Report No. 20173-TUN Republic of Tunisia Private Sector Assessment Update Meeting the Challenge of Globalization (In Three Volumes) Volume II: Main Report December 14, 2000 Private and Financial Sector Development Department Middle East and North Africa Region Document of the World Bank CURRENCY AND EXCHANGE RATE Currency Unit = Tunisian Dinar (TD) 1993 1994 1995 1996 1997 1998 1999 TD per US$, period average 1.004 1.012 0.946 0.973 1.106 1.139 1.184 TD per US$, end of year 1.047 0.991 0.951 0.999 1.146 1.101 1.260 FISCAL YEAR OF BORROWER January 1 - December 31 ABBREVIATIONS AND ACRONYMS AAEU Association Agreement with the European Union AFI Agence Fonciere de l'Industrie API Agence de Promotion de l 'Industrie BNA Banque Nationale Agricole BH Banque de 1'Habitat BOO Build-Own-Operate BOT Build-Operate-Transfer CAREPP Commission dAssainissement et de Restructuration des Entreprises a Participation Publique CC Cahier des Charges CEJJ Centre d'Etudes Juridiques et Judiciaires CEM Country Economic Memorandum CEPR Center for Economic Policy Research CERP Centre d'Etudes de Recherche et de Publication CFIB Canadian Confederation of Independent Business CNRPS Caisse Nationale de Retraite et de Privoyance Sociale CNSS Caisse Nationale de Securite Sociale COPIL Comite de Pilotage CSI Commission Superieure d'Investissement DGP Directeur General de la Privatisation ECES Egyptian Center for Economic Studies EU European Union ERF Economic Research Forum ERM Exchange Rate Mechanism FDI Foreign Direct Investment FIAS Foreign Investment Advisory Service FIPA Foreign Investment Promotion Agency FITI Fonds d'Incitation a l'Innovation dans les Technologies de l'Information FODEC Fonds de Developpement de la Competitivite FODEP Fonds de Depollution FREF Fonds de Restructuration des Entreprises Publiques GATT General Agreement on Tariffs and Trade Vice President: Jean-Louis Sarbib Country Director: Christian Delvoie Sector Director: Wafik Grais Task Team Leader: Hamid Alavi GDP Gross Domestic Product GMG Groupements de Maintenance et de Gestion GMPCS Global Mobile Personal Communication Systems GSMC Global System of Mobile Communication IACE Institut Arabe des Chefs d'Entreprises INS Institut National de la Statistique LEQ Institut d'Economie Quantitative INNORPI Institut National de la Normalisation et de la Propriete Intellectuelle IPOs Initial Public Offerings IPPs Independent Power Producers MCIIE Ministere de la Cooperation Internationale et de l'Investissement Exterieur MDE Ministere du Developpement Economique MFA Multi-Fiber Agreement MOJ Ministry of Justice OECD Organization for Economic Cooperation and Development OMMP Office de la Marine Marchande et des Ports ONAS Office National de I Assainissement OTC Office de Topographie et de Cartographie PPI Private Participation in Infrastructure PSA Private Sector Assessment QAG Quality Assurance Group QR Quantitative Restriction SHS Standard Harmonized System SICAF Societe d'Investissement a Capital Fixe SICAR Societe d'Investissement en Capital Risque SICAV Societe dI'nvestissement a Capital Variable SIDCO Societe de Developpement et d'Investissement du Centre Ouest SIREP Systeme Information Reseau Entreprises Publiques SME Small and Medium Enterprises SODICA Societe de Developpement et dInvestissement du Cap Bon SODINO Societe de Developpement et dInvestissement du Nord Ouest SODIS Societe de Developpement et d'Investissement du Sud SONEDE Societe Nationale dExploitation et de Distribution des Eaux SPPI Societe de Participation et de Promotion des Investissements SSR Social and Structural Review (Tunisia) STAM Societe Tunisienne d'Acconnage et de Manutention STAR Societe Tunisienne dAssurance et de Reassurance STB Societe Tunisienne de Banque STEG Societe Tunisienne de l 'Electricite et du Gaz TD Tunisian Dinar UIB Union Internationale de Banques USAID United States Agency for Intemational Development VAT Value Added Tax VSAT Very Small Aperture Terminal WTO World Trade Organization Republic of Tunisia - Private Sector Assessment Update Volume II - Main Report Republic of Tunisia PRIVATE SECTOR ASSESSMENT' UPDATE TABLE OF CONTENTS Page PREFACE ...............................................3 1. INTRODUCTION ...............................................1 A. INCREASED PRIVATE INVESTMENT IS VITAL FOR GROWTH ......................................................:.I B. THE FOUNDATIONS OF A COMPETITIVE PRIVATE SECTOR ............................................2 2. CHARACTERISTICS AND PERFORMANCE OF THE PRIVATE SECTOR ................................................................ . 3 A. ROLE AND CHARACTERISTICS OF THE PRIVATE SECTOR .....................................................................4 B. PERFORMANCE .....................................................................7 3. CONSTRAINTS To ACCELERATED PRIVATE SECTOR INVESTMENT ......................................... I 1 A. MOVING MORE DECISIVELY ON REFORMS COMPLEMENTARY TO TRADE LIBERALIZATION ............................. 11 B. PERCEPTIONS OF PRIVATE INVESTORS ..................................................................... 13 4. REORIENTING POLICIES FOR PRIVATE SECrOR-LED GROWTH .................................................................... 1 5 A. INCENTIVES FOR PRIVATE INVESTMENT .................................. 16 B. PRIVATIZATION .............................. 27 C. RESHAPING LEGAL AND REGULATORY POLICIES .30 D. REDUCING ADMINISTRATIVE BARRIERS ...................................................................... 33 5. IMPROVING ACCESS To FINANCE ...................................................................... 36 A. ACCESS TO FINANCE THROUGH BANK CREDIT ....................................................................... 37 B. ACCESS TO FINANCE THROUGH CAPITAL MARKETS ...................................................................... 40 C. ACCESS TO FINANCE FROM NON-BANK FINANCIAL INSTITUTIONS ..................................................................... 42 D. GOVERNMENT-SPONSORED PROGRAMS ...................................................................... 43 E. PROPOSED MEASURES TO FACILITATE ACCESS TO FINANCE BY SMES .............................................................. 43 6. LAYING FOUNDATIONS FOR SUSTAINED LONG-RUN PRIVATE SECTOR COMPETITIVENESS ........................ 46 A. DEVELOPMENT OF SKILLS ...................................................................... 46 B. MODERNIZING AND EXPANDING TUNISIA'S INFRASTRUCTURE ..................................................fi. 50 1) TELECOMMUNICATIONS .............................................. 51 2) PORTS ...............................................58 3) INDUSTRIAL LAND .............................................. 59 4) POWER ............................................. ..59 5) WATER ...............................................60 6) SANITATION ..................1 . .................................. .............. 61 7) CROSS-SECTORAL ISSUES .............................................. . 6 1 C. REORIENTING GOVERNMENT SUPPORT TO SME DEVELOPMENT .62 7. LOOKING AHEAD.65 Republic of Tunisia - Private Sector Assessment Update Volume 11 - Main Report List of Tables Page Table 2.1 Private/Public Value-Added as a share of GDP, 1983-1997 ..............................................4 Table 2.2 Profile of the Tunisian Economy, 1997 .......................................................5 Table 2.3 Distribution of Tunisian Enterprises by Size .......................................................6 Table 2.4 Distribution of Firms by Sales, 1997 .......................................................6 Table 2.5 Offshore and Onshore Enterprises, 1998 .......................................................7 Table 2.6 Private Investment in Tunisia .......................................................8 Table 2.7 Share of EU Imports ...................................................... 10 Table 3.1 Response of Private Investment as a Share of GDP ...................................................... 12 Table 3.2 The Five Leading Constraints to Private Initiative ...................................................... 13 Table 4.1 Tunisia's Tariff Dismantling Commitment in the EU Association Agreement ................ 18 Table 4.2 Incentives Granted to Offshore and Partially Exporting Firms ........................................ 24 Table 4.3 Privatization by Sector in Tunisia, 1987-1998 ...................................................... 28 Table 4.4 Public and Private Sectors in Tunisia-Selected Performance Indicators .......................... 29 Table 4.5 Number of Days to Realize Operations Related to Imports (by size of enterprise) .35 Table 4.6 Tunisia's Position among other Countries - Dwelling and Customs Clearance Time .35 Table 4.7 Modernization of the SINDA System and its Impact on Reducing Transaction Costs by the year 2003 ..................................................... 36 Table 5.1 Indebtedness and Capital Structure of Private and Public, 1996 ...................................... 37 Table 5.2 Access of Small and Large Private Firms to Finance, 1996 ............................................. 37 Table 5.2 Access of Small and Large Private Firms to Finance, 1996 ............................................. 37 Table 5.3 Share of Debt, Long-Term Debt, Equity Capital ..................................................... 38 Table 5.4 Perceived Constraints on Access to Finance According to the Size of Firms .................. 38 Table 5.5 Access to Credit and Reasons for not Borrowing from Banks according to Size of Firms ........................................ 39 Table 5.6 Medium and Long-Term Financing of Enterprises ........................................ 40 Table 5.7 Issues of Corporate Bonds by Non-Financial Enterprises ........................................ 41 Table 6.1 Levels of Schooling in Tunisian Manufacturing, 1994 ........................................ 46 Table 6.2 Prices of International Communications ........................................ 54 Table 6.3 Prices of Internet Services ........................................ 55 Table 6.4 Quality of Telephone Services ........................................ 56 List of Boxes Box 4.1 Main Features of the Tunisian Investment Code ........................................ 22 Box 4.2 Indonesia's Elimination of Tax Holidays in 1984 ........................................ 25 Box 4.3 Intel's Investment in Costa Rica ........................................ 25 Box 5.1 Lending to Small Businesses - A Menu ........................................ 44 Box 6.1 Impact of Telecommunication Sector Constraint on Private Sector Development ........................................ 57 Box 6.2 Example of Excessive Regulation: The Internet Segment ........................................ 57 Box 6.3 Export Market Access Fund ........................................ 64 List of Figures Figure 2.1 Trends in Foreign Direct Investment .........................................9 Figure 4.1 Response to Spontaneous Constraints ........................................ 33 Figure 6.1 Telecommunications Revenues as Percent of GDP ........................................ 51 Figure 6.2 Status of Fixed-Line Networks ........................................ 52 Figure 6.3 Mobile Telecommunications Potential ........................................ 52 Figure 6.4 Internet Growth Potential ........................................ 53 Figure 6.5 Telecommunications Costs ........................................ 54 Republic of Tunisia - Private Sector Assessment Update Volume II - Main Report REPUBLIC OF TUNISIA PRIVATE SECTOR ASSESSMENT UPDATE PREFACE The purpose of this Private Sector Assessment (PSA) Update is to evaluate how conditions for private sector development in Tunisia have evolved since 1994, when the first PSA was carried out, and what are the remaining constraints to private investment. Because of the rapidly changing environment which is presenting Tunisia's private sector with significant competitive pressure, however, this PSA goes beyond simply assessing the progress in implementing the recommendations from 1994. Rather, it lays out a more elaborate framework for thinking about private sector development in Tunisia in the context of global economic integration and increasing competition from international competitors, especially in the European market. Tunisian exports to Europe have traditionally been strong, but are now under heightened competition from Asian and Central and Eastern European countries. They are also being hurt by the continued anti-export bias of the domestic economy, even as other countries are rapidly putting in place the legal and regulatory framework, infrastructure, and investment incentives for private sector activity that are enabling their firms take advantage of the opening of the European market. Hence, improved competitiveness of Tunisian enterprises, especially small and medium ones, is a major issue in this context. After analyzing the characteristics and performance of the private sector since 1994, the report describes the remaining constraints to private sector development, from the point of view of both Tunisian entrepreneurs and foreign investors. It then proposes reforms in incentives to encourage private sector-led growth and lays out a framework for modern governance; discusses the need and measures to expand access to finance for small and medium enterprises; and proposes options to lay the foundation of a long- term private sector growth strategy. The authors hope that the analysis in this report will provide some options to enable Tunisia to maintain its competitive position in, a environment radically different from that which Tunisia's past success possible. The report was written by a team led by Hamid Alavi, and consisting of Denis Chaput, Christine Richaud, Lorenzo Savorelli (access to finance); Dominique Bichara and Eric Haythorne (legal and regulatory framework); Guillermo Hakim (skill development); Mohamed Lahouel (Competition policy); Faycal Lakhoua (business survey); Michel Loir (transport); Leila Mokaddem and Pierre de Raet (privatization); Carlo Maria Rossotto (telecommunications); Manuel Schiffler (water and sanitation, power, industrial land); and Andrew Stone (design of the business survey questionnaire). Christine Richaud also contributed to the analysis of the investment code and SME support mechanisms. Araceli de Leon- Herlihy (IFC) contributed to the analysis of the private sector structure and performance. The team wishes to thank Christian Delvoie, Hassan Fazel, Fatma Felah, Olivier Fremond, Edward Gardner, Wafik Grais, Daniela Gressani, Auguste Tano Kouarne, Benoit Millot, Jacques Morisset, John Nellis, and Andrew Stone, for their invaluable comments, and Liliane Vert for her contribution to the editing and production of the document. The team also benefited greatly from a QAG review of this report. The report could not have been completed without generous collaboration of Institut Arahe de Chefs d'Entreprises, which also financed and carried out the enterprise survey. Republic of Tunisia - Private Sector Assessment Update Page I Volume H - Main Report 1. INTRODUCTION To prepare for the competitive challenges posed by the adherence to the Association Agreement with the European Union (AAEU) and World Trade Organization (WTO)requirements, as well as the dismantling of the Multi-Fiber Agreements (MFA), Tunisian firms need to undertake investments to find and develop markets, implement more efficient production processes, improve product quality, develop new products and services, and respond flexibly to changing market demancd. To encourage these investments, the Government has made significant progress in creating an enabling environment. But, private investment has not responded as expected to policy reforns and support programs. This report is an update of a Private Sector Assessment (PSA) conducted in 1994, and complements the Social and Structural Review (SSR). The report outlines Tunisia's progress in improving the environment for private sector activity since that time, and examines the reasons for the persistence of weak private sector investrnent despite important recent reforms -- including in the areas of trade liberalization, investment incentives, legal and regulatory reform, privatization of state-owned enterprises, financial sector development, trade facilitation, and technical support to private enterprises. Based on these findings, the report then focuses on what further policy and institutional measures are needed to overcome the remaining constraints to private investment. A. INCREASED PRIVATE INVESTMENT IS VITAL FOR GROm'TH 1.1 The heightened international competition will require Tunisia to develop a stronger, more dynamic private sector to achieve the Government's growth objective of 6-7 percent per year in 1999- 2001 and beyond. The private sector is facing competitive pressure partly from the process of tariff dismantling in the context of the Association Agreement with the European Union (AAEU), and partly from heightened competition on the European market attributable to imports from Asia and East and Central European countries.' The phasing out of the Multi-Fiber Agreement, which gave Tunisia preferential access to European markets, will also subject Tunisia's key textile and clothing export industry to increased competition from other emerging economies. Under increased competition, Tunisian firms will need significant investment to implement more efficient production processes, improve product quality and competitiveness, build capacity in new sectors and increasingly apply modern information technology for supply chain management. At the same time, the AAEU will put pressure on public finances. Increased private investment is therefore vital to economic growth in coming years. But, increasing private investment requires the implementation a critical mass of policy reforms, beyond what has been achieved so far, to win domestic and foreign investors' confidence under changing business conditions. 1.2 Based on CAS projections, achieving a GDP growth rate of 7 percent would imply a rate of private investment growth of about 12 percent per annum. Significant progress in creating an enabling environment for private sector activity has been made in the 1990s-especially since the last PSA in 1994. While the private sector's contribution to growth haes increased following these progressive reforms, private investment has not adequately increasecl, remaining below the Government's In addition to the AAEU, global deregulation, improvements in information exchange and transportation, rapid pace of technological progress, and fast adoption of e-commerce, are expected to increase competitive pressure on Tunisian private sector. Republic of Tunisia - Private Sector Assessment Update Page 2 Volume If - Main Report expectations, as outlined for example in the IX Plan.2 The persistently weak private investment response suggests that price reform and macroeconomic stabilization, as well as many of the recent programs to encourage private investment, have not compensated for the remaining inefficiencies in the business environment. The remaining bottlenecks are, in large part, the legacy of Tunisia's past inward-looking economic policy and the reliance on public investment to lead economic growth, which have created a large public sector, a protected formal private sector, and in parallel a large number of smaller enterprises with limited access to formal sources of finance and markets. B. THE FOUNDATIONS OF A COMPETITIVE PRIVATE SECTOR 1.3 To win the confidence of private investors, Tunisia will need to create a more predictable business environment, where the rules-of-the-game are simple and clear, and where state involvement is minimal. This will unleash private initiative to respond to market signals. The generous, but complex, investment incentives, designed to favor certain activities and enterprises over others, have implicitly increased government control of private sector activity. Winning investors confidence, therefore, calls for a departure from this internally driven model of governance, which allows for personal connections to influence business decisions and encourages rent-seeking behavior. This hampers private investment at large, even when the Government's stated goal is to invigorate the private sector with transparent incentives and institutions accessible to all private enterprises. 1.4 The present report argues that a range of policies and measures would improve the efficiency of the private sector and its contribution to the Tunisian economy. These include: * Enhancing market signals and competition by revising the schedule of tariff reductions in the context of the AAEU in a way to reduce effective protection, and by removing the remaining controls on retail prices. * Simplifying the investment incentive regime to create more confidence on the part of private investors, and reduce the dualism within the industrial sector between offshore and onshore firms. * Accelerating privatization and streamlining those administrative procedures that are still presenting a constraint for business start-up and operation. * Reshaping domestic regulatory framework to facilitate business entry, operation and exit, and to increase the ability of private investors to conduct efficient transactions, along with well-defined property rights, effective and clear enforcement of contracts, and an efficient system for resolving disputes. * Facilitating access to formal sources of finance for private investors, especially SMEs. 1.5 The report also suggests the following actions towards laying the foundation for sustainable longer-term private sector development: * Building labor skills by re-shaping the vocational training system. * Modernizing infrastructure, especially telecommunications and marine transport, that help connect the private sector to the global economy, and addressing the shortages of industrial land. * Re-orienting private sector development programs more towards the needs of the private sector. 2 While the private sector share has grown rapidly in the manufacturing sector (from 45 percent in the late 1980s to 85 percent today), it has lagged behind the public sector in the non-tourism services sector (the biggest contributor to economic growth) and in non-manufacturing industries. Private investment is below what was forecast in the Ninth Development Plan, and the private sector share in total investment (51 percent) remains well below that of most other emerging economies. Following the signature of the AAEU in 1995, onshore investment has actually declined in nominal terms (TD 874 million in 1998, compared to TD 900 million in 1995). Republic of Tunisia - Private Sector Assessment Update Page 3 Volume II - Main Report 2. CHARACTERISTICS AND PERFORMANCE OF THE PRIVATE SECTOR While Tunisia is becoming a private sector-oriented economy as a result of the recent reforms to encourage local and foreign investment (Annex 1), the private sector still accounts for only about 63 percent of GDP, and its share in total investment remains below average for competitors. Most private firms are SMEs and microenterprises, and account for the bulk of value added and employment in agriculture, manufacturing, and tradable service sectors, but are hardly involved in many other important activities such as mining, telecommunications, power, education, and air and marine transport, and their share in exports remains limited. The conditions that made Tunisia's good performance possible are being fundamentally altered by developments in the international markets. Tunisian producers are facing much stronger competition in their export markets, following the elimination of the MF,, and in the local market, with the implementation of the free trade agreement with the European UJnion Manufactured exports growth rate in real terms has declinedfrom 12.8 percent p.a during 1987-91 to 4.0 percent p.a during 1992-98. In addition, Tunisia's share in certain key export products, such as boys' and girls' clothing, has fallen in traditional export markets relative to that of new competitors. To face these challenges, further private investment is required to upgrade products, develop new activities and cultivate new markets. 2.1 The descriptive information in this section focuses on two aspects of the private sector: (a) its structural, socioeconomic, and sectoral characteristics; and (b) its contribution to various macroeconomic aggregates such as value added, employment and investment. This information, however, suffers from three inadequacies. First, the distinction between public and private economic activity is not always clear. The definition of a public enterprise has evolved over time. A Government share ownership of 10 percent was sufficient for an enterprise to qualify as public up to 1985; this threshold was raised to 34 percent that year, and further to 50 percent for non-financial enterprises in 1989. These changes in definition reduced the number of firms classified as publicly owned, but in aggregate, public assets have not decreased substantially. Second, in part due to the first shortcoming, there is a lack of comprehensive, systematic, and consistent data on the private sector, and most descriptive information is therefore fragmentary in nature. Third, available data almost exclusively refer to registered economic activity, thereby excluding the significant area of informal sector (unrecorded) activity. 2.2 Tunisia's past approach to economic management has been marked by a protectionist trade regime, little competition in the domestic market, and a large Government presence in the economy, including a cumbersome bureaucracy and regulatory regime. The present economic structure, even with a number of important reforms, still carries the legacy of this past policy.3 There are three categories of private firms:4 * A formal, organized private sector. Most Tunisian private enterprises have grown under protection, and are largely family owned. The more established elements within the business sector seem to give as much priority to the relationship with the Government as to the marketplace as a source of growth. The organized private sector includes: > Large enterprises, defined as those with 200 or more permanent employees. The Government is a shareholder in about 200 of these enterprises, which total 507. 3Relative to that of the low and middle-income countries, the Tunisian public sector is large (Annex 2); and relative to their private counterparts, public enterprises (PEs) tend to be large and inefficient. 