  1,020,187,120  893,967,226   500,000,000  ‐ 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Years 42. As parts of the machinery and electronics communities, the electrical and electronic products mark a high complexity level (PRODY) among industrial sectors. However, the average complexity level of the Tunisian industrial sector is below the complexity required for the communities, which indicates a requirement for a higher investment to bridge the gap in complexity distance. MEE Rating (Lens 1): b) Lens 2- Sector employment profile and potential 43. MEE currently employs 124000 people (Table 1). Electronics alone accounted for 10.6 percent of total jobs created in 2008-2011, while electrical equipment accounted for another 3.46 percent.54 Table 1: Employment trends in the MEE sector 2008 2007 2009 2010 2011 Number of HE, VET and SE labor employed by 11010 98500 10320 11750 12400 sector 0 0 0 0 Number of net new jobs created per year 11600 -6900 14300 6500 Sources: INS ENPE note_emploi_2010; Jobs by Sector 2007-2010 44. Employment in MEE grew at a CAGR of 8 percent between 2003 and 2008. Net job potential in 2011-2016 is estimated at 70,000-95,000. However, only 3 percent of these new jobs will require higher graduates. Tunisia’s country strategy projects 45,000 new jobs in the overall 54 IBM Global Location Trends: Facts & Figures. IBM (2012). 98 MEE sector by 2016, including from electronics and aerospace, within which the car harness industry (which now accounts for 70 percent of the car industry) will grow by ~30,000 jobs.55 45. The number of students completing education and training in MEE is 75,000-80,000 by 2016. Only 30,000-40,000 of these will actually be “MEE-ready” given the varying quality of young graduates. This will result in a gap of 40,000-55,000 (given the estimated need of 70- 95,000 by 2016). In particular, there will be gaps in the following specialties: production engineers, mechanical engineers (e.g., Computer-Assisted Design), welding, and machining. Notably, the share of HE: VET in the sector is 15: 85.56 MEE Rating (Lens 2): c) Lens 3- Sector Competitiveness 46. This sector includes many clusters and value chains under one umbrella sector. Mapping all clusters would not be possible to achieve within the scope of this exercise. However, the competitiveness of this sector explains the fact that nearly all studies (WBG and others) that were interested in a sectorial approach for Tunisia have chosen at least one of its components (electronics, aero-spatial, electro-mechanical etc.). MEE Rating (Lens 3): d) Conclusions 47. Tunisia’s MEE sector is a large and fast-growing exporter. However, its exports are concentrated in the big three European markets, and its share in world exports remains very small. While the sector lacks market diversification, it remains a key export sector for the country, with growing demand in sophisticated markets and higher-added value industries. 48. The sector is also a large and growing employer. However, only about half of MEE students will be “MEE-ready”, resulting in a significant need gap. This indicates a structural weakness in the quality of higher and vocational education, which will need to be plugged if the sector is to meet its innate potential. 5- Tourism a) Lens 1- Exports profile and potential 55 Education for Employment for Youth in the Arab World: Tunisia Deep Dive. McKinsey & Company commissioned by International Finance Corporation (2011). 56 Education for Employment for Youth in the Arab World: Tunisia Deep Dive. McKinsey & Company commissioned by International Finance Corporation (2011). 99 49. The Tunisian export value was estimated at $ 2645 million in 2010.The tourism sector’s share in the total export basket of Tunisia was estimated at 11.9 percent in 2010, and its share in the Tunisian GDP was estimated at 6.1 percent in the same year.57 In 2012, 8 percent of tourism firms’ sales were from exports to international markets.58 Tunisian exports are concentrated on Maghreb countries and European countries. Tourism Rating (Lens 1): b) Lens 2- Sector employment profile and potential 50. Employment grew in the sector at a CAGR of 4 percent between 2003 and 2008. 59 In 2011, however, tourism accounted for 115,000 jobs, down from 130,000 in 2009. In 2010, it accounted for 4 percent of total workforce, down from 4.47 percent in 2008. 51. The net job potential in tourism by 2016 is estimated at 35,000-70,000. However, only 2 percent of these new jobs will require higher graduates. Though Tunisia has ambitions and potential for high-end tourism (e.g., cultural, well-being, business), current skill gaps include poor customer service, language skills, and little innovative product design. Tourism will require significant investments to unlock job creation (particularly in physical infrastructure and creation of appropriate financing mechanisms), thus delaying the potential impact on unemployment.60 52. In hotels, 9.4 percent of jobs are in the top wage category, while in recreation this figure is much higher at 27 percent. Just 1.8 percent of all high-paying jobs are in hotels and another 0.5 percent in recreation. The average wage in hotels is about 1.4 times higher than in agriculture, while in recreation it is 1.6 times higher.61 Just 35 percent of employees in tourism in Tunisia have a permanent contract. The rest are temporary employees (53 percent) or apprentices (12 percent). In addition to their vulnerability, nonpermanent employees earn 25 to 40 percent less than those who are permanent.62 Tourism Rating (Lens 2): c) Lens 3 – Sector Competitiveness 53. Tunisia’s tourism cluster has several strengths. It is very rich in diverse endowments. Tourists enjoy relatively high degrees of safety, an open culture, a vibrant private sector that is 57 Tunisia Datasheet with sources 58 World Bank, Tunisia Investment Climate Assessment, 2012 59 Education for Employment for Youth in the Arab World: Tunisia Deep Dive. McKinsey & Company commissioned by International Finance Corporation (2011). 60 Education for Employment for Youth in the Arab World: Tunisia Deep Dive. McKinsey & Company commissioned by International Finance Corporation (2011). 61 Labor Market in Tunisia in 2011. Selected Results of the Labor Force Survey Statistical Bulletin. Institut National de la Statistique and the World Bank (2011). 62 Tunisian Ministry of Vocational Training and Employment, “Employment Statistics: 2010,” 2011, www.emploi.gov.tn/?id=3&L=2. 100 steeped in the tourism tradition, well trained graduates from the eight schools of tourism, and easy transportation. There is high potential for specialized niches like medical tourism and educational tourism. As a result, the cluster attracts sophisticated tourists from Europe and strong regional demand from the Maghreb. 54. At the same time, the cluster faces several structural challenges. Foremost is the resilient image problem, which results in attracting mostly low-value tourists from otherwise sophisticated countries. An over-dependence on Europe has left the Middle East markets untapped. This is compounded by weak local demand. Then there are infrastructural and logistics issues: low-cost airlines are non-existent, very few boutique hotels and limited hotel diversity in general, ICT usage is weak, no open-sky policy, no renowned major tourist centers with global standards (e.g. casinos, entertainment parks), and Medinas remain unexploited. The cluster suffers from red-tape, tour operators control the market, and IFCs are crippled. A concerted public-private push is needed for the cluster to re-invigorate and re-invent itself. Exhibit 9: Cluster Map for Tourism Source: Salhab et al. (2012) 101 d) Conclusion 55. The reform of the tourism sector is the focus of many international development organizations, and its reform has been the subject of a recently updated governmental strategic study. Many (though not all) of the points raised in this study resonate with the analysis above. 56. One clear consensus is on the need to move up the value chain, and many actions that can lead to this are highlighted in the strategic plan. The challenge however is in implementation, and a large part of this depends on the private sector embracing these reforms. Tourism Rating (Lens 3): 102