4 In most statistics, the private sector includes firms in which the Governmmet has less than 34 percent ownership. Republic of Tunisia - Private Sector Assessment Update Page 4 Volume H - Main Report > Small and medium enterprises, defined as those employing between 10 to 199 employees for industry and services except commerce, and 6 to 199 employees in commerce. These enterprises generally have fixed locations, are registered with the proper authorities, and keep regular accounts. Compared to their larger counterparts, these firms usually have difficulty accessing the financial and other resources necessary for competitive investments. > Microenterprises, defined as those employing between 1 and 10 employees in industry and services and 1 to 5 in commerce. * Offshore enterprises. To counter the anti-export bias of the protected domestic economy, an offshore sector was created to boost exports. The offshore sector refers to the population of enterprises that export 80 percent or more of their production-a total of 1,874 enterprises at the end of 1998, which account for 63 percent of merchandise exports, and more than 80 percent of manufactured exports. More than 60 percent of manufactured exports are textiles and garments, half of which are produced by offshore enterprises through subcontracting activities and marketed overseas by foreign investors in the offshore companies or by foreign buyers. The offshore enterprises operate under specific incentive and rules and are therefore much more exposed to external competition than other enterprises in the organized sector. * Informal sector firms. The desire to escape taxes and costly regulations, as well as crowding out by public sector firms, has led to the creation of a large informal sector and a proliferation of small enterprises.5 A. ROLE AND CHARACTERISTICS OF THE PRIVATE SECTOR 2.3 The Share in GDP and Employment. The share of the private sector in GDP, including the financial sector, is 63 percent (Table 2.1 )-a slight increase since 1990. The declining share of the public sector is due to the new dynamism shown by private firms and to the gradual implementation of the privatization program. A large-scale divestiture program for 1999-2000, involving 76 PEs, should lead to a further increase in the private sector's share in GDP. Table 2.1: Private/Public Value-Added as a Share of GDP, 1983-1997 ____________ (shares of GDP at factor cost) Private 0 Sctor Pubitc Sectr 1983-86 58.1 35.3 17.9 4.9 41.9 27.5 14.4 1987-91 59.5 36.9 17.8 4.8 40.5 26.4 14.1 1992-95 63.1 38.2 21.2 3.7 36.9 22.3 14.6 1995 63.8 38.8 21.4 3.6 36.2 21.2 15.0 1996 65.3 39.9 22.2 3.2 34.7 19.9 14.8 1997 63.3 _ ___ 36.7 ___ Source: National Accounts (background tables, various issues), Institut National des Statistiques (INS). * Microenterprises are defined as enterprises with fewer than 5 employees in commerce and fewer than 10 in other. Public enterprises are defined by a state equity share of at least 34 percent (methodological notes of the National Accounts, INS). 5 This report does not treat the informal sector in detail, but background information is available in files. Republic of Tunisia - Private Sector Assessment Update Page 5 Volume 11 - Main Report 2.4 The private sector generates almost all agricultural and fishing output and the bulk of value added of manufacturing and non-administrative services (Table 2.2), but is less involved in sectors such as telecommunications and transport (Annex 2). It also accounts for the bulk of employment generation, especially in sectors where competition is higher and regulations less binding. Table 2.2: Profile of the Tunisian Economy, 1997 (TD million) Sector Value Add ,d Private Prvate C'Oacen- lmpot Secto Share Sector Shre tratifo P _eera ' of o 'f ' '' .io Invetent mploymet Total Private VA Share % - % % AGRICULTURE AND FISH 2775.7 98.0 92.8 98.1 n.a. 12.1 MANUFACTURING 4583.3 92.4 85.0 INDUSTRIES Agro-industries 1152.9 96.2 84.2 77.6 88.4 11.9 Construction material and glass 408.2 90.4 75.0 80.7 57.5 8.5 Mechanical and electrical 588.2 94.1 80.0 78.3 85.0 67.9 Chemicals 476.6 51.9 50.0 68.9 86.4 40.4 Textiles, clothing, leather 1440.1 100.0 99.0 97.0 53.9 61.0 Miscellaneous industries 517.3 99.7 98.0 95.1 62.0 29.9 NON-MANUF. INDUSTRIES 2505.3 42.3 50.4 Mines 170.1 7.5 32.7 n.a. Petroleum and gas 851.1 10.8 0.0 100.0 Electricity 343.7 9.6 0.0 100.0 Water 110.2 9.9 0.0 100.0 Civil works and construction 1030.3 88.5 85.5 98.1 n.a. SERVICES 7347.6 87.4 40.4 Commerce 1723.7 96.7 n.a. Transport and communication 1646.5 47.1 54.7 100.0 Hotels, cafes, restaurants 1344.9 99.8 97.5 88.3 Other services 1794.7 99.1 _ 89.8 Source: Minist&re du Developpement Economique (MDE), IEQ Survey for concentration ratios (share of the four largest firms in sales). Data exclude the financial sector. Data on private sector share in investment is for 1998. 2.5 Dominance of small enterprises. The share of enterprises with less than six employees has remained constant at about 82 percent since 1987. In 1996 there were only about 1,400 firms out of a total of about 87,000 with more than 100 employees (Table 2.3).6 Apart from a few dozen that can be considered as large enterprises employing more than 500 persons and belonging mostly to the public sector and the financial sector, the majority of Tunisian firms are very small private units, which have limited access to formal sources of finance, and for which highly qualified personnel is too costly. Moreover, since most of these firms fall into the onshore category, administrative bottlenecks also represent a problem for them. 6 According to INS and Caisse Nationale de Securite Sociale (CNSS) data, the informal sector (non-registered) includes 340,000 firms, the majority of which are microenterprises. Republic of Tunisia - Private Sector Assessment Update Page 6 Volume II - Main Report Table 2.3 Distribution of Tunisian Enterprises by Size Measured by Employment Numuber of ~Perentag,e Number .Percentag'e Number of~Percentgeo Less than 6 31,995 81.8 43,874 81.0 71,984 82.4 6-10 2,771 7.1 3,987 7.3 5,983 6.9 11-20 1,793 4.6 2,600 4.8 3,892 4.5 21-50 1,264 3.2 1,931 3.6 2,830 3.2 51-100 535 1.4 788 1.4 1,217 1.4 More than 100 727 1.9 1,023 1.9 1,420 1.6 Total of more (7,090) (18.2) (10,329) (19.0) (15,342) (17.6) than 6 _ _ _ All sizes 39,085 100 54,203 100 87,326 100 Source: Caisse Nationale de Securite Sociale (various issues). 2.6 In the industrial sector, firms with fewer than 20 employees account for almost 60 percent of all active private companies, and companies with fewer than 250 employees account for more than 94 percent of all companies (Annex 2). In addition, about 45 percent of manufacturing enterprises have a sales volume below TD 0.5 million, and 77 percent below TD 2 million (Table 2.4). Table 2.4: Distribution of Firms by Sales, 1997 (TD million) Sales > TD 0.5 million From TD 0.5 to 2 million > TD 2 million Exporting 1013 524 266 1803 Non-exporting 722 731 619 2072 Total no. of firms 1735 1255 885 3875 Sales > TD 0.5 million From TD 0.5 to 2 million > TD 2 million Exporting 56 29 15 100 Non-exporting 35 35 30 100 Total sales 45 32 23 100 Source: Agence de Promotion de l 'Industrie (API), May 1999. 2.7 The limited size of firms is due to two main factors: Family ownership and the highly protectionist policy that lasted over more than three decades. Tunisian entrepreneurs have so far been very reticent to opening ownership outside family ties. Given limited financial resources, this attitude has restricted their choice of investment to small projects. The existence of high barriers to entry of imports has made many of such projects artificially profitable. Republic of Tunisia - Private Sector Assessment Update Page 7 Volume H - Main Report 2.8 High concentration of production by large firms. As indicated in Table 2.4, SMEs and microenterprises-despite their large number-account for only a fraction of production in the Tunisian economy. Market concentration, as measured by the shares of the four largest firms in total value added in a given sector, is very high due to the small size of the domestic market and to the legacy of investment licensing, which was not discontinued until 1987. The most concentrated industries are agro-industry, chemicals, and the mechanical and electrical industries; the least concentrated-and most export oriented-are textiles, clothing, and leather goods. Concentration in the construction materials industry varies, with tile making being the least and cement manufacturing the most concentrated activity (87 percent of production is by the four largest firms which were, until recently, all state owned). 2.9 Dual structure. An offshore sector was created through special incentives to counter the anti- export bias of its protected domestic economy in the 1970s and 1980s. While this policy fueled the country's strong export performance and facilitated Tunisia's entry into export markets, it has not given the domestic private sector the stimulus to competitiveness that normally results from external trade and competition. The main reason is that the offshore sector has developed very few linkages with the onshore economy, and takes from it virtually no tradable inputs.7 Table 2.5: Offsbore and Onshore Enterprises, 1998 Industries Number of Enterpriss Employment ExportsSlS Onshore Offshore Onshore Offshore Percent Agro-industries 364 62 36,414 7,101 21.1 Construction materials and glass 278 10 24,614 290 12.7 Metallurgical and mechanical industries 389 43 25,375 2,276 19.7 Electric and electronic industries 102 94 6,709 19,484 57.8 Chemical industries 305 29 16,403 6,859 39.1 Textiles and clothing 386 1,436 24,236 14,6021 81.0 Wood and wood products 94 15 6,855 595 17.4 Leather and shoes 101 131 5,265 12,009 67.4 Miscellaneous industries 190 54 11,074 2,257 20.3 Total 2,209 1,874 156,945 196,892 36.5 Source: Agence de Promotion de l'Industrie (API) B. PERFORMANCE 2.10 Investment Trends. Even though Tunisia's overall investment ratio (the ratio of investment to GDP) has been higher than that of middle-income developing countries (outside of East Asia), the private sector's share of total investment is still too low in comparative terms-5 1 percent in 1998, against 48.4 7 Another indication of dualism is import penetration, measured by the ratio of imports to domestic demand, which increased in 1988, in the early phase of structural adjustment and following the easing of import restrictions, but showed little change thereafter. The important exceptions were textiles, clothing, and leather, for which the collective ratio rose from 51 percent in 1988 to over 60 percent in 1997. Republic of Tunisia - Private Sector Assessment Update Page 8 Volume II - Main Report percent in 1990. Thus the public sector continues to play a much bigger role in physical capital formation than in most other emerging economies (Annex 2).s 2.11 The most significant expansion of private investment since the start of structural adjustment has occurred in manufacturing, the share of which increased from about 48 percent in 1990 to more than 85 percent in 1998 (more than 35 percent of private investment in the manufacturing sector is currently in the context of the mise a niveau investments).9 The private sector share has also increased in non- manufacturing investment, from 40 percent prior to structural reforms to 50 percent at present, due mainly to the expansion of foreign direct investment (FDI) in petroleum and gas exploration, and domestic private investment in construction.10 By contrast, the private investment share in services has hovered around 40 percent since the 1980s. This sector is dominated by activities such as transport and telecommunications, where privatization and private sector participation have made the least progress. Table 2.6: Private Investment in Tunisia (values in current TD million unless otherwise noted) Total investments 2,500 4,121 5,690 Total public sector 1,289 2,126 2,788 Public administration 565 1,005 1,258 of which equipements collectifs 258 423 615 Public enterprises 685 870 1,530 Total private sector 1,211 1,995 2,902 Breakdown domestic/foreign Foreign direct investment except privatization 365 313 351 Local investment 846 1,682 2,551 Foreign in private investment (percent) 30.1 15.7 12.1 Breakdown offshore/onshore investment' Total industrial investment 1,054 1,046 1,166 Offshore 319 147 292 Onshore 735 899 874 Breakdown of private non-housing investment by size 1990 1995 1996 Microenterprises 260 361 396 Companies 641 1,156 1,124 Share of microenterprises in private investment (percent) 29.0 24.0 26.0 Investment tied to rnise a niveau 1996 1997 1998 Investment 192 279 403 Mise a niveau subsidies 23 39 54 Sources: (a) INS and Central Bank; (b) API; (c) Bureau de Mise aL Niveau. 2.12 Contribution of private investment to growth. Although private investment ratio (as a share of GDP and total investment) has remained below expectations, the contribution of the private sector to the growth of value-added of non-financial enterprises has increased steadily since the mid-1990s. Tables in Annex 2 shows that while the contribution of sectors in which the private sector plays a significant role While private investment has taken the lead over public investment in manufacturing, it has lagged behind in infrastructure and non-manufacturing sectors. Public enterprises (34 percent or more state owned) continue to be the major investor in transportation (especially air and maritime), telecommunications, energy, electricity, water, mining, and chemicals. The Government also invests in social services (education and health), as well as in infrastructure (agriculture, irrigation, telecommunications, and roads). The microenterprise share of private investment stood at about 25 percent of total private investment in 1996, down somewhat from 1990. 9 The privatization of the bulk of the cement enterprises, planned for the next three to four years, should increase private investment share in the industrial sector. '0 This share is also expected to rise in the future because of the greater projected involvement of foreign firms in activities previously reserved for the public sectors, such as power generation and sewage treatment. Republic of Tunisia - Private Sector Assessment Update Page 9 Volume H - Main Report (in terms of its share in value added) has grown steadily in recent years, the rate of investment growth has been highest in sectors where the public sector dominates. This irnplies that private investment has been more efficient than public investment, and that measures to improve the business environment, accelerate privatization, and reduce transactions costs of doing business, are likely to go a long way toward promoting growth. 2.13 Foreign direct investment. The Government has taken important steps to encourage FDI.L The incentive regime has been made more attractive to foreign investment. The Foreign Investment Promotion Agency, created in 1996, has developed investment promotion strategies and is actively promoting foreign investment in agro-industry, automotive components, information technology, electronics, and pharmaceuticals. Foreign investors' perceptions of the risk of investing in Tunisia are also steadily improving. Sovereign rating, a major element in risk assessment by foreign investors, shows that Tunisia is increasingly achieving investment-grade status, just below that of Kuwait, Israel, and Lebanon. The level of FDI (excluding privatization) has been regularly increasing over the past five years, from TD 305 million in 1995 to TD 437 million in 1999. Moreover, this rise is mainly due to a marked increase of FDI in the manufacturing sector, which accounted for 45 percent of FDI (excluding privatization) in 1999, compared to 8 percent in 1995. Nevertheless, the level of FDI in Tunisia remains marginal. The share of FDI in total private sector investment has been declining, from 30 percent in 1990 to only 12 percent in 1998.12 The share was high in the first half of the 1990s because of large FDI in the energy sector (87 percent in the mid-1990s). It is worth noting that the marked increase in non-energy FDI in 1998 (Figure 2.1) corresponded to the privatization of two large cement companies (Cimenteries de Jebel Ouest and Enfidah), which fetched about TD400 million, thus bringing the Ilevel of total FDI to TD760 million. In 1999, FDI was TD 437. Figure 2.1: Tunisia: Trends In Foreign Diirect Investment 0Foreign In vestm en ts in Tunisia (l192-19 99) 1 8 7 000 6 400 : 300_ ___ 2 00 00 19 9: 2_ 9 9 1 9 9 4 1 9 9 1996 19 9 199a 1999 Source: Government of Tunisia 2.14 Furthermore, FDI activity in the manufacturing sector (mainly offshore) has not become integrated into the domestic economy. As a result, longer term benefits of FDI, as a catalyst for enhancing efficiency and competitiveness in the Tunisian econoimy, are not fully realized. As discussed below, the low FDI activity is due to the factors that constrain private investment in general, especially in the onshore sector, but also to some specific disincentives to foreign investment. These include the complexity of the investment code, foreign exchange restrictions, and certain administrative bottlenecks. 11 FDI represents the bulk of net private capital flows in the MENA region. In the case of Tunisia, these inflows are almost exclusively FDI. 12 The purchase of two privatized cement plants in 1998 increased FDI for that year two-fold compared to 1997. Thus the 1998 figure (TD 351 million) does not include the proceeds from the sale of the two cement plants (TD 409 million). Republic of Tunisia - Private Sector Assessment Update Page 10 Volume H - Main Report 2.15 Export performance. The evolution of exports is normally an indicator of trends in competitiveness and the export-oriented sector often acts as a vehicle to introduce technological advances in a small economy like Tunisia. Tunisia's impressive growth in exports in recent years has been fueled by the private sector-dominated offshore textiles and clothing industries and the tourism sector. The main destination for these exports is the EU, with 85 percent of those exports going to this market. Despite their high and growing contributions to exports, textiles and mechanical/electrical manufacturing - have had relatively modest contributions to GDP growth. Production in these two sub-sectors is generally undertaken under offshore arrangements, which allow for duty-free access to imported inputs and benefit from an array of investment incentives. As a result, value added generation in these sub-sectors has remained very limited, as imported inputs undergo little transformation before re-exports. 2.16 Tunisia's exports are under tremendous pressure from ecological factors (tourism) and competition from other countries (offshore exports). The heavy concentration on textile and garments has given way to certain risks, resulting from the scheduled elimination of the Multi-Fiber Agreement (MFA) in 2005. Through the MFA, Tunisia expanded its share of the EU textile and garment market from 1.5 percent in 1980 to 4 percent today. After the MFA is eliminated, increased competition from countries with cheaper and/or better skilled labor will make it difficult for Tunisia to maintain its market share in Europe or to penetrate other OECD markets. In effect, the growth of manufactured exports has declined in real terms from 12.8 percent per year during 1987-91 to 4.0 percent during 1992-98 (Annex 2 shows comparative nominal export growth rates). In addition, Tunisia's share in certain key export products has fallen in traditional export markets relative to that of new competitors. Table 2.7: Share of EU Imports 1988 1990 1995 1996 1997 Bangladesh 0.3 0.5 2.2 2.4 2.4 China 3.8 5.5 10.5 10.6 11.7 India 0.8 0.9 4.0 4.1 3.9 Tunisia 1.0 1.4 1.1 1.1 1.4 Turkey 3.2 4.1 8.7 7.7 8.2 Bangladesh 0.0 0.1 0.5 0.5 1.0 China 2.5 3.3 7.4 8.1 8.9 India 1.5 2.1 3.2 3.3 3.2 Tunisia 1.5 1.7 2.5 2.4 2.5 Turkey 7.3 10.7 14.5 12.4 12.9 Source: COMTRADE 2.17 With regard to the service sector, over the years Tunisia has developed a strong capacity to export.'3 Services represent nearly one third of total exports of goods and services. Tourism has greatly contributed to the surplus of the service account in recent years, thereby strengthening the linkages with Europe (more than 90 percent of tourist arrivals are from Europe). In addition to tourism, new services are quickly emerging in Tunisia and can be expected to rise, in particular, in international medical care, data processing, software design and translation, and consulting services. The future success of Tunisia's exports lies not only in further diversification of manufactured exports, but also in the nurturing of exports in new services related to information technologies, where the potential for booming exports is high. Tunisia's traditional exports of goods (textile garments) and services (tourism) rely mainly on the 13 Cf. A. Haddad, 1999. Republic of Tunisia - Private Sector Assessment Update Page 11 Volume II - Main Report use of unskilled labor (with the former sector being more labor intensive than the latter); as the diversification toward manufactured goods such as electrical machinery, manufactured fertilizers, and information technology-related services takes root, the availability of skilled labor assumes increasing premium. 3. CONSTRAINTS To ACCELERATED PRIVATE SECTOR INVESTMENT Based on evidence from other countries, the needed changes to encourage private investment go beyond the EU requirements of simply reducing tariffs and meeting manufacturing standards. Portugal, for example, has fared better after EU accession because it has exceeded EU requirements in terms of rapidly creating the conditions for private sector growth, while Greece, for example, has fared worse because it has done so only more slowly. Evidence from other countries has also shown that performance under accession depends less on the degree of a country's adherence to EU trade requirements than on policies that create a conducive business environment and ensure the efficient allocation of resources through private sector development. The perceptions of private enterprises of the business environment in which they operate, shed further light on what prevents them from investing, operating and expanding. Surveys of Tunisian enterprises, emerging exporters, andforeign investors (Annex 3) confirm that reforms have not yet created the kind of operating environment they see as necessary to fully succeed undler integration. Small, medium, and large firms alike are concerned with tax level and administration, as well as some other administrative barriers for business start-up and operation; smallfirms are constrained' by the high cost and the lack of access to finance, and medium and large firms are hesitant to invest due to high telecom costs and marine transport costs, and the scarcity of industrial land. Emerging exporters (especially partial and indirect exporters) are, in addition, concerned about the complex trade procedures, weak overseas connections, and the lack of marketing assistance. Foreign investors are concerned about the uncompetitive investment regime, and the administrative procedures involved in establishing and operating businesses. In addition, onshore private enterprises are hesitant about investing by fear of the competitive pressure resulting from increased liberalization. These concerns are the symptoms of the incentive regime that these enterprises have sofar been exposed to. A. MOVING MORE DECISIVELY ON REFORMS COMPLEMENTARY TO TRADE LIBERALIZATION 3.1 Private sector assessments undertaken by the Bank in more than 20 countries over the past few years, have highlighted a number of key common factors linked to strong private sector contribution to economic growth. While the nature and extent of constraints to private sector development vary significantly across countries, these common factors include notably: a stable political and macroeconomic framework, outward-oriented exchange rate and trade policies, an efficient govemment role in the economy focusing on the provision of public services rather than production of goods and services, market liberalization aimed at ensuring competitive and open domestic markets, a modernized and effective system of business law, a modem and low-cost infrastructure, a strong education and training system, and a sound and competitive financial system. Most of these factors also apply to Tunisia as shown in subsequent chapters. 3.2 Recent econometric studies involving a large sample of countries indicate that trade liberalization stimulates private investment if it occurs within a context of political and macroeconomic stability, and if companion policies are adopted that encourage the supply response of private investors. Among them, Republic of Tunisia - Private Sector Assessment Update Page 12 Volume H - Main Report implementing complementary domestic regulatory policies and helping the institutional and infrastructure needs of exporters have been found to be important.'4 3.3 The divergent experience of Portugal and Greece in their accession to the EU, and the experience of other countries (Table 3.1) suggests that integration will yield benefits, in terms of growth and employment generation, to the extent that macroeconomic conditions are stabilized and that reforms -- which support a flexible private sector response to liberalization -- are undertaken to complement trade liberalization. This experience also explains why private investment (local and foreign) favors certain economies rather than others. 3.4 Portugal's strong commitment to structural reform is a key factor in its relative success. Privatization in Portugal has been the most aggressive in the OECD (proceeds representing 9 percent of GDP during 1989-95), and the number of private banks operating in Portugal has doubled. Labor market regulations and investment restrictions have been eased. A combination of these reforms contributed to a 10-fold increase in FDI and to a 70 percent increase in private investment over the last decade. 3.5 In Greece, on the other hand, the liberalization period spanned two decades and was considered a weak episode with few tariff concessions or reductions in quantitative restriction coverage. Resistance to liberalization and reform also persisted after EU entry, as evidenced, for example, by Greece's non- participation in the Exchange Rate Mechanism (ERM), and its delay in achieving adequate progress on liberalization of capital markets and reform of labor and product markets. The private investment/GDP ratio increased during the reform years, but it dropped significantly thereafter. The large transfers from the EU were primarily used to fund a widening fiscal deficit, which increased from 4.5 percent of GDP in the three years before 1981 to 11.7 percent, on average, in the five-year period thereafter. The mixed experience of Greece following EU accession contrasts with the more positive experience of Portugal, and suggests that efforts at integration yield benefits to the degree that complementary reforms are undertaken. Table 3.1: Response of Private Investment as a Share of GDP To Trade Liberalization, Average Ratios Country Rfmvperiod Pre-rm Reformo Pst-refrorm Curren (5 years befort peiodi (yers ater (frompotefr _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ refor m ). _____. ________ re for m t o 1 9 9 5 Chile 1974-81 - strong, s 7.4 10.9 10.3 17.0 Colombia 1968-82 - strong, ps 9.4 10.5 9.2 9.8 Greece 1962-82-weak, s 13.5 16.5 11.7 13.2 Indonesia 1966-72 - strong, s 5.9 6.7 11.5 15.5 Israel 1969-77 - strong, s 12.9 17.7 18.4 15.7 Korea 1989-79 - weak, s 20.2 26.0 23.4 28.6 New Zealand 1982-84 - weak, s 14.7 17.4 15.6 14.3 Pakistan 1972-78 - weak, ps 7.5 5.5 6.9 9.1 Philippines 1970-74 - weak, ps 14.0 15.4 18.6 17.4 Portugal 1977-80 - weak, ps 16.9 17.5 20.4 19.1 Singapore 1968-73 - strong, s 13.2 25.2 25.5 28.6 Spain 1977-80 - strong, ps 23.7 20.5 17.6 17.6 SriLanka 1977-79 - strong, s 8.3 9.4 13.1 13.1 Tunisia 1987-90 - weak, s 13.2 10.6 11.6 11.0 Turkey 1980-84 - strong, s 9.3 7.5 13.3 17.5 - Uruguay 1974-82 - strong, s 10.5 14.2 7.0 7.9 Note: s= sustained; ps=partially sustained. Source: Dadush and Morrell (1997); Liberalizing Foreign Trade, Lessons of Experience in the Developing World, Michaely, Papgeorgio, and Choksi (1991) 14 Levine and Renelt, AER (1995); and World Bank (1996). See also Best Practices in Trade Policy Reform, Thomas and Nash, Oxford University Press (1991); Dadush and Murrell (1997); and Lynn et al. (1996). Republic of Tunisia - Private Sector Assessment Update Page 13 Volume II - Main Report 3.6 There are also important lessons to be drawn from Chile's experience. Chile began the process of liberalization in the 1970s, encountered difficulties with the banking sector in 1981-83, but stayed the course and enjoyed spectacular growth from 1985-86 onward. Why was the Chilean experience unique? Decisive policies led to privatization of major PEs and opened the way for dynamic private sector development despite opposing interests, including labor unions. Prior to reforms, Chile had little in the way of fruit exports. Yet, the change in relative prices (through the exchange rate) and the liberalization of exports spawned a dynamic sector which absorbed a large amount of unskilled labor. However, the real gains for the private sector in developing new export products came when ports and telecommunications were privatized and competition in these sectors was encouraged, thereby increasing efficiency and lowering costs significantly. Unit costs at ports fell dramatically and telecommunications costs are now some of the lowest in the world, stimulating a vaLst array of new exports, particularly in financial services. B. PERCEPTIONS OF PRIVATE INVESTORS 3.7 A key factor affecting private sector investmnent is entrepreneurs' confidence and outlook for the future, as well as their perceptions of the constraints they face in starting up, operating and expanding their businesses. In preparation for this report, a survey of :397 private enterprises in Tunisia was conducted in mid-1999 by LACE (the IACE Survey), to solicit such perceptions. The results of this and other relevant recent enterprise surveys are summarized in Annex 3 and are outlined here. The following chapters evaluate these results in more detail. 3.8 As shown in Table 3.2, the PSA Survey respondents indicated that taxes and tax administration are their two leading concerns. The third leading constraint, the level of demand, is more related to the outlook for the future than to day-to-day activities, and is of more concern to firms in construction and agriculture, the two sectors most reliant on the domestic market.15 The cost of financing ranks fourth, followed by infrastructure services and labor regulation, which are ranked as minor constraints. 3.9 More specifically, by firm size, high taxes are a conicern for firms of all sizes, while tax regulations and administration are key issues for medium and large firms. High financing costs are a constraint for SMEs, and access to finance is a constraint for small firms. In addition, infrastructure constraints, mainly telecom costs, transport costs, and access to industrial land, are more severe for medium and large firms than for small firms. Table 3.2: The Five Leading Constraints to Private Initiative overail Small Firms Medium Firms Large Firms (more than (6-20 employees) (21 to 100 employees) 100 _epoye) Tax regulations and High taxes Tax regulations and Tax regulations and administration administration administration High taxes High cost of finance Insufficient demand High taxes Insufficient demand Insufficient demand High taxes Insufficient demand High cost of finance Labor regulations High cost of finance Infrastructure Infrastructure Access to finance Infrastructure Price instability/external trade procedures 15 Most Tunisian enterprises have not been exposed to competition because of the past protective regime, and have not therefore been forced to enhance their competitiveness. They therefore see the upcotning competition (due to AAEU) as a major concern. In addition, many offshore enterprises have relied on foot-loose operations which are increasingly under pressure from lower wage countries. Republic of Tunisia - Private Sector Assessment Update Page 14 Volume H - Main Report 3.10 The nature of constraints for microenterprises is not very different from that of SMEs. Their key concern is high taxes and tax regulations, followed by cost of and access to finance, and insufficient demand Microenterprises and small enterprises remain handicapped by a shortage of financial institutions capable of serving them, and by the inflexibility of Tunisian banks in enforcing onerous collateral requirements for any credit they extend. This problem persists despite recent Government initiatives to facilitate microfinance, the most notable being the creation of the Banque de Solidarite, a financial institution that serves microenterprises. 3.11 To cast a different light on these results, an open-ended, spontaneous question on current constraints was raised to the enterprises surveyed. The responses are consistent with those outlined above, but provide more information on the nature of the constraints. Respondents said that the leading constraint to current enterprise operations was market demand and competition, which will be greatly intensified by liberalization. About 60 percent of the onshore firms were concerned about upcoming competition from EU imports. Some said they are reluctant to make major investments -- except for those encouraged under the mise a niveau program. In this context, some respondents said that most (mainly public) support programs do not meet their needs to increase productivity and improve market access (Annex 5). The problem of debt recovery, which is lumped together with market demand and competition, is highlighted by 20 percent of all the firms interviewed, suggesting problems with credit information and enforcement. 3.12 The second problem concerns procurement-the availability of inputs, equipment maintenance, technical services, distribution. This is followed by constraints related to administration and regulations, financing, skill shortages, and infrastructure (especially telecommunications and transport costs). 3.13 Two other surveys were conducted on the constraints to competitiveness of potential and emerging exporters. A Bank team, in collaboration with the Ministry of Commerce, conducted a survey of 212 emerging exports in November 1998.16 The results of these surveys indicate the following weaknesses: a Insufficient knowledge of export market requirements and buyers: (a) Firms had made little investment to enter export markets (product quality, marketing, etc.); (b) firms, especially SMEs in the onshore sector, had very limited export experience; they needed assistance with information on potential markets and appropriate market segments, quality and price standards in these market segments, and potential supply chain intermediaries; (c) there was a weak overseas buyer connection; the majority of exports were to a single buyer, usually through subcontracting arrangements; (d) there was a weak exporter link to domestic producers. * Lack of access to working capital export finance for SMEs and emerging exporters. The majority of the firms interviewed, in particular SMEs, expressed concern about access to working capital for export production, even when they had confirmed letters of credit from foreign buyers. * Cumbersome export and import procedures: There are multiple procedures and steps involved in trade activity; it takes an average of 7 to 8 days for customs clearance for a partial exporter. A competitor in France supplying the same goods and services can effect customs clearance within hours. * High marine transport costs: Marine transport costs from Tunisia to France or Germany for a 20-foot container are almost equal to transport costs from China and India. 16 The Bank survey covered partial and indirect exporters, mainly small and medium in the onshore sector, as well as a few firms in the offshore sector involved in subcontracting operations with foreign buyers. About half of the firms interviewed were in the textiles and clothing business. Republic of Tunisia - Private Sector Assessment Update Page 15 Volume H - Main Report 3.14 Furthermore, a survey of 55 foreign investors from Asia, Europe, and the United States (conducted by the Foreign Investment Promotion Agency (FIPA)) in 1998 showed that: * Tunisia has political and socioeconomic stability. * Tunisia's foreign investment policies and incentives are favorable, but not sufficiently so to give the country a competitive edge in attracting FDI. In particular, the investment regime is uncompetitive in requiring prior authorization for foreign companies that are not wholly exporting when the foreign company's share exceeds 49 percent. * Physical infrastructure and transportation services are adequate except for telecommunications. In addition, while the cost of water and electricity is competitive, some types of investment may be deterred by electricity shortages. Some investors may also be discouraged by the Government's tight control on Internet access. With respect to transport costs, air transport costs are competitive, but sea transport is very expensive, placing Tunisia at a competitive disadvantage relative to Thailand and other East Asian countries, despite Tunisia's geographical proximity to Europe. * Foreign investors regard the Tunisian labor force as trainable and adequately skilled. * Investment approval and business establishment procedures are cumbersome, particularly for non- exporting firms. Foreign investors are also frustrated by the lengthy and cumbersome process required for renewing expatriate work permits. * While customs procedures work smoothly for exporters, other companies are concerned about the substantial delays. 3.15 The international experience and the enterprise surveys lay the foundations for the following chapters. Based on this evidence, it seems that the policy agenda remains incomplete, which could give conflicting signals to the private sector in light of trade liberalization and global integration. The following chapters treat the complementary policies needed to create a transparent, competitive and simple business environment to promote competitive private investnent.17 4. REORIENTING POLICIES FOR PRIVATE SECTOR-LED GROWTH The concern about competition and insufficient of demand is clearly a symptom of the incentive regime, which protected the private sector and in large part determined the extent and nature of private investment. Opening to competition (e.g., from the EU) presents a substantial challenge for Tunisian firms accustomed to operating under protection and special privileges (MFA). But the private sector will not respond efficiently if it receives conflicting policy signals. High effective protection resultedfrom the tariff dismantling schedule under AAEU, discourages efficient private investment. Taxes and tax administration have been considered by enterprises as the two leading constraints to their operations. The analysis shows, however, that tax rates in Tunisia are in line with competitor. Instead, there are two explanations: (a) The VAT base and rate have increased since 1996 to compensate progressively for the revenue losses of tariff reductions under the AAEU, although tax VAT rates in Tunisia are still in line with competitors; and (b) the relations between enterprises and tax administrators is unclear, callingfor rapid adoption of the Code de Procedures Fiscales. 17 Given the concerns about competitiveness and market demand, aspects of the incentive regime that could be improved to provide signals to enterprises to undertake efficient investments, shed outdated production techniques, improve quality and reduce costs, are assessed in the next section. Republic of Tunisia - Private Sector Assessment Update Page 16 Volume H - Main Report The incentives for domestic investment are still complex, selective, and inconsistent across industries, which undermines the efficiency of investment and constrains economic growth. International experience shows that tax incentives are effective mainly in attractingfoot-loose investments, but are less effective in attracting the kind of investments that Tunisia needs today. A simplified and more predictable investment and regulatory regime would create more confidence on the part ofprivate investors. Another bottleneck to achieving higher levels of private investment, is the deep-rooted dualism within the industrial sector between offshore and onshore firms. With deep trade liberalization and openness to the EU, the distinction between offshore and on-shore firms is becoming increasingly less tenable. As the AAEU approaches completion and protections are removed, the differential tax treatment in favor of offshore firms will amount to discrimination against partially exporting firms and firms producing for the local market. Major market liberalization and privatization efforts since 1994, have rolled back state intervention, creating space for expanded private sector activity. However, the Government still plays a dominant role in many aspects of the Tunisian economy. As international experience shows (e.g., East Asia), Government indeed has a vital role to play in supporting economic growth and private sector development, by: (a) reducing its administrative control and involvement in the productive sectors; and (b) facilitation of economic efficiency and equity, through openness, promotion of competition, and provision of public goods. Privatization in Tunisia has been slow, but the recent experience has demonstrated that there are many benefits to be reapedfrom faster and more rapid privatization. The Government could also further streamline administrative procedures in support of private sector. The recent measures taken under the Liasse Unique initiative and the Export Development Project could be reinforced and complemented by streamlining customs and ports procedures. Finally, private sector wouldfurther benefit if Government support programs used private firms for their delivery, focused more on products rather than institutions, removed information constraints, and emphasized performance- based approaches. A. INCENTIVES FOR PRIVATE INVESTMENT 1) Maintaining Appropriate Macroeconomic Incentives 4.1 Tunisia has maintained a prudent macroeconomic policy since 1986: the fiscal deficit and inflation have been reduced, monetary aggregates have been better controlled, and the exchange rate has been managed flexibly. While these reforms have created a stable macroeconomic environment conducive to private investment, improvements in fiscal stance, wage policy, and exchange rate policy can further enhance the macroeconomic incentives to private investment. 4.2 The fiscal deficit, which has been reduced from 4.3 percent of GDP in 1996 to 3 percent in 1998, may increase as a result of the decline in receipts from import duties. If this happens and the Government resorts to the domestic financial markets to finance its deficit, there may be a risk of crowding out the private sector. To avoid such a case, it would be important to broaden the tax coverage and limit the expenditures. 4.3 Collective bargaining for wage determination, covering three-year periods, is sector rather than firm based, and does not allow firms to introduce productivity-based wage incentives. The fact that it generates stability and prevents frequent wage-related disruptions, has been possible under low inflation. However, the system lacks a nominal anchor. Wage and salary adjustments should be kept within Republic of Tunisia - Private Sector Assessment Update Page 17 Volume II - Main Report moderate limits, and in line with productivity improvements. In addition, collective bargaining should be made more flexible by including both sector-based and firm-specific adjustments, the latter based on productivity. In the context of greater price liberalization, it would be desirable for wage negotiations to be guided by medium-term inflation targets, updated on a regular b7asis. 4.4 The real exchange rate appreciated in the early 1990s but has remained stable since 1994, thus preventing an exchange rate-induced loss of competitiveness. Stability of the real exchange rate is achieved through depreciating the dinar by the differential of inflation with respect to trading partners. The drawback of this policy is that other determinants of competitiveness are not taken into account. The exchange rate policy would need to be guided by a broader range of indicators, such as developments in relative market shares and in relative unit labor costs. 2) Strengthening Competition 4.5 The gains from private sector development come not from private ownership of the means of production, but mainly from competition among firms to supply high-quality, low-cost goods and services to local and foreign markets. The Tunisian onshore private sector faces little competition. Adequate competition will be key to private sector supply response during the adjustment period, and would encourage new investments by reducing the market power of incumbents. The measures that could promote competition include eliminating or reducing trade barriers, eliminating price controls, breaking up monopolies and preventing anti-competitive practices wherever feasible. a) Deepening Trade Liberalization 4.6 Remaining quantitative restrictions and licensing. Trade policy shifted in March 1994 from the positive to the negative list regime, allowing liberalization of 70 percent of imports. Since then, the negative list has been further shortened. For several goods, however, the removal of licensing has been subject to compliance with import cahiers des charges (CC), wvhich specify quality-related and other conditions. In the absence of the CCs, imports continue to be restricted to existing authorized importers, mostly public companies. While many CCs have been issued since 1994, they remain to be issued for fertilizers, cement, tires, cereals, petroleum, sugar, coffee, tea, and some other products, and monopoly state trading continues to prevail in the case of cereals. To allow for wider competition, the issuance of the remaining CCs could be accelerated 4.7 The removal of licensing on the bulk of imports has enhanced competition in the domestic market. However, import duties are still too high in comparison with other middle-income countries, and competition in the domestic market is still hindered by high rates.'8 The average non-weighted rate stood at about 30 percent, far exceeding rates prevalent in Latin America or East Asia and among the highest in countries of the MENA region (Annex 2). 4.8 Tariff binding. Tariff bindings are relatively high and they do not cover all imports. Whereas tariffs are bound for most agriculture import lines and almost all textiles and clothing, they are bound for '8 In the early 1990s, tariff dispersion was significantly reduced, with the maximum actual rate brought down to 43 percent, compared to rates exceeding 200 percent in the 1980s. However, the removal of licensing in 1994 was preceded in the two previous years and followed in later years by the introduction of new import levies, called temporary compensatory duties (droits compensatoires provisoires). These duties, set between 10 and 30 percent, were levied for a maximum of 3 years on a significant share of imports, involving mainly manufactured consumer goods. For textiles, clothing, and footwear, for instance, tariffs were increased to 73 percent during 1994-97. By the end of 1998, all temporary duties were removed and the maximum rate was back to 43 percent. Republic of Tunisia - Private Sector Assessment Update Page 18 Volume 1 - Main Report only 46 percent of industrial imports. The Government thus has a great deal of latitude to raise tariffs in order to protect domestic manufacturing. Commitments are much lower for footwear (less than 20 percent), base metals and products (25 percent), and miscellaneous manufactures (less than 23 percent). Given the importance of commitments to the WTO, competition may be greatly enhanced if tariff binding is extended to the bulk of manufactures.. 4.9 Customs valuation. Minimal customs values (valeurs minimales en douane) are an important instrument used to protect local industry and procure tax revenue for the Government, but they may raise the degree of protection beyond what is needed to offset under-invoicing by importers. Potentially, they may weaken competitive forces. These values are currently applied to about 25 percent of the 8,000 active tariff lines. Customs duties are not assessed on the values declared by importers, but on prices established by the Ministry of Industry, which are supposed to approximate the normal values in the exporting countries. It is therefore important that the setting of VMD be very transparent. 4.10 Tariff removal on imports from the EU. Tariff dismantling was planned to start immediately following the ratification of the AAEU, but the implementation began only in 1996. Tariff reductions are enacted during a lengthy transition period,19 which induces firms to invest in import-substituting activities. One option may be to reduce base tariff rates for the fiscal year 2001 and keep the existing dismantling schedule under the AAEU Table 4.1: Tunisia's Tariff Dismantling Commitments in the EU Association Agreement G roup otf Gods Se e [ t 5-year transition (Annex 3) 24 87 20 26.7 12-year transition (Annex 4) 29 89 22 30.4 8-year transition starting in 36 4 43 33.8 year 5 (Annex 5) Products exempted (Annex 6) 1 0 1 n.a. Industrial goods to be 10 100 14 21.6 liberalized immediately (those not listed in an annex) Source: B. Hoekman and S. Djankov, "Towards a Free Trade Agreement with the European Union: Issues and Policy for Egypt, " in A. Galal and B. Hoekman (eds), "Regional Partners in Global Markets: Limits and Possibilities of the Euro-Med Agreements, " Egyptian Center for Economic Studies (ECES)/Center for Economic Policy Research (CEPR) (1997). 4.11 Given the back-loaded nature of tariff reduction, effective protection is likely to increase in the early years of the transition, when tariffs will be significantly cut on intermediate imports but maintained at high levels on manufactured consumer goods. Because of the escalating nature of the tariff structure, effective protection has been relatively high in recent years, averaging 44 percent for the whole economy and 84 percent for manufacturing. Given some reasonable assumptions on cost structure, the levels of nominal tariffs on intermediate and final goods, and the tariff reduction commitments in the Euro-Med Agreement, effective protection will significantly increase until 2002 and will not fall back to the 1994 level before 2004.20 The persistence of high effective protection over several years runs against the 19 According to the AAEU implementation schedule, tariffs on manufactured goods competing with domestic production are to be dismantled only in the last 5 years of the 12-year transition period. 20 Rough estimates of effective protection illustrate the likely persistence of high effective protection over a relatively long period of time. Based on a share of 66 percent for intermediate inputs, these estimates are: 44 percent (1994); 73 percent (2001); 53 percent (2003); 43 percent (2004); and 33 percent (2005). Republic of Tunisia - Private Sector Assessment Update Page 19 Volume H - Main Report objective of liberalization and the promotion of competition in the Tunisian economy. The continuation of some protection may be needed to allow manufacturers to adjust, but the economic rationale for keeping high and increasing effective rates is not clear, and cannot be justified on efficiency or equity grounds. Therefore, another option would be to accelerate the dismantling by reducing rates in larger proportions in the early years than in the later years of the transition period b) Domestic Competition 4.12 The Government has recognized that the highly concentraLted market structure calls for vigorous legislation against restrictive business practices, and, accordingly, enacted a competition law in 1991, which was amended in 1995 and again in 1999.21 4.13 Price regulation. Although prices are deregulated, the Government has the right to intervene and set prices in some situations.22 While the bulk of domestic trade is free, significant differences remain between pricing at the producer and wholesale stage and at the retail stage. Price controls still cover more than 10 percent of trading at the producer and wholesale level, involving essentially subsidized products, chemical products, and public utilities. At the retail level, control extends to almost all agricultural goods. The latter are free at the producer and wholesale stage but restricted in their retail margins. It is not clear what purpose these restrictions serve, since wholesale prices are liberalized and the fixing of retail margins does not play any stabilizing role. Liberalization of these margins willfoster competition among merchants. It will also give consumers wider choices, and will relieve the administration of the burden of control. 4.14 Anti-competitive practices. Like pro-competition legislation in France and the EU, Tunisian law exempts agreements or dominant positions motivated by the objective of economic or technical progress. However, Tunisia does not tie the exemptions to two important conditions that exist in the EU and France: (a) the agreements should not impose restrictions that are not indispensable to the attainment of the beneficial objectives, and (b) they should not make it possible to eliminate competition for a substantial part of the products in question. These provisions could be introduced in Tunisia to prevent the misuse of the exemptions.23 21 The law prohibits all concerted actions and agreements aiming at impeding or restricting competition, especially agreements that impede market price formation; restrict market access for other firms; restrict or control production, market outlets, investment, technical progress, share markets, or sources of supplies. Ihese provisions concem essentially horizontal agreements. The abuse of a dominant position is also prohibited if it concerns the domestic market. The abuse of such position consists of the refusal to sell, tie-in clauses, the imposition of minimum prices, or discriminatory sale conditions. 22 Basic commodities or services, activities where competition is lacking because of a monopoly position, supply difficulties, or because of the effect of legal or regulatory provisions. Furthermore, prices may be administratively controlled for a maximum of six months in cases of crisis, exceptional circumstances, and abnormal market behavior in a given sector. 23 Competition may also be impaired by vertical agreements combined with bans on parallel imports. This issue goes beyond the national competition legislation, since such agreements are practiced intemationally. The EU allows parallel imports and prohibits restrictive practices on trade among member countries for a given good produced by a given firm. However, it allows bans on parallel imports with the respect to the rest of the world,. These practices enable multinational firms to segment markets and restrict competition. The latter is further impaired by exclusive agreements, as in Tunisia. Some argue that exclusivity is needed to encourage investment in distribution networks and after-sale services, while others say that what matters from the standpoint of competition is the availability of substitutes rather than the existence of many wholesalers for the same product. These arguments may be valid, but they cannot justify bans on parallel imports, especially in the case of a market the size of Tunisia, which lacks the variety and choice one can find only in larger markets of developed countries. The Tunisian legislation has recently permitted vertical agreements because such practices are common worldwide, even though they seriously restrict competition in the Tunisian market. Republic of Tunisia - Private Sector Assessment Update Page 20 Volume H - Main Report 4.15 Competition authorities. Anti-competitive cases may be brought before the Competition Council24 by the Minister of Commerce, firms, professional organizations, unions, consumers associations, chambers of agriculture, and chambers of commerce. The scope of work of the Tunisian Competition Council was widened in 1995 and again in 1999. However, its role could be further expanded to prevent restrictive practices, undertake studies and make suggestions concerning the promotion of competition, and advise the Government on any draft legislation related to competition. The Council is still developing as an institution, and has, so far, acted on only a very small number of cases presented by the private sector and the Ministry of Commerce.25 However, it could ultimately assume a larger role in regulating competition, and the law could be amended to make it obligatory, not optional, for the Government to consult the Council on matters related to competition, including privatization of major public enterprises. The Council could also be given sufficient resources to establish an efficient economic and legal analysis unit, able to undertake studies on market structure and conduct. In addition, at least one member of the Council could have strong economic expertise in industrial organization and anti-trust regulation. 3) Overcoming Fiscal Distortions and Disincentives a) Taxation 4.16 The PSA Survey respondents indicated that taxes and tax administration are their leading concerns. An investigation of taxation in Tunisia, however, revealed that taxation was in line with that of competitors. Tunisia has a single income tax for individual income and corporate profits. The corporate income tax is generally 35 percent, which compares reasonably with most competitors (35 percent in Morocco, 36-39 percent in Portugal). Agricultural companies, fisheries, handicrafts and small trades benefit from a reduced tax rate of 10 percent. Public and private enterprises are subject to identical taxation. In order to encourage firms to issue shares on the Tunis stock exchange - and thus adopt sound and transparent accounting standards - a measure has recently been introduced to reduce the corporate tax rate from 3 5 to 20 percent for firms that issue shares on the stock market for the first time. Furthermore, while tariffs on international trade are high in Tunisia, they have begun to decrease as a result of the implementation of the Association Agreement with the EU; import duties on equipment with no local equivalent were eliminated in 1996. The authorities plan to further rationalize tariffs and reduce the maximum rate to 25 percent by 2001 (compared to 43 percent in 1997). 4.17 The most important domestic indirect tax is a value added tax with a base rate of 18 percent, reduced rates of 6 percent for "sensitive products" and of 10 percent for certain capital goods, and a higher rate of 29 percent on luxury goods. According to the survey results, VAT rates and tax administration are perceived as the main tax burdens by firms. There are two explanations for this perception: * The main issues regarding the VAT are: (i) The VAT base and rate have increased since 1996 to compensate progressively for the revenue losses of tariff reductions under the AAEU. However, VAT rates are relatively lower in Tunisia compared to competitors and most European countries; for instance, the ordinary rate is 20 percent in Morocco; and (ii) inefficiencies still exist in VAT credit 24 The Council is headed by a judge or expert in the area of competition, and comprises seven judges and legal advisers (including the president if he is a judge), four representatives of the business community, and two experts. There has been no economist among members of the Council since its creation. Many of the issues it considers are of a technical nature, related to market concentration, price setting, and the assessment of anti-competitive conditions in general. 25 During 1991-97, it issued only three decisions, two of which were rejections of the complaints and resulted on one occasion only in the condemnation of abuse of a dominant position (involving a domestic poultry company). It also issued its opinion on five occasions on draft legislation submitted for consultation by the Ministry of Commerce. Eleven cases were pending as of mid-1 997. Republic of Tunisia - Private Sector Assessment Update Page 21 Volume II - Main Report reimbursement, creating liquidity problems for some enterprises. Measures have been adopted in January 1999 to make it possible for enterprises to get an advance of 15 percent on the amount owed to them. Nevertheless, the procedures can take up to six months for VAT credit on domestic market sales. Long delays also occur because of the procedures involved in to VAT reimbursement for exonerated imports. It is therefore important to accelerate the procedures so that VAT credit reimbursement can be completed at the end of the first month following the closing of the fiscal year. * As far as tax administration is concerned, the key issues are: (i) the differential treatment of onshore and offshore enterprises; (ii) the lack of clarity in relations between enterprises and tax administrators, in part due to the multiplicity of tax regimes and tax procedures; and (iii) the existence of a large informal sector. In this context, a majority of firms consider that they have no incentive to be more transparent. As such, according to IACE, many enterprises have adopted a nontransparent attitude in an attempt to avoid taxation. Moreover invoices are not systematically requested by firmns, which reduces transparency. In addition, there exist about 280,000 micro-enterprises subject to that voluntarily restrain their expansion to avoid business taxes, and are therefore a source of unfair competition for existing enterprises. In parallel, frequent changes in the tax regime make it difficult for the private sector to carry out advance tax planning. Given these issues, the resolution of the issue of "impotforfaitaire ", and the rapid adoption of the Code des Procedures Fiscales, which is likely to clarify enterprises-tax administrators relations would be important. 4.18 The Customs Code needs to be reformed to be compatible with WTO and EU requirements. Of particular concern are the valuation of imported goods and services, customs procedures, and the resolution of customs disputes. Detailed analysis of these matters has been completed and recommendations formulated by the CEJJ and local and foreign experts. Although a legislative drafting committee has been established under the auspices of the Direction de Douane of the Ministry of Finance (but without the participation of CEJJ), the date for submitting the legislation to Parliament remains uncertain. b) Establishing an Appropriate Incentive Structure 26 4.19 Investment Incentives and Beneficiaries. The Government has established a generous system of tax and financial incentives for enterprises (Loi no 93-120 du 27 Decembre 1993, portant promulgation du code d'incitation aux investissements-The Investment Code). The law and supporting regulations provide common and specific incentives for investments in priority areas, especially exports, regional development and SMEs. Since 1994, investments in a number of supporting sectors have also qualified for these incentives.27 The 1993 Code was amended in March 1999 to provide stronger support to private investment, especially SMEs. Today, in response to the prospect of heightened competition for Tunisian producers at home and abroad, the Investment Code is being adjusted to facilitate the creation of new activities and to include numerous ad hoc initiatives recently taken by the Conseil Supirieur de I 'Exportation (Annex 4). The main fiscal and financial incentives are summarized in Box 4.1. 26 The main features of the Tunisian Investment Code are described in Annex 4. 27 These include professional development, education, health, energy management, R&D, environment, culture (cinematography), and handicrafts. Investments in the financial sector, electricity, hydrocarbons and mining are not covered by the Code and are governed by specific laws. Republic of Tunisia - Private Sector Assessment Update Page 22 Volume H - Main Report Box 4.1: Main Features of the Tunisian Investment Code 0 Intives for all in (Cmmon nentive. The most important common incentive to investnent is the tax deductibility of reinvested earnings to a limit a 35percent of net taxable income for oth 'individuals nd companie Finns areilso given the option to depreciate capital with life longer than seven years according to a dlining ban instead of the straight-line rule. In addition, all imported equipment which de not have domestic subit is to be taxed at the tariff ateof 1 0o perceit. VAT and sales tax are suspefnded on non-locally roduced impord equipment and locally la ri a (ecific incents:Gnrou specific inicentives a granted to es ially e rts and regional devejopment. s 199, SMEs andrnew entrepurs may also benefitfrom tives. * Export incentives: firsms (totally exporting firms) * granted: inme tax hlyfor en ye after the first eport trnacio, followed by a reducd ate ea to 50 p t of th r er; 1 percent income tax rebate'on reinvested income; reimbursement o in tranot csts ad a tol ex from all taxes a duties on imported i sd capital goods. e Oalso benefit from a sishore firms are, allowed to sell 20 per t of heir production on the local market if they sies, ad 30 p otieir pro if their actity is agriculture or ftshig In such a c, ty must t t tand dis on domestic sales which are treated as impor (these domestic sals will be subje to the sane revigons of duties an taxes thanimorts om the EUli wtin the famework of the PTA - law 98-111). Offto fiTms, as well as foreigniv are a tr to 4 foreign manager Offsthor firms canno normly cumulate o and other incentives; however, social s I contributions, which represent 17.5 percent of tota wage bill, of ofsore firms establishidt inbcwardegions are paid by the State for 5 years (with a 5 year renewal since March 1999proie rm was createdb 193). i I $iWnl firmXsare grnd simi incentives but ol in pr to ter sates abroad. Thre& are however some differences between t nt of off ad fims, i arescribed in l 4-2. . Reg ional development: Investment u rt* in backwardregions of the 0ountry are;granted the same income tax holiday and eas off-shore fin. te, a e 10 holida pi t b m h ed income tax rte of 50 percent for I10 yernsedofidfinelyI d re ty to 25 percent and 10 percent of toalinvtm stinstead of8p t prior ta 9 is grantdofirmscreatin(apioiy regional develoment areas; and(b) otht ars. F sae a enjstate ctbint ture expenditures (de atio f th o ) st f of all socia fsecuity cf a * Spport to Small and Medium Entepise E) wmain specific in tives to SMES (law 994) include :(a) participan to equiy3 petofminimum calfo the fist investent paymen up tso TD million, and 10 percent af minimum capitl for additiona paymnt and (b) invesos are paid a premium of 70 perent of the total cost of studies and technisistarne theraimum amount being TD20,00 0. :: Support to New EntXreprneurs: New entrepreneurs, either exporting or not, benefit from severa incentives (law 99-4), which include (a) investments eligible tof > F DIsupport maynow amount to uto I 3 milion, instead of TD Imillion tt0assis-tac, the maximum amount b ing TI) 0,00;( prtcipation to equi itty 4 eret o5fminimu cptal for the frs i invstet payment, up to TI I million,and 20 percent of miinimu captal fr additional pamet; and (d) contributio of th 0 fcState to the purhse of lanSdand building, orepnding to 1/3 ofthirtotal cos, up to I) 30,;;000.00$00X0 :Thxe Investment Code also include tax and financial incentives to couraeiest inagricultural development, handicaf supportinginvestments (education,training,health,culture, tinsport), Resc aDevelopmant, technolgy promotion and tenvironmental protection and pollution control. Theseincentives aredes ed in Annexk 4. 4.20 The incentives aim at a relatively large range of activities, but the most significant beneficiaries have been offshore enterprises. These enterprises benefit from full exemption from tariffs and VAT on imported inputs, as well as generous tax holidays provided by the Investment Code. Although partially exporting firms benefit from almost the same (pro-rated) tax incentives than off-shore firms proportional Republic of Tunisia - Private Sector Assessment Update Page 23 Volume II - Main Report to their exports (Table 11), they face several administrative and bureaucratic constraints which are an impediment to their creation and expansion.28 4.21 Cost of Incentives. The total value of fiscal and financial incentives provided by the Investment Code is estimated at TD400 million in 1997. Of this amount, TD323 million was for fiscal incentives - of which TD190 million for tax reductions (djgrAvements) - and TD76 million for financial incentives. In the absence of details, it is difficult to make a precise assessment on cost of incentives in Tunisia. Still, international experience indicates that there are several costs associated with tax incentives, especially tax holidays. These costs include, but are not limited to: (a) the direct revenue loss that comes from granting tax holidays to investors who would invest anyway, or from holidays that are in excess of the minimum required to attract investors;29 and (b) any reduction of investment by firms who do not receive incentives.30 In addition, tax holidays could become "perrnanent". When these holidays expire, governments often find it hard to resist the argument of firms claiming that they cannot compete against new firms that have been granted tax incentives (Sri Lanka).31 4.22 Little Impact on Private Investment. Despite generous incentives, private investment has not expanded in recent years (see also Chapter 2). While offshore investment in 1998 (292 million dinars) was double that in 1995, it was less than the level in 1990 (319 million dinars). In addition, onshore investment in 1998 (874 million dinars) was less than the level in 1995 (900 million dinars). 32 Furthermore, investment incentives do not seem to have had a major impact on foreign direct investment, which remained stable at 2 percent of GDP - except in 1998 when it rose to nearly 4 percent of GDP as a result of the sale of two large cement factories which are not dlirectly related to tax incentives. Other foreign investments that have occurred, have mainly been in the energy sector, which are not covered by the Investment Code. 28 It is worth underlining that (i) onshore enterprises include not only firms oriented towards the local market, but all firms exporting less than 80 percent of their output; (ii) the "offshore/onshore" status is granted ex ante (even if ex-post controls may occur). 29 One study measures the "redundancy" of incentives for one country. It calculates that about 70 percent of investment would have occurred without any incentives. See Robert Halvorsen, 1996, "Fiscal Incentives for Investment in Thailand," in Anwar Shah (editor). 30 This is especially the case where taxes on firms not granted tax holidays, have to be higher than otherwise in order for revenue needs to be met. Higher general tax rates to maintain social expenditures impose disincentives on other investments. To the extent that taxes influence investment decisions, the result may be less investment in non-supported activities. In fact, it is even possible that the net result of incentives is less overall investment than would occur without the incentives. 31 In addition, the administrative problems of tax holidays could be important when a government grants tax holidays to operations in certain regions while taxing those in the others. The firms can allocate financing expenses among affiliated enterprises to minimize taxes. To close the loopholes, tax administrators must use arbitrary rules. The result is an increased perception of red tape and lack of transparency that discourages investments (source: Wells, 1999) 32 In addition, less developed regions have benefited less than expected from the incentives provided by the Investment Code, and the realization rate of investment plans in these regions has reached only 42 percent in the south, 24 percent in the northwest, and 8 percent in the center west region as of end-1998. Republic of Tunisia - Private Sector Assessment Update Page 24 Volume H - Main Report Table 4.2: Incentives Granted to Offshore and Parti ly Exportiug Firms _________A_____'__ Ta incentives4002 TotiTlyExporting|Qt$ Fim (ofhoe Patal Exotn Firm Commcmts Direct taxes (personal * Full deduction of incomes or profits * Full deduction of incomes This incentive is income tax, corporate for the first ten years or profits for the first ten proportional to the income tax) * Then deduction up to 50 percent years percentage of * Then deduction up to 50 turnover from exports percent V.A.T. * Full and permanent suspension *Suspension on goods, Exporting gives right (equipment, raw materials ...) products and services to the same incentive, required for exports regardless of the exporter' s status Import duties * Full exemption on imports of * Temporary admission The regime is almost equipment, raw materials and products * Refund the same as far as exports are concemed Tax rebate * 100 percent for purchase of shares * 35 percent for purchase of This tax rebate is * 100 percent for reinvestments within shares always coupled with the firm * 35 percent for the payment of a reinvestments within the minimum tax amount firm Registration and * exemption (for company acts) * Fixed duty (TD 100 per stamp duties * exemption for management acts act) for company acts * Common regime for management acts T.F.P (Vocational Exemption Common regime training tax) FOPROLOS FODEC Local sales * Subject to personal or corporate Common regime Similar tax regime income tax * Payment of imports duties, VAT on the finished product * Withholding tax 2.5 percent of tumover including taxes Expatriates * Employment of 4 expatriates permitted * No incentive * Expatriate staff benefit from: - full duty exemption on personal belongings including one personal car - payment of fixed tax rate equal to 20 percent of gross salary Foreign investors or * Full franchise on personal belongings * No incentive their foreign including one personal car representatives * payment of fixed tax rate equal to 20 percent of gross salary C.N.S.S. (Employer's * Expatriates may select another regime * No incentive contributions to than the Tunisian one. In this case, Social Security) employers do not pay employers' contributions to the Tunisian social security system Customs controls * Permanent or occasional control * No control Source: Direction Gdnerale des Incitations Fiscates et Financieres, Ministry of Finance, Tunisia. Republic of Tunisia - Private Sector Assessment Update Page 25 Volume H - Main Report 4.23 International Experience. While the underlying causes of a weak private investment performance are linked to many parameters (that are subject to the present study), international experience shows that complex fiscal and financial incentives rnay not be the best vehicles to attract private investment (except foot-loose investments). Instead, other considerations besides fiscal incentives, as illustrated in Box 4.2 and Box 4.3, seem to be more important from the point of view of investors. Many countries have opted to streamline their tax incentives on the basis that these incentives were not the most cost effectiveness instrument to promote private investrnent in their country. As noted earlier, this trend has been supported by most private investors who seek simplicity and transparence rather than generous but unstable tax incentives. Of course, streamlining tax incentives would require the authorities to think about reforming their general tax system. To compensate for the elimination of tax incentives, there will be certainly a need to reduce the general tax rate. This approach has been chose by many countries who have succeeded in attracting private investment (such as Lebanon and Chile). Box 4.2: Irdonesia's Elimination of Tax Holidays in 1984 Prior to the tax reform of 1984/85, Indonesia offerd investor; a generous tax package. An investor could receive tax holidays for a number of years, with the period depending on several project variables: the amount of investment, the nunber of workers, ct proportion of output exported, and the location. The tax reform of 1984 simplified the general income tax, lowered the rates on personal and corporate income (from 45 percent to 35 percent). and replaced most excise taxes with a VAT. As a major pant of tax reform, the Government eliminated all tax holidays, including those to new investors and also tax incentives for "going public" and for expansions. The first year after the reforrn was difficult: foreign investment approvals declined from those of previous years. Yet the reformers held to their resolve. Foreign investment soon recovered, and the growth ratc of investment accelerated. Foreign investors appeard to care little about the incentives at least once an attractive general corporate tax was in place. The very short-term drop in investment following the elimination of incentives was because a number of investors who knew of the likely reform, accelerated their investnent applications to benefit from tax holidays. Indonesia's experience shows that that rarely would a fum locate a plant in an otherwise uneconomic business environment to gain tax holidays, knowing that incentives are memingful only if its project is profitble. Source: Louis T. Wells, 1999, Attracting Foreign Investment: Incentives, Institutions and Infrastr re, Paper presented at the FIAS/UNDP high-level roundiable in Bangkok Box 43: Intel's hnvestment in Costa Riea In November 1996, Intel Corporation announced plans to construct a $300 million sernicondutor assembly and tes plant in Costa Rica. The announcemt came as a trimph to Costa Rican authorities, who had worked for months to attrat the US-based technology powerhouse. A typical Intel plant can cost more than SI billion and requires state-of-the-art engineering skills and clean- room oporations. Costa Rica, omnwhile, is a tiny county. With a population of 3.5 million and only limited development in electronics and other high technology sectors, it was in many ways an unlikely choice for Intel. Construction funds for the semiconductor facility represent six times Costa Rica's annual foreign direct investment, and exports from the plant double the country's exports in three years. The entire GDP of Costa Rica is one third of Intel's annual worldwide revenues. So why did lntel choose Costa Rica? The reason was not tax incentives or special privileges. From the very beginning, Cost Rican officials concentrated on Intel's special needs, inmersts and constraints, instead of tax incentives In initial searches by Intel officials, Costa Rica was not even on the list. In fact. Costa Rica was one of the unfavorable countries in terms of tax incentives among the countries that Intel considered for its investment. Source: Debora Spar, 1998 "Attracting High Technology Investment - Intel's Costa Rica Plant", Foreign Investment Advisory Services, Occasional Paper I1 Republic of Tunisia - Private Sector Assessment Update Page 26 Volume II - Main Report 4.24 Imnrovin2 Incentives. The Tunisian investment incentives today represent significant progress since the first measures of liberalization in 1987,33 but need to be furthered improved to attract the competitive private investment. Reforming the Tunisian tax system is part of a broad effort. It is evident that defining options to improve the impact of investment incentives would require further research. Based on the findings of this report, the following broad directions may be considered for more detailed analysis: * Simplifying tax incentive instruments. Local and foreign investors are likely to prefer a simple and more transparent incentive regime and rules-of-the-game, than generous but complex set of tax and financial incentives. The Investment Code is complex, providing differentiated levels of support across industries and sectors. As a result beneficiaries can be classified into more than 38 different categories.34 The results appear mixed in terms of private investment, while the fiscal costs have been significant. This complexity could also be a source of problem for investors who generally seek a simple and stable tax system when they are going through the investment decision process. A simple and more transparent tax system will also reduce the burden on the tax inspectors and reduce the risks of fraud. Simplification of incentives may become an easier task following the abolition of import duties within the framework of the AAEU, when the import duty exemption/reduction, which is one of the main incentives provided by the Code, will become meaningless. In addition, firms could receive benefits according to their export performance (not their a priori export activities), which is easy to measure, and promotes investment and exports in a dynamic way. - Eliminating offshore-onshore dichotomy. There is risk that onshore enterprises (including partial and indirect exporters) may be disadvantaged in the aftermath of the AAEU as offshore and most onshore firms will then both operate in a competitive, open market, but will not be granted the same facilities and incentives. In particular, onshore enterprises have to cope with relatively more cumbersome administrative procedures than those applied to offshore enterprises, an inefficient duty drawback scheme and import clearing procedures for imported inputs and equipment used in export production.35 In addition, contrary to offshore firms, they are not allowed to hire expatriates. These constraints partially explain why offshore firms are not willing to sell up to 20 percent of their production on the domestic market, although they are authorized to. The authorities are aware of these constraints and have adopted in particular the mechanism of temporary admission of inputs required in the production of planned exports; but this may not be sufficient to create a level-playing field between offshore and onshore enterprises. After the full implementation of the AAEU, this lack of level playing field may even discourage more foreign investment in the onshore sector, and subsequent transfers of resources, technologies and skills to Tunisia. 36 A better approach would be a common regime applied to all exporters, either offshore or onshore. Linkages between offshore and onshore sectors wouldfurther be encouraged by: 33 The five previous sector codes, which generated complexity, have been eliminated; the incentive structure is similar for all sectors, except energy, though taking into account the priority areas; foreign and national investors, as well as resident and non-resident firns, are treated equally in granting incentives; no prior investment approval is required in many cases; and some distortions that arose from previous incentive schemes have been eliminated -- for instance, grants have replaced subsidized credit in the tourism sector. 34 The investment incentives concern four category of enterprises: (a) on-shore, or non-exporting, enterprises; (b) offshore, or totally exporting, enterprises; (c) partial exporters; (and (d) indirect exporters, defined as those that sell their entire production to offshore enterprises. In addition, among the offshore enterprises, there is a distinction between resident and non-resident enterprises, based not on the firms' nationality (foreign or Tunisian), but on capital retention. 35 Onshore Tunisian-owned companies are only allowed free use of foreign exchange equal to 5 percent of their dividends and use for operations abroad of $200,000 per year. Beyond this, they must make as case for the use of more foreign exchange. 36 Although there is no mandatory relationship between offshore status and foreign ownership (and reciprocally), most foreign investors select the offshore status in Tunisia. Republic of Tunisia - Private Sector Assessment Update Page 27 Volume II - Main Report > Giving partially exporting firms the same advantages as offshore enterprises, regarding procedures for business start-up, operation and exit, employment of expatriates, tax rebates on purchase of shares and reinvestments and exemption from VAT and sales taxes on imports according to export performance; and > Eliminating customs duty on local sales of off-shore enterprises, in line with the elimination of duties on imports from the EU and the harmonization of incentives between offshore and partially exporting firms, thus stimulating domestic competition. * Gradually removing tax holidays. There is over-reliance on tax holidays; they are not the most cost effective instruments, and their impact in terms of increased competitive private investment is doubtful. On the one hand, they are likely to attract mainly short-term investment (e.g. footloose industries) with limited benefits for the host country. On the other hand, most investments are unlikely to make significant profits in the first few years of operations and, thus, not really influenced by tax holidays. In addition, tax holidays are ineffective for foreign investors from countries that tax foreign subsidiaries of their home companies (such as the United States).37 The benefits of tax holidays in Tunisia, therefore, may be largely offset by increased liabilities of the parent enterprise to the tax authorities of the home governments. Instead of tax holidays, it may be more appropriate to use some combination of international standards for cost deductibility and accounting in general, good loss-carry-forward provisions, and some kind of tax allowances or tax credits. These can be better targeted than tax holidays, for example, to promote fixed investment, labor training and technology transfer. They can be included in the tax code and operate automatically, and they give rewards only if and after the action is undertaken. While the cost-effectiveness of some or all of these are questioned by many studies, they are to be preferred to tax holidays. In the medium term, the most effective way to promote non foot-loose foreign investment would be to provide adequate and affordable infrastructure and transport services, appropriate utilities and skills (especially in the less prosperous regions), access to ind'ustrial land and property rights, and adequate and transparent legal and regulatory framework. Foreign direct investment in most of the restricted activities would be highly beneficial for Tunisia. Eliminating of these restrictions and prior authorization by the Commission Superieure des Investissementsforforeign investment in non totally exporting firms involved in service activities, in cases where foreign participation is equal to or exceeds 50 percent of equity, would encourage nonfoot-loose FDI.38 B. PRIVATIZATION 4.25 Public enterprises are present in most economic activities,39 and privatization has still a major role to play in prornoting the private sector. Legislation was enacted in 1989 to govern the restructuring and privatization of PEs, which had been suffering from increased indebtedness. Since that time, privatization in Tunisia has been guided by the overriding principles of ensuring the sustainability of companies (la pirennite de 1'entreprise) being privatized through restructuring prior to privatization, attracting additional funding and investments, flexible management and technology transfer, and preservation of employment. These considerations, rather than maximization of proceeds, have played the dominant role 37 There are also many home country tax codes impose no tax on foreign-earned income (e.g., France and Netherlands). 38 In addition, foreign investors are not allowed to own agricultural land, although they can lease land for up to 40 years. 39 The public sector represents a very large share of the non-manufacturing sector, especially in mining and energy. In the manufacturing sector, PEs play an important role in chemicals, accounting for 48 percent of total value added. In the service sector, PE activities are concentrated in ground transport (17 PEs, of vhich 15 are in road transport for passengers); communications (6 PEs, of which are 2 in telecom); construction (14 PEs ini building and public works); financial institutions (9 PEs, of which 6 are in banking and 3 in insurance); and health (6 PEs, of which 4 are in social security). Republic of Tunisia - Private Sector Assessment Update Page 28 Volume II - Main Report in privatization decisions. They also explain the slow pace of privatization until 1997-98 and the repeated statements by the authorities that privatization must be on a case-by-case basis and be pragmatic. In many respects, that policy has succeeded in building a national consensus and avoiding negative social reactions. The drawback has been that, until recently, the process has been very slow. The authorities increasingly realize the need to tackle larger public enterprises, to use more sophisticated techniques of privatization, and to resort to professional expertise, such as merchant banks. 4.26 Privatization in the Productive Sector. Until 1995, the dominant mode of privatization was the sale of assets, especially autonomous operating units of enterprises with unbalanced financial structure. With the enactment of Law 94-102 in August 1994, privatization by the sale of controlling interest share blocks became more frequent, often accompanied by initial public offerings (IPOs). More recently, the Government has favored IPOs and the opening of large enterprises to foreign investors. The legislation grants tax relief and other benefits to purchasers of PEs and to present and formner employees of the privatized company, the latter policy aimed at promoting social shareholding (actionnariat social). The results of the privatization program from 1987 to 1998 are shown in Table 4.3. Table 4.3: Privatization by Sector in Tunisia, 1987-1998 (TD million) Sector Nu1ber f Number of % Revenue 0;0 Transactions ______ Enterpises _ __ ______ Tourism & handicrafts 49 23.56 26 23.21 158.1 17.91 Transport 23 11.06 17 15.18 70.6 8.00 Chem., elect. & mech. Ind. 14 6.73 12 10.71 66.4 7.52 Trade 25 12.02 13 11.61 73.8 8.36 Agric., fish., agro-bus. 38 18.27 11 9.82 41.3 4.68 Building materials 27 12.98 12 10.71 441.2 49.99 Textiles 9 4.33 6 5.36 13.1 1.49 Banks 1 0.48 1 0.89 0.5 0.06 Others 22 10.58 14 12.50 17.5 1.98 Total 208 100.00 112 100.00 882.5 100.00 Source: Ministry of Economic Development, Direction Generale de la Privatisation. 4.27 Privatization in the financial and insurance sectors. As shown in Table 4.3, privatization in the financial and insurance sectors has so far been limited. Of the five public commercial banks,40 the Government so far has privatized only Banque du Sud, through successive increases in capital without increased state investment. Other privatizations are planned. An analysis of the profitability of deposit banks clearly shows that private banks are more profitable than public ones: in 1997, the return on equity of private banks amounted to 14.8 percent, against 8.3 percent for public banks. In the insurance sector, 3 out of 17 insurance companies are PEs, which carry substantial losses. Furthermore, the profitability of the largest insurance PE, Societe Tunisienne d'Assurance et de Reassurance (STAR) is very low compared to that of privately owned insurance companies. It is therefore important to proceed more forcefully with privatization in the insurance sector.41 4.28 Cost of the privatization program. The cost of the privatization program is largely covered by the Fonds de Restructuration des Entreprises Publiques (FREF), created in 1990 with assistance from the 40 Banque du Sud, Banque Nationale Agricole (BNA), Banque de l'Habitat (BH), Societe Tunisienne de Banque (STB), and Union Internationale de Banques (UIB). 4 The Government recently partially privatized STAR through an IPO for 12.2 percent of the capital, which is very small since the state's share prior to privatization was about 70 percent. Republic of Tunisia - Private Sector Assessment Update Page 29 Volume II - Main Report World Bank and replenished by proceeds from privatizations. FREF covers part of the cost of enterprise restructuring, including severance payments. For the period 1989-93, the total cost amounted to TD 42.5 million, or 21 percent of privatization proceeds. Since then, the cost has declined substantially, to 14.9 percent of proceeds for the period 1995-98, due to the fact thalt, starting in 1995, privatization efforts focused more on financially healthier enterprises. 4.29 Recent developments and the 1999-2000 program. In April 1998, in response to the need to adopt more rapidly to global competition, and in preparation for the AAEU, the Government adopted several procedural changes to increase flexibility in privatization, along with a policy of greater recourse to investment banks for the preparation of transactions involving large enterprises. In keeping with the new strategy, the 1999-2000 program, covering 76 enterprises, will concentrate on: (a) privatization of large PEs in the cement, mechanical, electrical, shipbuilding, textile, and service industries; (b) privatization of subsidiaries of public banks; (c) acceleration of public disengagement from the competitive sectors; (d) concessions in infrastructure sectors such as highways, solid waste treatment plants, and desalination plants; and (e) IPOs and opening of capital to stimulate the stock exchange. It is likely that 90 percent of this program will be realized by the end of 2000. Table 4.4: Public and Private Sectors in Tunisia - Selected Performance Indicators (average of 1992-96 for private sector; 1996 for public sector) Selected Economic Sectors Capital intensity Profitability Private Public Private Public Agro-industries 68.71 62.54 0.10 0.03 Building materials 63.69 210.23 0.07 0.08 Mech. & elect. Ind. 43.93 55.16 0.07 0.05 Chemicals 72.48 236.05 0.13 0.12 Textiles 13.07 92.82 0.12 0.00 Other industries 26.00 81.25 0.09 0.11 Energy 107.92 285.18 0.48 0.13 Public works 31.46 75.53 0.14 0.15 Commerce 89.30 479.24 0.06 0.00 Transport 28.89 105.56 0.38 0.09 Tourism and restaurants 50.05 82.86 0.10 -0.03 Services 90.67 308.11 0.08 0.02 Total 45.68 1735.04 0.12 0.08 Source: Institut National de Statistique. 4.30 Main Constraints to Faster Privatization and Proposed Solutions. Since the adoption of the Law 94-102, privatization program has accelerated. However, there are some weaknesses in the process that may undermine the success and speed of the program in the future: * The Incentive Framework. The Law 93-120 of December 27 1993 (Investment Code) and the Law 89-9 provide for specific incentives to buyers and workers of public enterprises.42 The 42 These include : (a) tax credits for reinvested earnings; (b) fixed fees for registering the new company; (c) exoneration from fees on buildings during the period of change of ownership; (d) exoneration from profit taxes during the first five years; (e) exoneration from taxes on stock exchange transactions; and (f) exoneration from capital gains taxes related to the sale of assets. The new and existing workers of privatized enterprises also receive the following incentives: (a) priority purchase rights; (b) purchase of shares at discount prices; and (c) free distribution of shares. Republic of Tunisia - Private Sector Assessment Update Page 30 Volume 11 - Main Report Government also takes charge of financial restructuring of the enterprises to be privatized. These incentives could create distortions which would penalize existing private enterprises in the same sector. The Government could review the incentives providedfor buyers of PEs, in view of reducing (or eliminating) some of these incentives, and instead provide for easier access to the Mise ai Niveau Program. This review could also compare the cost of incentives andfinancial restructuring, with the proceeds ofprivatization. * Institutional framework. The Direction GcgnWrale de la Privatisation (DGP) of the Ministere du Developpement Economique (MDE) lacks the resources to fulfill its mandate of monitoring privatized PEs. This may become a critical issue if the Government is to embark on a policy of granting concessions in the infrastructure sector. Another key institutional bottleneck is the absence of a single database on PEs; information is dispersed among several ministries. In this light, the implementation of the Svsteme Information Reseau Entreprises Publiques" (SIREP), needs to be accelerated Several other actions could be undertaken to help DGP step up the privatization program: (a) simplify procedures for preparing dossiers sent to the Commission d'Assainissement et de Restructuration des Entreprises a Participation Publique (CAREPP); (b) define the human and financial resources required to meet the new challenges faced; (c) increase subcontracting of specialized external expertise; and (d) redefine the criteria for selecting purchasers, based on the purchaser's proposed investment program. * Information dissemination. The privatization operations realized recently have been much more transparent than those realized before 1996, and information on privatization program is increasingly available to the public and potential investors. Concerning transparency, the Tunisian authorities emphasize the importance of terms of reference defining clearly the rights and obligations of parties involved in the privatization transactions, and the procedures for treating the purchase proposals. On the other hand, the authorities refrain from announcing the privatization program before they are absolutely sure about selling the enterprise. However, since the public still holds a relatively negative view of the social impacts of privatization, broader dissemination of information are important to remove the remnants of distrust. A broad public information campaign could be launched, using press communiques, a website, and regular publication of information relating to enterprises to be privatized. * Redeployment of personnel. Another constraint to accelerating the privatization program arises from the difficulty of redeploying redundant personnel. Although Tunisia has several financing mechanisms for micro projects started by redundant personnel, there is no entity dedicated to addressing their needs. Consideration could be given to the creation of an entity to facilitate the redeployment of redundant personnel. * Narrowness of the financial markets. The Government has taken steps to encourage share issues by privatized companies (reduced corporate taxes of 20 percent). However, of the 44 companies listed on the Tunis Stock Exchange, 16 are banks and insurance companies. IPOs represent only 6 percent of revenues from privatization during 1987-98, and only 5 transactions were IPOs during 1995-97. The 1999-2000 privatization program envisages only 10 such transactions. A more forceful privatization policy could considerably broaden the financial markets. To help broaden the Tunis Stock Exchange, MDE could encourage privatization by means of sale of equity, IPOs, and opening to investors. C. RESHAPING LEGAL AND REGULATORY POLICIES 4.31 With trade liberalization and the restructuring of the Tunisian economy, resource allocation and the expansion of investment are influenced by the degree of flexibility of the regulatory framework governing business entry, operation and exit, and establishing property rights. Uniforn and transparent interpretation and application of laws are essential to facilitate private investment. Progress has been Republic of Tunisia - Private Sector Assessment Update Page 31 Volume 1 - Main Report made in a number of legal and regulatory areas since the 1994 PSA, which highlighted the need for, inter alia, modernization of the Company Law and Commercial Code, improved bankruptcy procedures, and training of judges in economic cases. Nevertheless, reforms are still needed in a number of areas, as described below. 4.32 Facilitating Company Entry, Operation, and Exit. * Company Law. With the exception of the economic interest grouping ("groupement d'interet economique"), the Company Law43 does not as yet recognize the concepts of holding companies and groups of associated companies. Regulation should therefore be extended to minority shareholder rights and the responsibility of parent corporations for the acts of affiliated and subsidiary corporations. * Secured lending. The legal framework that governs the use of collateral for SME loans could be revised to enforce creditor rights and resolve conflicts among different creditors, and to allow all forms of assets to be considered as collateral44. Public registration of all secured interests could also be facilitated. Articles 1478 to 1531 of the Code des Obligations et des Contrats may also be examined. * Registration and stamp duty laws. The Code des Droits dR'Enregistrement et du Timbre needs to be reviewed with regard to taxes on sales of imrnovable property. * Labor Law. Although it has been revised through a law of July 16, 1996, the Tunisian labor code would further benefit from enhanced flexibility with respect to recruitment and labor mobility in on- shore companies45, in line with advantages granted in this regard to off-shore companies. In addition, private sector salaries are generally not linked to productivity and the country lacks an unemployment insurance scheme. * Securities Law. Law No. 99-92 on securities was adopted on August 17, 1999 with a view to develop financial markets46. However, authorization is still required whenever a participation of foreign capital in a company exceeds 50 percent,47 constituting an additional administrative obstacle.48 Listed companies should also be allowed to buy back more of their own shares. * Bankruptcy and businesses in financial difficulty. The Bankruptcy Law of 1995, although modified in 1998, has only enabled a very limited number of companies to benefit from recovery procedures; its implementation needs to be revised in order to facilitate the application of procedures designed for business in financial difficulty and therefore limit the number of bankruptcies. The adoption of the draft law on bankruptcy should be accelerated. 43 The revised Company Law or "Code des societes" is not yet effective. 44 The adoption of the concept of a single-shareholder company ('societe unipersonnelle") would ease SME's access to financing. Several draft laws are currently being prepared regarding commercial debt assignment and securitization, enforcement of security rights, the introduction of the "Bordereau Dailly'(fbr debt assignment), etc. A commission within the ministry of finance is in charge of examining new contracts and credit instruments. 45 If administrative procedures for hiring expatriates by off-shore companies have indeed been facilitated, the limited number of authorized expatriate personnel and the delays in renewing labor and residence permits still remain. 46 According to article 121 of the Commercial Code, bonds and other debt instruments can from now on be exchanged against shares, preference shares and investment certificates. Several incentive measures are offered (including to institutional investors), financial market transactions not being, for example, subject to taxes (except for a commission fee of 0,04 percent to be paid to the "security and exchange commission"), capital owned by foreign investors which can be freely repatriated without limit or prior authorization, etc. 47 The obligation not to exceed 50 percent of foreign capital only applies to the secondary market. 48 Progress is made to this end, article 19 of Law No. 99-92 of August 17, 1999 on the development of financial markets enabling companies to buy back a greater number of their own shares. Republic of Tunisia - Private Sector Assessment Update Page 32 Volume II - Main Report 4.33 Improving Enforcement Capacity and Judicial Institutions. * Legal reform process. A consultative mechanism is in place within each ministry concerned each time a draft law is being examined. Yet, a more active participation as well as a broader representation of the private sector and other concerned parties should be sought in the ongoing legislative reform process. * Dissemination of legal information. The quality of the work performed by the legal profession and the judiciary relies, namely, on their possibilities to have access to a legal information that is readily available, commented and regularly updated. Measures allowing a broader dissemination of legislation, judicial decisions and comments on case law should be considered. In addition, an index of legislation needs to be created. * Training within the judicial system. Although high-quality training is provided for new magistrates at the Institut Supirieur de la Magistrature, and new themes have been incorporated in the training programs (dealing with, e.g., legal aspects of e-commerce), it is recommended that training programs be further developed to benefit a larger number of magistrates, judges, court registrars, process servers, court reporters, and bailiffs on a regular basis. * Judicial process. The multiple efforts that have been undertaken by the ministry of justice to modernize the functioning and the management of courts should be supported. In the context of the on-going modernization and computerization of court registries, particular attention should be paid to enhance communication between courts and the legal profession to improve follow-up of cases with a view of enhanced case management and greater transparency. * Administrative constraints to the application of laws. A major issue resides in the standard administrative practice of refusing to execute decisions of administrative tribunals that favor a private party over the state. Such decisions are often perceived as a direct attack on the supreme power of the state. Measures should therefore be envisaged, with the support of the highest-level authorities, to ensure a better enforcement of decisions taken in favor of citizens * Commercial Arbitration. A draft law is currently under preparation with a view to revise certain practical provisions regarding commercial arbitration. The efforts of the ad hoc commission established to this end under the auspices of the ministry of justice should be supported. 4.34 Establishing and Securing Commercial, Industrial and Intellectual Property Rights. Property Law. The Commercial Property Law, introduced in 1954 and modified in 1977, should be updated. A draft law is being considered for the revision of provisions relating to the going concern ("fonds de commerce"). The legal framework regarding the protection of industrial and intellectual property rights (trademarks, patents, copyrights, etc) should be revised49. 4.35 Improving Contract Law. * Franchising and factoring. Except for factoring contracts enabling credit recovery, Tunisia's legal framework does not yet regulate such contracts as commercial factoring and franchising; it should therefore be completed accordingly in the short-tern. * Methods of proof. The Code des obligations et des contrats is currently being updated to reflect technological advances in communications (fax, e-mail, etc) and the implications of these advances on the methods of proof. A draft law on e-commerce is under preparation. 49 The law on trademarks and licenses has been revised recently. The law of 1994 on intellectual property is widely acknowledged to be insufficient to protect authors' and artists' rights. Republic of Tunisia - Private Sector Assessment Update Page 33 Volume H - Main Report D. REDUCING ADMINISTRATIVE BARRIERS 4.36 Effective support of the Administration to private enterprises would require to (a) provide comprehensive and reliable information to all investors, especially foreign, regarding investment incentives, taxation, labor legislation, and all administrative formalities, and (b) facilitate business start-up and operations, through quick and simplified formalities, facilitation of business operation, especially hiring of local and foreign employees and trade-related activities. Based on an open-ended question in the enterprise survey on current constraints, the third leading constraint to private investors was administrative constraints (20 percent of the respondents indicated this as the most scvere constraint). According to a USAID survey (September 1999), foreign investors acknowledge that the Tunisian Administration shows a high degree of professionalism, especially at the highest level (Ministries), but they complain about the lack of reliable and readily available information provided by administrative agents, especially regarding incentives, import formalities (quality controls) and labor legislation. In addition, according to the survey, applications for required authorizations are sometimes rejected without any explanation, administrative agents often provide an interpretation of laws and regulations which is erroneous and detrimental to the firm. The Administration, especially the CNSS, fiscal services, customs, Central Bank and ANPE, also imposes excessive controls on firms. Figure 4.1 (Response to Spontaneous Constraints) GRAPHIQUEl: CONTRAINTES EVOQUES SPONTANEMENT Divers Main d'oeuvre Ad.,mstrP__ Approid onemen 1 11 1 .o Ms che cocren et_ recodvreme ntItG.ittt5il IIGIttiilI ; 0,0 5,0 10,0 50,0 20 0 25,0 30.0 35,0 40,0 CONTRAINTES E PETITE ElMOYENNE _3RE MTOTAL 4.37 Despite significant progress in reducing administrative barriers to private sector development, some rigidities still remain, that increase transaction costs, discourage local and foreign private investment, and reduce Tunisia's external competitiveness. They concern mainly business start-up, tax administration and trade-related procedures. 4.38 Business registry and start-up. The single window (guichet unique) of API has greatly facilitated business registry and startups in the industrial and related services sectors, by assembling in one place all of the general steps required for business startups. It usually takes 24 hours for a new business to complete all the requirements of the single window for offshore firms and investments in Republic of Tunisia - Private Sector Assessment Update Page 34 Volume H - Main Report priority activities. The delays, however, occur where a new project requires authorization, mainly on a sectoral basis. Business and startup is subject to different investment regimes, depending on the sector where the investment is undertaken. The USAID study (through a survey of 33 North American investors) identifies many different steps with which an investor must comply to get authorization for its investment, to start up the business, and to obtain the advantages available in the investment. In Tunisia, there are still many ministries and administrations, many steps, and much documentation involved in the process of startup and application for incentives. 4.39 Investment authorization is required from the Commission Superieur d'Investissement (CSI), if the following conditions are not met: (a) 50 percent or more of the equity participation is by Tunisians; (b) the Board of directors is of Tunisian majority; (c) Tunisian president, general director, or manager, who must be a resident; (d) constituted according to Tunisian law; and (e) have an office in Tunisia.50 4.40 This has led to important delays in business investment, especially for onshore firms. For example, the startup process can take up to three months for an investor in agro-industry or tourism, and up to six months in certain manufacturing activities, and up to one year for many SMEs which may find it difficult to comply with all administrative requirements.5' 4.41 To facilitate business startup, the present report recommends the following measures:52 e Prepare a negative list of activities that are not permitted to foreign investors. * Reduce or eliminate sectoral authorizations by: (a) extending the declaration system of the single window to all sectors; (b) eliminating the carte de commercant; (c) eliminating the 50 percent limit on foreign participation in onshore investment; (d) imposing a deadline of 30 days to review an investment request; and (e) eliminating state monopoly in telecommunications, in line with the WTO/GATT agreement. * Reduce the number of forms and simplify the information needed from investors. In this respect, the "vis-a-vis Unique" and "Document Unique" initiatives proposed by API could prove highly useful. e Extend the one-stop-shop facility to all investors, including outside the industrial sector. * Intellectual and industrial property registration procedures can also be further streamlined. The administrative issues in land acquisition are treated in Section 6. 4.42 Business operations. Employment and immigration formalities in Tunisia take much less time than some other countries in the region. It takes up to 12 weeks in Jordan to obtain a work permit; in Tunisia it takes only two weeks. However, it could take up to 6 months for a foreign investor to obtain a carte de sejour. In addition, the formalities related to labor shedding can hinder business operations. 4.43 Trade-related procedures. The inefficiencies in trade-related procedures and logistics increase transaction costs for Tunisian firms and put them at a disadvantage vis-a-vis competitors. Tunisian domestic production and exports depend to a large extent on imported inputs. For example, imported inputs account for 60 percent of garment production in the offshore sector. The demand for inputs with 50 In addition, authorization from CSI and other organisms (central bank, ministries, ...) is required for investments in: pharmaceuticals, tourism, hydrocarbons, agriculture and fishing, telecommunication, audit services, banks and investment companies, trade services for internal market (travel agencies, public works, information technology, consulting, real estate), and international trade. For details, see USAID (1999). 51 This finding is from a recent assessment of administrative bottlenecks, sponsored by the USAID on behalf of MCIIE. In the telecommunications sector, an American investor waited 18 months and a British investor more than a year for responses to their authorization requests. 52 These are in line with the recommendations of the USAID study. Republic of Tunisia - Private Sector Assessment Update Page 35 Volume II - Main Report wider variety, quality, and technological content than can be supplied locally is expected to accelerate with the AAEU and with increased pressure for Tunisian firtns to become more competitive. The evidence from countries that have achieved high export growth illustrates that the commodity composition of exports becomes increasingly dependent on fast, just-in-time access to competitively priced and good-quality inputs. High levels of exports in these successful economies have been leveraged by trade facilitation. 4.44 While the trade regime in Tunisia has become increasingly liberalized, progress on trade facilitation has been slow. The administration of customs clearance, port logistics and procedures, and quality checks overburden resources and prove costly to both the Government and the private sector. The average time taken to clear imported goods after they have been unloaded from the vessel is 8 days - in quite a few cases, it reaches 18 days. For onshore Tunisian firns, there are 19 different steps involved in an import operation (Annex 5), and it can take an enterprise an average of 21 days to conclude an import transaction (Table 4.6).3 These procedures are related to formalities in port logistics, customs clearance, and quality and safety controls, all of which affect transaction costs. Table 4.5: Number of Days to Realize 0 erations Related to Im orts (by Size of Ent rise) Average Number of Days Small Medium Large Total Letter of credit 9.2 5.0 5.2 5.7 Shipping 2.1 1.8 2.5 2.1 Unloading 3.5 2.3 4.5 3.3 Customs 8.1 4.7 4.09 4.9 Release of Goods 5.7 2.5 2.5 3.0 Inspection 4.2 2.7 3.4 3.2 Total 32.8 19.0 22.1 22.1 Source: IACE Survey. 4.45 The inefficient processes underlying this delay are very costly to Tunisian enterprises. Beyond cost, the current processes severely impede the capability of Tumisian companies to respond to or accept short-notice orders, negatively affecting the competitiveness o:f Tunisian exporters. Tunisia's position in relation to some of its competitors is shown in Table 4.6. Opportunities for relief of these problems lie in: (a) better management of resources and automation; (b) redesign of policies, procedures, regulations, and documentary requirements; and (c) institutional modernization. Table 4.6: Tunisia's Position among Other Countries - Dwelling and Customs Clearance Time Country Dwelling Time io Ports Customs Cklarane Time Physical Inspection (%) Argentina 4/5 days 3 hours 30 Brazil 4/5 days India 48-120 hours 100 Indonesia 48-96 hours 100 Korea 48-72 hours 100 Malaysia 8-24 hours Sample basis Mexico 12-24 hours Sample basis Morocco 7-9 days 12-24 hours 70 Pakistan 48-120 hours 100 53 The import procedures for offshore firms are much more streamlined (Annex 4). Republic of Tunisia - Private Sector Assessment Update Page 36 Volume H - Main Report Singapore 15-25 minutes sample basis <5 Thailand 48-72 hours 100 Tunisia Up to 18 days 48-72 hours 50-80 Source: World Bank estimates - Transport Thematic Group, FPSI. 4.46 It has to be noted, however, that significant progress in streamlining and improving customs procedures have been made since the early 1990s. The number of documents required to execute an import operation has been reduced from more than 60 in 1990 to about 12 at the present time. The modernization of the SINDA system, as well the rapid implementation of the liasse unique and trade facilitation projects (with Bank assistance), are expected to significantly reduce transaction costs in import operations by the year 2003 (Table 22). Table 4.7: Modernization of the SINDA System and its Imeact on Reducing Transaction Costs by the Year 2003 t 2199 2000001 2002 j 003 Time taken for submission of 48 hours 36 hours 24 hours 24 hours 24 hours electronic manifest Customs clearance time 2-3 days 2-3 days 30 minutes 15 minutes 15 minutes Percentage of merchandise 30-50% 30% 20% 15% 10% inspected Source: Ministry of Commerce 5. IMPROVING ACCESS To FINANCE As in most other countries, SMEs in Tunisia have relatively less access to credit, especially medium and long term loans, than larger firms, and at a higher cost. Banks are reluctant to lend to businesses which do not prepare "bankable " business plans and relevant accounts; they also lack the skills needed for a deep analysis of credit and project finance. Non-bank financial institutions, such as venture capital funds, have limited activities and have not yet developed sufficient ability to assess new projects. Government programs, with the exception of mise a niveau and API's new initiatives, have not been effective in reaching SMEs. In addition, capital markets, which could serve as an alternative to bank credit, are under-developed There are currently only 44 companies listed in Tunis exchange and daily trade volume is below $8 million. Mutual and pension funds normally put between $1 and 5 million in a single emerging market stock; a daily volume of $8 million would not give them much maneuvering room. In Tunisia there are about 500 companies with more than $1 million in capital that would be candidates for the exchange, but like most large companies in other countries in the Region, they are family owned and so far have shown little interest in sharing ownership. As AAEU goes into effect, competition from European imports is likely to push some private companies into the market in search of financing to enhance their competitiveness, but more measures are needed to facilitate large enterprises' recourse to alternative sources offunding to bank credit. Republic of Tunisia - Private Sector Assessment Update Page 37 Volume 11 - Main Report 5.1 One of the constraints to increased private investment, especially for SiEs, is access to finance for investments and working capital.54 The primary source of investment financing in Tunisia is firms' own funds, imposing a significant limit on their expansion. According to the IACE survey, 53 percent of firms finance more than 50 percent of investment out of own funds. The second major source of financing is local commercial banks: 51 percent of firms use commercial bank loans to finance investment, with 19 percent of firms financing more than 50 percent of their investments out of bank credit. The capital markets, as well as existing risk capital funds and leasing agencies, service a limited number of clients. According the LACE survey, only 14 percent of firms get finance from issues of shares, which in 95 percent of cases provide less than 5 percent of the total investment cost. Several Govemment-sponsored programs are designed to provide equity and credit to SMEs, but the quality, penetration, and size of these programs remain limited (Annex 5). A. ACCESS TO FINANCE THROUGH BANK CREDIT 5.2 Differential access to finance by public and private firms. The main recipients of bank credit have been state-owned enterprises, large industrial conglomerates, and offshore enterprises. According to the INS data for 585 firms, on average, public sector firms have better access to credit than private firms, as indicated by the higher total and long-term debt ratios for public sector firms.55 Table 5.1: Indebtedness and Capital Structure of Private and Public, 1996 Private Firms Public Firms Total debt to capital stock 1.68 1.95 Medium & Long-term debt to capital stock 0.29 0.59 5.3 Access to credit according to size of firms. Table 5.2 shows that small firms among the 512 private firms in the samnple, defined as those with sales of less than 500,000 TD, rely more on short-term debt (relative to total debt) than do larger firms.56 These enterprises are vulnerable to the risk of insufficient liquidity due to their dependence on periodic extension of their short-term loans.57 Table 5.2 shows the share of small enterprises in total debt among the 512 firms in the sample. Small private firms represent only a minor portion of the stock of total debt, total long-term debt, and total equity capital.58 5 The bulk of the contribution to value added and employment comes from SMEs, especially those with 100 to 250 employees (Nabli and Behlous, 1999). Data collected by the Bank team confirms thlat the majority of Tunisian enterprises fall in the SME category, and that this group tends to generate the largest amount of sales and employment. 55 These findings are consistent with a recent study by Bahlous and Nabli (1999), which confirm that the public sector is less constrained in the access of credit and long-term finance. This study also shows that the real cost of debt to the public sector was close to zero before financial liberalization (during 1984-86), and while it increased considerably after reform, it remains far lower that the cost of debt to the private sector. 56 This is based on financial data for the years 1992-1996, from a sample of 585 enterprises, including 512 private enterprises and 73 public sector firms, collected by the INS. 57 Depending on interest rates, short-term financing of permanent assets may sometimes be justified in terms of cost advantage. This is, however, not the case for Tunisia, where risk reduction through consolidation of risk maturity is a central issue for development of the private sector 58 A 1998 study by the Canadian Confederation of Independent Business (CFIB) confirms this result: 30 percent of business owners surveyed for that study in 1997 said that availability of credit is among their most serious business concerns (one firm in three has trouble accessing credit). The study recommends special tax treatment of SMEs' retained earnings to help them maintain and increase their equity levels. Concerning long-term debt, several studies (Demirguc-Kunt and Maksimovic, 1996 and 1998) show how the availability of long-term finance is highly correlated with a firm's growth and productivity. Republic of Tunisia - Private Sector Assessment Update Page 38 Volume H - Main Report Table 5.2: Access of Small and Large Private Firms to Finance, 1996 Privae Firs wit Privte Firmis with Salea of T Total debt to capital stock 1.65 1.68 Medium & Long-term debt to capital stock 0.16 0.30 Short-term debt to total debt 0.91 0.81 Source: Institut National de Statistique, Tunis(1999). Table 5.3: Share of Debt, Long-term Debt, Equity Capital Small Large Small Large Small Large Small Large Small Large Debt in total debt 3.0 97.0 2.0 98.0 2.0 98.0 2.0 98.0 2.0 98.0 Long term debt in 0.4 99.6 0.3 99.7 0.3 99.7 0.4 99.6 0.4 99.6 total debt Capital in total 2.0 98.0 2.0 98.0 2.0 98.0 2.0 98.0 2.0 98.0 capital I I I I Source: Institut National de Statistique, Tunis(l 999). 5.4 Table 5.4 based on the results of the IACE survey, confirms that firms face different constraints on access to finance depending on their size. The level of interest rates and collateral requirements are perceived as a higher obstacle by small and medium firms compared to larger ones. Similarly, lack of availability of short term finance seems to impose higher constraints on small firms. Conversely, large firms complain more often about insufficient access to foreign banks. Table 5.4: Perceived Constraints on Access to Finance according to the Size of Firms59 jPote;ntialcntraints Smal fTt$ irms08 Meiu ;: g t wfirms Larg firms t 2t4:: ; Level of interest rates Moderate obstacle Moderate obstacle Minor obstacle Collateral requirements Moderate obstacle Moderate obstacle Minor obstacle Procedures and paper work Moderate obstacle Moderate obstacle Minor obstacle to apply for a loan Need for personal No obstacle No obstacle No obstacle relationship to get a loan Lack of availability of bank No obstacle No obstacle No obstacle credit Lack of availability of short Minor obstacle No obstacle No obstacle term finance Lack of access to foreign No obstacle No obstacle Moderate obstacle banks Lack of access to export No obstacle No obstacle No obstacle financing Information on credit No obstacle No obstacle No obstacle Source: IACE survey. 5 Microenterprises with fewer than 6 employees are not included due to the small number of answers. It may be worth noting, however, that they did not mention any moderate or major obstacle but collateral, which is consistent with the fact that only one of them borrowed from banks over the past three years. Republic of Tunisia - Private Sector Assessment Update Page 39 Volume 11 - Main Report 5.5 In addition, the IACE survey results also indicate that 41 percent of firms (out of 253 enterprises who responded to the access to finance questions) did not get a loan over the last three years. However, 69 percent of them explained that they did not want to borrow from banks or development institutions, while only 8 percent had their financing plan rejected by banks and 5 percent lacked collateral (18 percent did not borrow because of other reasons and most of them may be considered as rejected as well). In addition, a higher proportion of small and medium enterprises60 borrowed from banks compared to larger firms. Nevertheless, the following table suggests that small and medium enterprises consider that they face a higher constraint regarding access to credit compared to larger firms: only 48 percent of small and 69 percent of medium enterprises which did not borrow did not actually want a loan, compared to 80 percent of large firms. These results suggest that established SMEs face a relatively higher constraint than larger firms regarding access to credit. In addition, it is worth underlining that this constraint is probably higher for access to start-up finance. Table 5.5: Access to Credit and Reasons for not Borrowing from Banks accordin to Size of Firms (Percent) Small Medium Large Total Borrowed during the past 3 years 63 62 56 59 Did not borrow during the past 3 years 37 _38 44 41 Total 100 100 100 1o0 Reason for not borrowing: - Firm did not want a loan 48 69 80 69 - Financing plan was rejected 19 10 0 8 - Lack of collateral 14 5 0 5 - Other reasons 19 15 20 18 Total 100 100 100 100 Source: IACE survey. 5.6 Cost of credit. IACE Survey's results as indicated in Table 5.4, show that the level of interest rates impose a constraint on small and medium enterprises. It is worth underlining that the relatively high percentage of firms which did not want to borrow from banks over the past three years (Table 5.5) may be partially explained by the cost of credit. Central Bank's data as of September 1999 indicate that bank lending rate margins range between 0 and 7 percentage points above the money market rate (5.875 percent). According to these figures, it seems that larger firms benefit from softer conditions: the margin between the lending rate and the money market rate (MMR) is 2 percent or less on 29 percent of total credit: since these 29 percent of total credit are extended to only 9 percent of the total number of bank clients, this category is likely to include mainly large firrns, which usually borrow larger amounts per firm than smaller enterprises. The bulk of clients (56 percent) receive 19 percent of total bank credit, with a margin ranging between 4 and 5 above the money market rate, which corresponds to real lending rates from 7.5 percent to 8.5 percent, commissions not included. This category is likely to include most SMEs, which have therefore to cope with a quite high cost of credit. Lending rates do not reach prohibitive levels, however: the margin above the MMR is higher than 5 points on only 2.5 percent of credit, corresponding to less than 1 percent of clients. In addition, increased competition in the banking 60 Size definition is as follows: (i) small firms: between 6 and 20 permanent employees; (ii) medium firms: between 21 and 99 permanent employees and (iii) large firms: 100 employees and over. Micro firms (fewer than 6 employees) are not included because of the small number of answers: only one firm borrowed from banks. Half of firms which did not borrow did not want a loan. Other enterprises did not explain why their application was rejected. Republic of Tunisia - Private Sector Assessment Update Page 40 Volume 11 - Main Report sector and reduced percentage of non performing claims in bank portfolio is likely to result in a decrease in interest rates. Key constraints to bank financing of SMEs 5.7 Collateral requirements. As indicated by the survey, the value of collateral required by banks for the most recent lending operations is high for all borrowing firms, regardless of sector and size: on average, it represents 182 percent of the loan amount. Nevertheless, as indicated by Table 5.5, large firms are more able to provide required collateral, whereas SMEs may lack appropriate collateral and be therefore unable to borrow from banks: as indicated on Table 5.5, 14 percent of small firms and 5 percent of medium enterprises which did not borrow from banks over the past three years had been rejected because of lack of collateral. In addition, bank credit to SMEs is granted mostly in exchange for personal or physical guarantees, whereas credit to larger firms may be more frequently based on reputation and relationship banking. 5.8 Accounting standards. Our discussions with the Central Bank and commercial banks indicate that SMEs face constraints regarding access to bank credit because they may not be able to provide appropriate accounting information based on international standards. Banks rely mainly on financial information when assessing borrowers' creditworthiness, and it will be difficult, costly and time- consuming for them to assess SMES' actual creditworthiness. The survey results indicate that only 40 percent of small firms and 52 percent of medium firms have accounts based on international standards. 5.9 Capitalization and Financing plan. SMEs may also have difficulty to borrow from banks because of low capitalization. An analysis of the indebtedness and capital structure of the INS sample of 512 enterprises shows that permanent capital to permanent asset ratios appear weak, with some enterprises relying heavily on short-term liabilities to cover long-tern costs. Based on the survey results, 19 percent of small firms and 10 percent of medium firms which did not borrow from banks over the past three years had their financing plan rejected by banks. In addition, SMEs may face higher difficulties to elaborate and negotiate their financing plans. As indicated in Table 5.5, procedures that are required to apply for a loan appear to be perceived as more cumbersome for small and medium firms, which may more often lack the required skills. Substandard accounting information and level of capitalization are likely to impose a stronger constraint on SMEs, because banks rely mainly on financial structure when assessing borrowers' creditworthiness, rather than on less standardized criteria, which would require more time, skills and costs. B. ACCESS TO FINANCE THROUGH CAPITAL MARKETS 5.10 The main objective of capital market development is to provide an alternative to bank credit for non-financial private enterprises. Such enterprises can be financed through share issues and bond issues, as well as bank credit and other types of indirect finance. The table below shows that direct finance is still negligible in relation to indirect finance. Republic of Tunisia - Private Sector Assessment Update Page 41 Volume H - Main Report Table 5.6: Medium and Long-term Financin of Enter rises (TD million) 1995 1996 1997 1998 A. Direct Finance - Shares (share capital increases through public 292 143 116 97 offerings) - Corporate bonds 81 96 58 134 Subtotal 373 239 174 231 B. Indirect Finance - Increase in medium and long-term bank credit 607 110 567 888 Total medium and-long-term financing 980 349 741 1119 - Increase in total bank credit to the economy Memo: National savings (current prices) 3,435 4,253 4,869 5,344 Direct financing by enterprises in percentage of 10.8% 5.6% 3.6% 4.3% national savings I____ _ Source: Bank credit data collected by the Central Bank's Centrale des Risques. Since the collected data include only credits of TD 20,000 and more, they underestimate the total amount of bank credit. 5.11 Financing of enterprises through share issues. Market capitalization of the Tunis stock exchange amounted to about TD 3 billion at the end of March 1999, or 12.1 percent of GDP, after reaching a peak of close to TD 4 billion, or 23.3 percent of GDP, in 1995. Bank stocks and shares of all types of financial institutions still represent a large part of the stock market capitalization (about 65 percent as of March 1999). Hence, the Tunis stock exchange, with a relatively small percentage of non- financial enterprises among the listed companies, remnains a poor reflection of the country's economic activity. 5.12 There are currently only 44 companies listed in Tunis exchange and daily trade volume is below $8 million. Mutual and pension funds normally put between $1 and $5 million in a single emerging market stock; a daily volume of $8 million would not give them much maneuvering room. In Tunisia there are about 500 companies with more than $1 million in capital that would be candidates for the exchange, but like most large companies in other countries in the Region, they are family owned and so far have shown little interest in sharing ownership. As AA:U goes into effect, competition from European imports is likely to push some private companies into the market in search of financing to enhance their competitiveness, but as proposed below, measures are needed to facilitate large enterprises' recourse to alternative sources of funding to bank credit. 5.13 Corporate financing through bond issues. Between January 1998 and May 1999, 14 enterprises launched 23 bond issues totaling TD 230 million. About 85 percent of this amount was raised by credit institutions, mainly leasing companies, in addition to itwo development banks. Corporate bond issues by non-financial enterprises remain negligible in the overall financing of large enterprises in Tunisia. Table 5.7: Issues of Corporate Bonds by Non-financial Enterprises 1994 1995 1996 1997 1998 Amount (in 47 19.2 16 38 28 TD million) __ _ Number 11 7 5 5 4 Republic of Tunisia - Private Sector Assessment Update Page 42 Volume H - Main Report 5.14 Issues of corporate bonds in Tunisia are either rated by a Tunisian credit rating agency; guaranteed by one or several banks; or neither guaranteed nor rated, if the enterprise is listed on the Tunis Stock Exchange. Contrary to corporate bonds in more developed financial markets, Tunisian corporate bonds are not backed by real assets and are issued against the general credit of the company. 5.15 Bank loan pricing in Tunisia significantly reduces the group of enterprises that could issue bonds on the market at favorable costs relative to bank loans. In fact, Tunisian banks grant credit to large enterprises at very low rates that do not include adequate risk premiums and proper allowance for minimal intermediation costs. In addition, these lending rates do not properly reflect the real or potential cost for Tunisian banks of borrowing funds on the market. It would seem that higher fees and commissions on highly rated corporate bond issues could be more profitable for Tunisian banks or their securities firms than bank credits at rates equal or close to the advertised minimum lending rate. 5.16 Main constraints to the development of capital markets. There are constraints in both the supply of and demand for corporate securities: * The main supply-side constraints are: (a) lack of flexibility in the Company Law, limiting the formation of joint stock companies and the attractiveness of funding by issuing new shares; (b) absence of a legal framework for the creation of holding companies; (c) lack of incentives to issue stock as an alternative to bank credit; (d) low fee structure for investment banking services; and (e) stock listing requirements that inhibit market access by new companies. * The main demand-side constraints are: (a) lack of liquidity in the secondary market for shares; (b) insufficient compliance with financial disclosure requirements on the part of listed companies, which weakens the reputation of the stock market; (c) lack of transparency in the placement of corporate securities, which favors institutional investors and limits the participation of individual investors; (d) lack of institutional savings from insurance companies and pension funds; and (e) unfavorable taxation, which restricts the development of equity mutual funds. C. ACCESS TO FINANCE FROM NON-BANK FINANCIAL INSTITUTIONS 5.17 Tunisia has experienced a period of development of investment funds, mutual funds, and venture/risk capital funds, due largely to the fiscal incentives for such activities. There are 90 closed-end funds (Societes d 'Investissement Li Capital Fixe, SICAF), 19 open-end funds (Societies d 'Investissement a Capital Variable, SICAV), and 16 venture/risk capital funds (Societis d'Investissement en Capital Risque, SICAR), with a minimum capital of TD 500,000. Four SICARs are basically Govemment- sponsored regional development funds, all of which have a capital base of TD 5 million and invest in 61 agriculture and tourism. Most other SICARs are subsidiaries of large private industrial or banking groups (or a combination of the two), and invest primarily in the group itself. Only three SICARs are listed on the stock exchange. 5.18 The impact of these financing vehicles is limited. TININVEST and SPPI (Societe de Participation et de Promotion des Investissements) are the only two SICARS that have attracted foreign capital and have played an active role in investing in new ventures and service sectors. They have invested in about 60 enterprises, with a success rate of 75 percent (in terms of profitability), due to the extremely careful due diligence and labor-intensive follow-up work done by each institution with the 61 They are the Societe de Developpement et dI'nvestissement du Nord Ouest (SODINO), du Centre Ouest (SIDCO), du Sud (SODIS) and du Cap Bon (SODICA). Republic of Tunisia - Private Sector Assessment Update Page 43 Volume H - Main Report companies to which they have provided equity or long-term funding. Although this seems to be the right approach, it addresses only a small part of SME financing needs. D. GOVERNMENT-SPONSORED PROGRAMS 5.19 Tunisia has several Government-sponsored programs to enhance the supply of finance to the enterprise sector: (a) Several development banks receive funds firom bilateral donors and Arab countries and provide long-term credit to industry at special conditions, (b) external credit lines from multilateral agencies and donors are on-lent by commercial banks to targeted sectors such as agriculture, tourism, and mining, and external "soft" funds are available to a number of non-bank financial institutions providing finance to SMEs; and (c) a number of Government funds lend to SMEs. In addition, the Fonds National de Garantie (FNG) was created in 1983 to reduce credit risk (for investment lending) for banks lending to SMEs. The fund was capitalized by the contributions by commercial banks. However, the banks were not easily able to recover their loans in the case of default through FNG, therefore reducing the latter's credibility. The FNG has been reformed several times in recent years, without significant improvement in its impact. Most recently in 1999, new reforms have been introduced to enlarge functions of the FNG, notably to guarantee certain type of equity participation in SMEs by venture capital companies (SICARs). FNG guarantees now cover credit and equity participation, the interest on defaulted loans, and part of the cost of credit recovery (75 percent in the case of investments in undeveloped regions and 50 percent in other cases). The modalities of FNG are outlined in Annex 5. E. PROPOSED MEASURES TO FACILITATE ACCESS TO FINANCE BY SMES 5.20 Bank credit. The following measures would help increase SME's access to bank credit: * Regulatory adjustments to facilitate SMEs' access to bank credit.62 The following measures could be considered to ease access to bank credit: (a) broadening the definition of collateral to make SMEs eligible for credit; (b) implementing risk-based supervision of credit for bank lending to small customers; (c) adopting a system of tax deferrals and incentives for retained earnings of SMEs; (d) creating a credit reporting agency that would standardize procedures to classify creditors and keep a log of the credit history of corporate as well as household clients; and (e) promote stricter accounting and disclosure standards for all enterprises. * Commercial bank procedures and skills and informatiion technology. Commercial banks can realize the potential of SME lending by enhancing skills, procedures, and information technology, and developing marketing strategies. The recent experience of Eastern Europe and West BanklGaza, as well as some African countries, can be instructive (see Box 5-1). • Guarantee schemes for SME Financing. International experience has shown that credit guarantee schemes are difficult to design and implement, especially when targeted to small businesses and micro-credit. They may increase moral hazard and delinquency among borrowers. However, they have an important role to play in providing guarantees on a sound basis and thus improving access to credit of SMEs. Successful programs are based on several basic principles: (a) subsidized credit should be avoided as it generates distortions in financial market, damages competition among credit suppliers and leads to unsound selection of borrowers; (b) the guarantee scheme should be an independent body, and should be perceived by banks as part of their lending strategy rather than as a political tool or a public institution; (c) it should be adequately capitalized and staffed with qualified people so as to allow guarantee requests to be handled effectively and in a short period of time (not 62 See also Chapter 4. Republic of Tunisia - Private Sector Assessment Update Page 44 Volume H - Main Report exceeding three weeks), since reputation and bank confidence in the scheme are key element of success; (d) guarantee services should be complemented by strong marketing and communication activities to lenders and SMEs; (e) guarantee schemes should aim at achieving strong expertise and economies of scale in risk assessment and claim handling; (f) they should be adequately sized and targeted to SMEs rather than micro-businesses only (firms with about fewer than 300 employees); and (g) there should be appropriate prudential guidelines such as upper exposure limit on individual guarantees, limit on the amount of eligible loans and adequate risk-sharing principles. In particular, guarantees should only be granted when borrowers finance at least about 20 percent of project cost out of equity. The amount of the guarantee should range between 60 percent to 80 percent of the loan, depending on the guarantee fund staff involvement in borrowers selection and debt recovery.63 Box 5.1:S. LLending to Small Businesses - A Menu Worldwide experience shows tw tsmll business lending can be profitable and sustainable. Banks smetimes engage in small: busins lending tohdiversifthirportfio anlto spredteirptoliris on ln SS 1 million to one company in one economic sector c0anbe mich, moe risky than00 loans of S 0,000 to 100 copeing in a variety of sectors. Other banksgage in small buiss lending to createompttive niches and torw h the o g of their cuItome. But banks must change the way they d sirs and opt new lending techn t n s rcosts. In essencm , small busdie ng isrelaionh lend;aTersdev tim le i sy knowledge. Decision mang and fotlow up is as cloe banks' traditional 4a*se and document based Ino te for l n d Sue lsabus le ntils: (a) Full suport fom top( appcations based on cs h tha ssn i ngssti(i nio la rl nmagetment systemss to prompt ot etiaplst)okng icrs rfor bot loan approval and repat o1 co n; r lon offi basdon pef edetintdas a mix of numaber of loans f disbursed and repyments obtaineI); (g) asiinitial toans for limited dun inlo size and maturity with ood rep fo a i highenohe aninteest raeto cover initive costs and high risks. Most small business lending programs have starith Gnent assisacet build upc ilbakcaitto lend in this sector. In successful programs, banksh i et w ss p m e icd EbRD's work with the top ssian baks a nin ba ;iBaRa Inesia (rgr 17 milliion saes n 2:.5 million orwr,wth n vrage oan izeoU 62) NBD mir bsnsslnin Egp :sev Britih National Westminster Ba Dt O k.. A t byUn d i ited sfund t commnerial banks' small clients wereat leas 3 times as pra s r eta ient won wassets f upto 25 percent (Wells Fargo Bank is a acularly susful exampl) SME l is a l bu in the UnitdSt: the commercial component of small iibuee is US$ 7$bl, equive t eh mortgagnaaket and twice as l}areascredit cads. ;0t ;;f ;00 0 0 00 X;0t0 0t00 5.21 Capital markets development can facilitate access to finance for SMEs, but more importantly, it would generate other sources of finance for larger enterprises than bank credit, therefore easing SME finance. To address constraints in the supply of corporate securities: (a) large bank borrowers can be encouraged to use alternative financial instruments by regulating bank exposure to large borrowers; (b) the Company Law can be amended to increase the range of admissible financial instruments, while not 63 These principles are described in more details in Credit Guarantee Schemes for Small Business Lending, Volume 1- Main Report, Grahan Bannock and Partners Ltd., April 1997. Republic of Tunisia - Private Sector Assessment Update Page 45 Volume II - Main Report diluting control by company founders; (c) fees can be brought into line with the capital requirements of securities firms; (d) and listing requirements for new companies could be relaxed. 5.22 To address constraints in demand: (a) liquidity in the stock exchange can be increased by limiting off-floor transactions, and by facilitating stock splits to make stocks more affordable to small investors; (b) small investors can be further encouraged by establishing a quota for small investors in the placement of new issues, and by extending to them the tax exemption on capital gains; (c) compliance can be increased by strengthening enforcement of securities regulLations and by adopting international accounting standards; and (d) institutional investors can be encouraged through reforms of the insurance industry and pension funds. 5.23 Risk capital. Founded in 1973 by article number 45 of law No. 73-82, FOPRODI aims at promoting SME development and specific regions of the country. In its initial phase, FOPRODI financed some 1700 enterprises (1/4 of all industrial projects), of which only 50 percent repaid their obligations. This very important resort to FOPRODI during the seventies and eighties was due to the fact that banks were required to allocate a fraction of their resources to the financing of these projects, through the "Ratio d'activites prioritaires ". Following the elimination of this ratio, the fund has then been less and less used (about 20 projects in 1998). API's managers have identified a key reason to this poor performance, namely the lack of an appropriate guarantee fund (Fonds national de garantie). 5.24 Therefore, FOPRODI has been redesigned to support industrial projects and job creation by providing venture capital. The new scheme seems promising, as '20 projects have been financed since the mid-1999 reform. Under the new scheme, FOPRODI, through SICARs (Societes d'Investissement en Capital Risque), privately financed closed end risk funds, will participate in the equity of new companies. Eligible investments amount to up to TD 3 million (instead of TD I million previously) and the previous loan component is replaced by equity participation. Total equity must account to at least 30 percent of total project cost. The balance (70 percent of total cost) is financed through: (i) FORPRODI credits, which carry a 3 percent annual interest rate and are repayable over a 12-year period; they may account for up to 30 percent of total project cost; (ii) bank credits; and (iii) State contribution to the purchase of industrial land and technical studies and assistance, to up to 2.75 percent of total project cost. Overall, initial own funds provided by the entrepreneur represent 10 percent of total equity. 5.25 To strengthen supervision and monitoring of the entrepreneur's activities, the FOPRODI contribution (45 percent of total equity) will be managed by the SICAR during project implementation rather than being immediately granted to the entrepreneur. In addition, this contribution is expected to be reimbursed by the entrepreneur after a given period of time, thus allowing financial sustainability of the facility. To avoid misuse of funds, the SICAR itself is required to invest 45 percent of total project cost out of its own resources. This contribution has to be repaid by the entrepreneur after a maximum of 12 years, the price being contractually established at the time of investment. Thus, the new FOPRODI is rather a participatory credit scheme than a venture capital fund. The initial share of entrepreneur's own funds in total project cost is low (3 percent of total project cost), which may lead to excessively risky investment choices; moreover, banks may be reluctant to finance such projects, given the high level of indebtedness with respect to FOPRODI and repayable contributions. The American experience of SBIC (Small Business Investment Company), described in Annex 11, may provide useful insights on how to design and support effective venture capital funds for SMEs . Republic of Tunisia - Private Sector Assessment Update Page 46 Volume H - Main Report 6. LAYING FOUNDATIONS FOR SUSTAINED LONG-RUN PRIVATE SECTOR COMPETITIVENESS A. DEVELOPMENT OF SKILLS 6.1 With increased competition, the Tunisian labor force will need to play an even more important role in enhancing private sector competitiveness than in the past. Labor costs in Tunisia compare favorably with competitors, but labor laws can be improved. Monthly unskilled wages range from 162- 192 dollars,64 compared to $ 221 in Morocco and $ 190-321 in Egypt. Moreover, the average wage for skilled labor such as technicians and engineers is lower than in most comparable countries. The fringe benefit ratio (35 percent) is higher than that of Egypt (25 percent) but equal or lower than Morocco (35 percent) and Poland (48 percent). Despite these positive aspects, however, rigid government's laws and regulations in the labor market represent a disincentive to increase private investment. To lay-off employees, a request must be submitted to the Inspection du Travail which can take up to one month to review. Then permission from the Commission de Contr6le may be requested. In addition, investors have to cope with restrictions on employment of expatriates. 6.2 In view of increased competitiveness, skill development represents a major issue in Tunisia. According to the latest available data, the 1994 population survey (Table 6.1), almost one-fourth of the total working labor force had no schooling at all and two-thirds had either no schooling or at most completed primary level. Only 7 percent of the labor force reached the higher education level. With the exception of the chemicals industry, in which 60 percent of the labor force has either secondary or higher education, manufacturing activities follow more or less the same skill composition as in the other sectors. This indicates that the Tunisian labor force is falling behind in terms of education and skills compared to 65 competitors. 6.3 Moreover, the lack of foreign competition has avoided the pressure on local firms to upgrade the skills of their workers and to improve their ratio of skilled and white-collar employees to blue-collar workers. Consequently, the Tunisian economy in general and the manufacturing sector in particular have shown a low ratio of staff and skilled to unskilled labor. The absorption of high skills and staff has been handicapped so far by the limited size of most Tunisian firms. 6.4 The level of skills is also very low in the textiles and clothing sector, which is the main manufacturing exporting sector. More than 70 percent of the labor force has completed at most primary education and only 1 percent has reached the university level. The development of the offshore textile sector has therefore been based, so far, on low wage and relatively unskilled labor. This advantage is being eroded by competition from lower labor-cost countries and integration into the world economy requires a labor force endowed with much higher education and skills, capable of rapid mastery of new technologies and of adjustment to changing patterns of production and specialization. 64 Source: The Services Group, Inc. 65 In Morocco, however, about 40 percent of labor force in the productive sector were unskilled workers in the early nineties (Kingdom of Morocco, Preparing for the 21st Century, World Bank, 1994). In Egypt, 75 percent of workers have achieved less than eight years of schooling. Republic of Tunisia - Private Sector Assessment Update Page 47 Volume 11 - Main Report Table 6.1: Levels of Schooling in Tunisian Mainufacturing, 1994 Percentage of workina labor force Sector No schooling Primary Secondary Higher Total Food 16 52 28 3 100 Construction materials 19 47 30 4 100 Mechanical and electrical 7 46 41 5 100 industry Chemicals 7 33 50 10 100 Textiles, leather, and shoes 17 56 26 1 100 Other manufacturing 7 56 26 1 100 Whole economv 24 40 29 7 100 Source: National Statistical Institute (1994). 6.5 Given the significant education and skill gap, the government is increasing its training capacity both for formal and vocational training. The formal education system has been reformed in order to guarantee a minimum of nine years of education to all children. The current ratio of school enrollment at the university level is on the order of 12 percent, which is still low compared with many countries with similar per capita income. This ratio is projected to increase to 25 percent by the year 2010, which will constitute a major improvement compared with the current situation but which will still put Tunisia at a big disadvantage with respect to its major European trading partners. 6.6 Tunisia is also in the midst of implementing a broad reform of its vocational training (VT) system. The reform seeks to move the VT system away from a supply-side approach into one where the needs of the private sector define the VT policies. 6.7 The VT system provides training and employment services to 2 million workers, of which 25 percent are in industry, 25 percent in agriculture, 32 percent in services, and the rest in construction, transport and tourism. The training system is composed of four main subsystems: * private training institutions providing training essentially for the services sector with about 45 percent of the total training capacity of the country; * the network of seven technical institutes under the Ministry of Higher Education (MHE), with 22 percent of total capacity; * the vocational training programs run by the Ministries, of Agriculture, Health and Tourism, representing 15 percent of the total capacity, and providing training within each of their sectors respectively; and * the Ministry of Vocational Training and Education (MVTE), with its national network of training centers providing 18 percent of the total training capacity of the country, primarily in industrial program. In addition, the MVTE is also responsible for running apprenticeship program enrolling about 23,000 apprentices, which consist primarily of enterprise-based, task-oriented training programs at the level of semi-skilled workers, for youths with less than full basic education. 6.8 Private proprietary training has grown rapidly in the past eight years, and today there are 411 private training centers offering 34 different fields of specialization to more than 22,300 individuals. Approximately 8,000 students graduate from private training institutions every year, making private Republic of Tunisia - Private Sector Assessment Update Page 48 Volume II - Main Report sector the single most important source of trained workers in the country. However, more than 95 percent of the trainees enrolled in private institutions are concentrated in four areas of specialization: clothing (31 percent), computers and secretarial skills (6 percent), hair styling (8 percent) and electricity/electronics (I percent). More than 70 percent of the students in private training institutions are female. Most of the training in private institutions is at the skilled-worker level (77 percent) and the rest at the technician level. 6.9 The MVTE is the only provider of industrial training at the level of skilled workers and technicians in Tunisia. The training is provided in two types of centers: (i) polyvalent centers, which provide training at the skilled-worker level in various skills for different types of industries; and (ii) sectoral centers, which provide training mostly at the technician level in specialization found in a particular economic sector (construction, electricity, transport, leather and shoes, wood and furniture, etc.). MTVE's capacity to train technicians represents about 20 percent of its total training capacity. 66 Key Issues, current initiatives and proposed measures 6.10 Supply-Driven Planning for Training. Up to 1996, manpower projections have been used to forecast skill requirements and to determine the size and composition of vocational training programs. With the reduction of the State as a job provider and the development of a market-oriented economy, the MVTE has embarked in a far reaching reform. As part of this reform, the MVTE is developing its capacity to monitor the labor market, development base data on employment and labor, conduct labor market-based analysis and monitor the impact of the various programs and services. New investments in training capacity could be increasingly decided on the basis of economic analysis and on the basis of impact evaluation studies. 6.11 Segmentation of Pre-Employment Training. Pre-employment training in Tunisia is segmented into two main parts: private proprietary institutions providing training mainly for the tertiary sector, and public provision of training for the industrial sector. In order to increase the relevance of training, the ongoing VT reform seeks to encourage and develop private sector participation in the provision of industrial training. Several measures have been undertaken in the past three years, like the new incentives in the Investments Law for the education/training sector and second, a shift from institution-based training to enterprise-based training. New management strategies could be developed where public training centers are managed by the private sector, or Federations, with greater institutional flexibility (or example, where the staff of training centers are not necessarily civil servants, thus allowing for rapid adjustment to changing skill needs). 6.12 Low External Efficiency of Pre-Employment vocational Training. Public industrial training programs have had two main drawbacks. First, until very recently, they have been organized predominantly as institution-based training with weak links to the needs of enterprises. As the latter did not participate in the elaboration of training programs nor in the actual provision of training, graduates from public program found it difficult to get jobs, and as a consequence general insertion rates have been low. Second, training programs were conceived to give general education dropouts, who leave the education system before secondary school, minimal preparation for entry-level employment. To address these issues, the MVTE has opted to work with enterprises in the elaboration of training programs and in 66 Created in 1990, MVTE's mission is to elaborate and evaluate the Government's policy for vocational training and employment. In 1993, the former Office de la Formation Professionelle et de I 'Emploi (OFPE) was dissolved and replaced by four agencies under the responsibility of the MVTE: (i) a training agency (Agence Tunisienne de la Formation Professionnelle, ATEP); (iii) and agency for in-service training (Centre National de la Formation Continue et de la Promotion Professionnelle, CNFCPP); and (iv) and agency for the training of trainers and the elaboration of training programs (Centre national de la Formation des Formateurs et de I 'Ingenieurie de la Formation, CENAFIFF). Republic of Tunisia - Private Sector Assessment Update Page 49 Volume 11- Main Report the actual provision of training. For example, while enterprise-based training programs have reached 18 percent of the total, and are expected to reach 25 percent by the year 2001. Also, the recent reforms in education and training stipulate a higher quality at entry and exit for vocation training students, which will imply an increasing share of training at the technician level. A significant number of basic school dropouts will be redirected towards apprenticeship program. These programs, however, suffer from various deficiencies, in particular, an insufficient number of tutors, inadequate curricula and low course attendance. Training programs should not become the receptacle of the dropouts from general education, on the contrary, general education could increase its completion rates and quality. Efforts to develop enterprise-based training need to be sustained with incentives to enterprises to offer training opportunities. 6.13 Lack of Financial and Managerial Autonomy for Training Centers. Public training centers have allocated funds from ATEP's budget, and they have only recently started to charge small fees for student registration and for room and board. Although these charges represent less than 10 percent of the overall budget allocated to the training center, ATEP plans to increase fees gradually. The weak linkages between the training centers and enterprises also limits the contractual services training centers can provide and thus limit the potential diversification of the centers' revenue sources. All these translate into a limited autonomy of the centers vis-a-vis ATFP. The MVTE is currently designing a new model of training center to deal with the issues of autonomy. Special attention will need to be given to new funding mechanisms to training centers that would help increase the responsiveness of these centers to the needs of businesses. For example, allocation of funds to training centers based on performance (using indicators such as rate of insertion of graduates, satisfaction of private sector, quality of the training, etc...) would be a step in the right direction. Individual training centers' performance would be compared to national benchmarks. Training centers could also strengthen their current efforts to market services directly tofirms as a means of diversifying their sources cffunding. 6.14 Limited In-Service Training. In addition to pre-employment training, MVTE is also responsible to the promotion of in-service which is financed by a vocational training tax (VTT) levied on firms except export-oriented (offshore) firms. Manufacturing firrms pay 1 percent of their payroll, which non-manufacturing firms pay 2 percent. In 1993, tax revenues amounted to TD3 1.0 million, roughly equivalent to the annual recurrent expenditures of the MVTE. The tax, however, is not earmarked to finance the public training system, and qualifying firms receive a partial rebate if they conduct in-service training. 6.15 Enterprise-based, in service training for workers, is an activity which few Tunisians enterprises undertake. After a long tradition of protectionism, the link between human resources development and enterprise competitiveness is not yet firmly grasped by enterprises. A handful of enterprises, most of them public and amongst the largest in the country, conduct in-service training and benefit from the vocational training tax rebates. Most of the private sector does not. However, an increasing awareness among private sector entrepreneurs that a more open economy will require higher standards of human capital development to compete in the market is increasing their interest in in-service training activities. The tax rebate is not a strong incentive for most enterprises, especially small and medium enterprises (SME), since the training tax they pay is small and would only partially cover the costs of in-service training. 6.16 The PRONAFOC has been introduced in 1996, as a program to promote in-service training among small and medium enterprises, and is considered a valuable innovation by enterprises. The PRONAFOC targets workers from enterprises with less than I 00 permanent workers and aims at helping firms procure the right skills for the efficient use of production methods, for the introduction of new technology, for an improvement in the quality of output, and to improve the maintenance of equipment. It Republic of Tunisia - Private Sector Assessment Update Page 50 Volume II - Main Report also aims at helping enterprises improve their management methods. Priority sectors have been identified: textiles, clothing, leather and shoes, electric and mechanic industry, agro-industry construction, ceramics and glass. Training financed under the PRONAFOC can adopt several different forms like, training in the enterprise or in a different enterprise, night courses, distance learning, and short courses abroad. In addition, PRONAFOC finances training needs assessments. 6.17 PRONAFOC is governed by a steering committee composed of representatives from the Ministries of Employment & Training, Economic Development, Finance, Industry, a representative from the National Center for In-Service Training, a representative from the employer's federation, and a representative or the worker's union. The responsibility for day to day operations is with the National Center for In-Service Training. Initial evidence shows that these programs need to be more demand- driven and need to improve their capacity to assess individualfirms 'training needs. 6.18 An instrument under the FIAP (Fonds d'Insertion et d'Adaptation Professionnelle) also has for objective the development of in-service training for workers. But contrary to the PRONAFOC, it does not limit the beneficiaries to firms with less than 100 workers. Any private enterprise is allowed to apply for assistance from FIAP. The purpose of this instrument is to improve productivity and work organization in the enterprise by training workers whose qualifications and skills are no longer adapted to the needs of the enterprise. To achieve these objectives, FIAP assist enterprises by financing training needs assessments and actual training activities. An evaluation of FIAP, as well as the PRONAFOC, is currently underway to identify further areas for improving these schemes. B. MODERNIZING AND EXPANDING TUNISIA'S INFRASTRUCTURE67 6.19 According to the LACE survey, infrastructure services are not a major bottleneck for private business in Tunisia. However, to meet the challenge of globalization, improvements in a number of areas, such as telecommunications and marine transport, seem necessary. 6.20 The Government has ambitious plans to increase the coverage and quality of infrastructure services in light of increased competitive pressure engendered by the AAEU. In this context, it is encouraging private sector participation in the provision of infrastructure services on a pilot basis. However, the Government's approach to private participation in infrastructure (PPI) is cautious and slow. This approach has so far favored pilot projects, such as Build-Operate-Transfer (BOT) schemes, even in sectors where competition in the market is technically feasible, as in the power sector. While it is important to carefully evaluate the experience with pilot projects, an overcautious approach could cause Tunisia to fall behind other countries in terms of quality and cost of some infrastructure services, especially telecommunications and marine transport. 68 6.21 In general, the objectives and approach to PPI may vary by sector. In telecommunications, power, port services, and industrial land development, the aim may be to generate competition among many service providers. In water and sanitation, the key objective could be to involve the private sector through concessions for parts of the system and to contract out of ancillary and support services, while public enterprises retain the monopolies for the supply of core services. The pace of private participation also may vary. It could be faster in sectors with a wide gap between international best practice and level 67 More details on the telecommunications, transport, power, industrial land, water, and sanitation sectors can be found in the annexes covering the respective sectors. 68 The success of PPI depends crucially on the way it is approached and implemented. If the regulatory framework or the transfer process is flawed, the results may be disappointing, and it may be worthwhile to postpone private participation until the conditions for success are met. Republic of Tunisia - Private Sector Assessment Update Page 51 Volume H - Main Report of service in Tunisia (telecommunications), and slower or even unnecessary where service levels in Tunisia are close to international benchmarks (water and sanitation). 1) TELECOMMUNICATIONS Figure 6.1: Telecommunications Revenues as % of GDP 6.22 Sector Overview. In a globally integrated environment, demand for telecommunications services in Tunisia is likely to increase dramatically, giving rise to significant growth potential for the sector. At the present time, however, the share of telecommunications revenues in GDP is 1.5 percent, a figure higher than some regional competitors (Egypt and Turkey), but lower than that in most industrialized countries, where the sector represents between 2 percent and 3 percent of GDP. Moreover, in other emerging economies, , . / E' such as Chile and Malaysia, the share of the sector in GDP exceeds 3 percent. In these cases, telecommunications has been a growth engine, promoting development in other sectors (e.g. banking in Chile). 6.23 Most telecommunications services are exclusively provided by Tunisie Telecom, a public company created in 1996 under the Ministry of Post and Telecommunications (ONPT). The company has limited operating independence from the Ministry, and important steps for its commercialization-such as the submission of an audited opening balance-have not yet been completed. 6.24 In terms of telecommunication services available to the private sector, fixed-line services are well developed. Basic fixed line penetration seems broadly in line with the purchasing power of the country. Although the number of fixed lines have increased substantially, from 475,000 in 1994 to 767,000 in 1998 (a pace difficult to sustain in the future), there is still a disparity in access between urban (over 18 percent penetration in Tunis) and rural areas (about 2 percent in some cases). Sector growth, in particular, will be driven by enhancement of present revenues per line, rather than from addition of new subscribers. 6.25 Concerning mobile services, analogue mobile communications was introduced in Tunisia in 1991, but the number of connected subscribers stagnated at about 5,000 for several years. Mobile services have shown a robust growth over the last 18 months, thanks to the deployment of a GSM network, inaugurated on March 21, 1998. GSM network capacity is currently 50,000 lines, but this capacity is quickly running out. Accordingly, Tunisie Telecom has recently launched a tender for network extension to 100,000 installed lines and has introduced allocation principles by which business customers are preferred to residential ones69. 69 According to the enterprise survey, 67 percent of the businesses used mobile phones. Only 6 percent did not use the mobile phone because they could not get one despite their request. Most respondents indicated that they used mobile phones because they were more comfortable, and only less than 10 percent of mobile phone users justified their choice with the low reliability of fixed lines. Republic oJ I unim - Prrivae S'eAor l.svssment l.pdate Page 52 V olume II - Aluin Report Figure 6.2: Statuis of Fixed-Line Networks Correlation Income - Fixed Line Penetration 1.4 c O0 1.2 C 0 2 06 -0 2 Log GDP capita Source. ITU 6.26 In broad terms, mobile service penectration is low compared to other emerging economies (such as Lebanon, Estoniia. Malaysia), which brought penetration close to OECD levels. Figure 6.3: Mobile Telecommunications Potential Source GlobalA obile Republic of Tunisia - Private Sector Assessment Update Page 53 Volume 11 - Main Report 6.27 The possibility of Global Mobile Personal Communications Services (GNIMPCS) is not yet provided by the regulatory framework but commercial providers are already negotiating with local authorities. Concerning other satellite services, Tunisia is an active member of several international consortia, such as Rascom, Thuraya and Oxigene. Besrour Intercom is the only paging operator, with about 5,000 subscribers. 6.28 Data and Internet Services have not been sufficiently liberalized7". 'Iunisie Telecom, through Agence Tunisienne de l'Internet (ATI), operates the backbone network"7, over which value-added, data and Internet services are offered by a small number of private operators. Specifically, only two private commercial providers, Globalnet and Planet Tunisie, were licensed to provide Internet services, and five public sector bodies are exclusive Internet providers to public sector clients. ATI acts as regulator of the Internet segment, determining prices, service conditions and regulating the allocation of private licenses. Consequently, Internet services are underdeveloped. Figure 6.4: Internet Growth Potential 6.29 According to private sector sources, there are about 30,000 subscribers, among which about 5,000- 10,000 non-paying users. The following table shows the magnitude of delay. As of January 1999, there were less than 70 Internet hosts in Tunisia, which translated into 0.7 hosts per 100,000 inhabitants. This value is low if compared to Morocco (three times higher) and Egypt (four times higher). Furthermore, emerging economies like Chile and Malaysia have more than 200 Hosts per 100,000 inhabitants, 300 times more than Tunisia 6.30 Although a precise data services analysis is outside the scope of this work, we need to stress the progress achieved in the establishment of a modern and reliable infrastructure for data services in the area of banking73. 6.31 Impact on Private Sector Development. While telecommunications services, in terms of price, quality and the range of services, have significantly improved, they still pose constraints to private sector competitiveness. These constraints are mainly related to high costs, absence of modern services, and poor quality compared to some of Tunisia's main competitors. 70 Data services have been partially liberalized by Arr&te du AMinisire des communications do 22 mars K997, portant de;finition et classement des services a valeur ajoutee des telecommunications. 7 Tunisie TIelecom currently offers Digital leased lines (64Kbits/s and 2M), MIC R2, Frame Relay (FR). ISDN (called RNIS, Reseau Numerique a Integration des Services) 72 In terms of Internet services, that the two existing ISPs developed a good offer, comparable to the European one, ranging from traditional Web and e-mail access to Webpage development, hosting and offer of information and commercial services over the Net. The two providers are also engaged in developing Internet applications for c-commerce (especially in the agro- business area), and IP-based Virtual Private Networks. 73 Different banks have already established a high capacity netw^ork for their electronic payment system. T'he Government estimates that about 1,200 banking agencies are now connected to ISDN and X25 data networks. Morcoxer, the SIBTEL network offers ISDN and high capacity leased lines for data access. Republic of Tunisia - Private Sector Assessment Update Page 54 Volume 11- Main Report 6.32 High Costs and Prices. With respect to the price of basic fixed line services, the tariff structure appears unbalanced. Long distance and international communications are priced over cost and local calls and monthly subscriptions are subsidized. This tariff structure is not efficient, as it does not reflect the real cost of provision of services. In particular, international communications is expensive and constitutes a competitive disadvantage for export-oriented firms. The gap, which is not dramatic for regional standards, widens when comparing Tunisia with European operators that have radically changed their tariff structure to face competitive challenges. Table 6.2: Prices of International Communications Operator Tunisie Etisalat Telkom SA Itisalat-al- Infostrada Telecom Maghreb (Italy) Call to USA (USD/min.) 0.87 1.25 0.82 0.9 0.16 Call to France (USD/min.) 0.72 1.25 0.82 0.63 0.16 Source: corporate information. 6.33 As far as mobile services are concerned, the cost of GSM services is higher than regional and, especially OECD standards and, places the local users at a competitive disadvantage. The tariff structure of Tunisie Telecom presents one of the lowest monthly fees in the region, slightly less than 17 US$/month. On the contrary, the airtime charge, the price paid per minute of conversation, is the highest. The joint evaluation of subscription and airtime fee shows that, apart from very low usage customers, Tunisie Telecom is more expensive than most of its regional competitors (see Annex 6). In particular, residential, SOHO and large clients of Tunisie Telecom pay more than subscribers to other regional operators. Only for residential customers, estimated to use the mobile phone for less than 100 minutes a month, the offer of Tunisie Telecom appears broadly in line with regional competitors, being slightly more expensive than the Turkish and Lebanese offers, but better than the Egyptian and the Moroccan 74 ones Figure 6.5: Telecommunications Costs 6.34 Considering global price benchmarks, the offer of Tunisie Telecom seems broadly in line with that of European operators"5, but much higher than the price paid by an American customer76, notwithstanding the lower purchasing power. 6.35 The price of main Internet services is expensive. The access monthly fee is about 17.2 USD/month (itself low for international standards) but is to be added to a surcharge of about 8 US cents per minute paid by subscribers dialing the ISP access number. 74 We need, however, to bear in mind that the residential users are not, defacto, gaining any benefit from these tariffs, since the Government decided to segment the offer and limit the availability of phones for residential users. In this way. I unisic Telecom is clearly exploiting monopoly rents, overcharging business customers and temporarily preventing residential ones from having access to services. 75 For example a user of Telecom Italia Mobile would pay 97.5 USD for 360 minutes of use, while a user of Stet Hellas would pay about 80 USD and a user of Omnitel 79 USD 76 Sprint Spectrum offers 360 minutes for 49.99 l]SD. Republic of Tunisia - Private Sector Assessment Update Page 55 Volume H - Main Report Table 6.3: Prices of Internet Services Subscription Connection Six months Surcharge One-year Services Type fee per minute E-mail 33.3 USD 79.1 USD [NA] 1'37.5 USD E-mail, Telnet, Newsgroup Web 33.3 USD [104.1 [0.08 USD] 208.3 USD WWW, E-mail, FTP USD] Residential 33.3 USD 104.1 USD [0.08 USD] 170.1 USD E-mail, Telnet, Newsgroup, WWW, FTP, IRC Professional 33.3 USD 229.1 USD [NA] 395.8 USD E-mail, Telnet, Newsgroup, WWW, FTP, _ _ _ _ _ _ _ _ _ _ _ _ _________ _ ______ IR C Source: Planet Tunisie. 6.36 Concerning leased lines, the constraints to private sector (levelopment are multiple: * their high cost makes difficult the development of telecommunications-intensive services, as potential entrepreneurs are discouraged from initiating a private concern in this area, due to the high cost of their primary input, leased capacity; * providers of data and Internet services suffer directly from the high price of leased lines, an input for their business operations: the high costs of leased lines are directly translated by service providers into higher prices for final customers; * According to international analyses, advanced services, or "'knowledge-based services"77 are most likely to be damaged by this underdevelopment. Among these, there is tourism, financial services, insurance, business and consulting services. * A cost that has not been captured by international benchmark, is the high cost of terminals and Customer Premises Equipment (CPE). These high costs directly translates into high prices for terminal equipment, data terminals, cellular handsets, pagers, switches and routers. 6.37 Quality. As concerns quality of service, network relialbility, measured in terms of fault rate (number of faults per 100 lines per year) shows room for improvement. The fault rate decreased from 70 percent to 40 percent between 1997 and 1999, but is still far firom OECD best practice. In fact, other emerging economies (e.g. the Philippines), brought the fault rate close to OECD standards (4-5 percent). Past growth rate reduced the waiting list, which, however, remains still close to 15 percent of overall network size. This result might seem encouraging, if compared to that of other similar economies (e.g., Estonia, Lebanon). However, other developing countries, such as Morocco, Turkey and Malaysia, have successfully reduced the waiting list to less than 5 percent. This value is still sub-optimal, since OECD countries show a level between 0 percent and 2 percente8. In this respect, the entrepreneurs surveyed stated that many had to wait for very long time until they received a line. Indeed, 37 percent said that they had to wait for ten weeks or more, 34 percent for between tvvo and ten weeks, and only 29 percent received a line in two weeks or less. Customer assistance improved as now over 85 percent of faults are repaired within 48 hours (Ministry of Communications). Without diminishing the importance of quality improvements made in the recent past, the private sector is still only partially satisfied. Although official 77 OECD, Technology, Productivity and Job Creation, 1996. 78 In some cases, this result should be coupled with the penetration level of mobile communications (discussed below). Countries like Estonia or Lebanon, with a long waiting list for fixed line services, developed a mass market for mobile communications, still absent in Tunisia, compensating the unmatched demand for fixed line services. Republic of Tunisia - Private Sector Assessment Update Page 56 Volume II - Main Report statistics on Call Completion Rate are unavailable, the enterprise survey found that many commercial users need to dial several times before being connected. Table 6.4: Quality of Telephone Services Local Long-distance 71% 60% 2 21% 22% 3 6% 11% > 3 times 2% 5% 6.38 Range of Services. In the area of mobile services, scarce GSM development, and, notably, the absence of pre-paid cards, are a direct effect of the lack of competitors. The market segmentation of GSM services is, in itself, an evident constraint to private sector development. In addition, the constraints in the area of private networks mean high cost of corporate communications, absence of "state-of-the-art" solutions for corporate communications, such as Virtual Private Networks, and the scarce development of telecommunications intensive services, such as outsourcing or help desk, which considerably need modem private networks. 6.39 Key Issues and Proposed Measures. The above constraints can be considered a result of the following elements: * Absence of competition in the provision of services: Tunisie Telecom is the only provider of local, long distance and international fixed and cellular voice services. The negative effects of monopoly in basic services are outlined in Annex 6 and have affected both price and range of offered services. This is the single most relevant constraint to telecommunications sector development. In particular: > Tunisie Telecom exploits a monopoly rent on all voice services. > High prices and demand segmentation allow maximization of the monopoly rent on GSM services. Middle-income users and SMEs, that would have the purchasing power to buy GSM services and would use them efficiently in their business operations, are negatively affected by the restriction of available supply. > Leased lines prices are substantially more expensive than European benchmarks, due to the absence of competitors. The high price of leased lines is an obstacle for the development of several telecommunications services, particularly data, Internet and value added services. Moreover, the level of competition for the provision of Internet services is inadequate. In addition, telecommunications-intensive services are also underdeveloped, due to high cost of basic communications and leased lines and burdensome administrative procedures.79 > The absence of a market for leased lines is also limiting private networks potentialities, as private corporations cannot bypass Tunisie Telecom. 79 An analysis of the potential for these services in Tunisia would certainly deserve a separate study. However, it is important to remark that how some of the main driving sectors in Tunisia - tourism, agro-business and textiles - have been indicated by a recent IFC analysis as the sectors that will mostly benefit from the provision of competitive telecommunications-intensive and IT services. Republic of Tunisia - Private Sector Assessment Update Page 57 Volume II - Main Report Box 6.1: Impact of Telecommunication Sector Constraint On Private Sector Development Telecommunications Sector Constraint Private Sector Development Impact 1. High monopoly rent on international High price of international communications service 2. Underdevelopment of GSM segment High prices of basic service Absence of pre-paid cards High Unmatched, demand 3. High leased lines price High Internet prices High prices for private and data networks Scarce development of telecom intensive services 4. Underdevelopment of data services High prices of data services Scarce development of telecom related services 5. Underdevelopment of all market segments Unmatched demand for fixed and cellular services. where Tunisie Telecom is present Scarce client-orientation 6. High cost for terminals and CPE High price of terminal equipment, data terminals, cellular handsets, pagers, switches. 7. Private Networks Limitations High cost of corporate communications Absence of VPN _____________________________ I Scarce development of telecom intensive services > Limited autonomy of Tunisie Telecom. Tunisie Telecom is only partially independent from MoC, responsible for pricing, service offer and network development. Tunisie Telecom is not organized according to the modem organizational structure of private firms. Limited autonomy translates in delays in service provision, scarce client- and limited innovation in introducing new services. > High Import Duties: the existence of excessive duties on foreign telecommunications and computer equipment has been stressed by private sector operators as a problem increasing penetration of services. High import duties translate into a higher cost for terminals and Customer Premises Equipment (CPE), with a negative impact both for service providers and for final users.. > Excessive Regulation: in those areas, data services and private network, partially open to competition, detailed regulation persists. MoC is responsible for indicating technical specifications for private and data networks and fixing the price of services. Box 6.2: Example of Excessive Regulation: the Internet Segment Most countries allow open entry in the Internet segment, which generates strong growth in subscribers and price reduction. Limiting to two the number of ISPs, imposing detailed regulation on prices, condition of service and market segmentation, are major obstacles to Internet development. * Market Segmentation: private and foreign customers are sewved by private ISPs, while Government institutions, educational establishments and research institutes are connected to public sector providers. Therefore, competition between service providers is limited; * Barriers to Entry: only two private operators have been licensed, Planet Tunisie and Globalnet, notwithstanding seven other firms responded to the RFP. The entry barrier reduces the incentives for incumbents to act efficiently, keeping prices in line with the real costs of service provision; * Detailed Government Involvement: MoC reserves the right to strictly regulate ISPs activities, in termns of technical specifications and prices, which requires specific approval. Republic of Tunisia - Private Sector Assessment Update Page 58 Volume H - Main Report 6.40 The Government has made an offer to the WTO that will push forward the liberalization agenda, especially in cellular and data services. However, there is concern that Tunisia will not be able to comply with WTO obligations, given the delay in implementing relevant regulations in mobile telephony and data. Moreover, the liberalization agenda has not been defined yet, and this creates uncertainty for telecommunications investors. 6.41 Suggested policy reforms include a new telecommunications sector law and the full or partial privatization of Tunisie Telecom; as well as immediate liberalization of GSM, GMPCS, and Very Small Aperture Terminal (VSAT) services; competition in the provision of alternative infrastructure; complete liberalization of Internet services and private networks; and simplification of existing administrative procedures. A timetable for full scale liberalization should also be elaborated by the Government. 2) PORTS80 6.42 Structure. The Office de la Marine Marchande et des Ports (OMMP) under the Ministry of Transport has a de facto monopoly on pilotage and towage, owns and operates all quay cranes, and provides storage and custodial services in regional ports. A new legal framework (see below) provides for competitive provision of port services. However, the monopoly long exerted in the country's three main ports by the Societe Tunisienne d'Acconnage et de Manutention (STAM), a public enterprise, still exists: no other operator has yet been authorized to access this lucrative market. 6.43 Performance. Goods in Tunisian ports spend up to 18 days in storage. Much of this storage time is voluntary; traders use the port as a substitute for inland storage, which may be more expensive, or they may try to defer the payment of customs duties until they find a client for their goods. Such practices do not impose a burden to the economy, as long as port storage charges are not subsidized. In other cases, however, retention is involuntary-due to administrative procedures or inefficiencies in port services, including restrictive labor practices-and does impose an economic burden. 6.44 Reforms. The Government has taken steps to address most of these bottlenecks. The Code des Ports Maritimes de Commerce (Law 99-25), enacted in March 1999, allows for competition in service provision in all Tunisian ports, including by private enterprises. OMMP, however, still provides selected port services. The Government plans to streamline customs procedures within the framework of the AAEU. 6.45 Deepening reforms. To properly fulfill its regulatory function-including licensing of private port service providers and controlling tariffs of public operators-it is essential that the OMPP divest its operating functions completely. In addition, its functions need to be clearly defined, its autonomy from the Government strengthened, and the transparency of its procedures and accountability to users enhanced. A complete reorganization of cargo handling is also necessary, including privatization of the public cargo handling (STAM). 6.46 Restrictive labor practices need to be revised, in conjunction with a compensation plan for affected workers. Finally, small private cargo handling operators could be strengthened through incentives to regroup, which would enable them to benefit from economies of scale and improve their so This PSA focuses on ports because they are perceived to be a more important bottleneck to private sector development and competitiveness than other transport subsectors. Republic of Tunisia - Private Sector Assessment Update Page 59 Volume H - Main Report access to commercial credit. This, in turn, would allow them to finance the purchase of port equipment and compete on a level playing field with the public operator. 3) INDUSTRIAL LAND 6.47 Structure. The most important entity in the construction of industrial estates is the Agence Fonciere de l 'Industrie (AFI), which enjoyed a monopoly in that sector until 1994 and has constructed 55 of the 75 estates in Tunisia. The others were established by regional councils, municipalities, and the private sector. Most industrial estates are administrated by Groupemnents de Maintenance et de Gestion (GMG), private non-profit groups financed by fees from the estate's users and that report to the Government. 6.48 Land registration involves three different and ill-equipped institutions: the Land Tribunal, the Conservation de la Propriete Fonciere, and the Office de Topographie et de Cartographie (OTC). The three agencies do not coordinate with each other and lack adequate information systems, and their registers are out of date. 6.49 Performance. Developed industrial land is scarce in the northeastern coastal area which is most attractive to investors. The national master plan allocates sufficient land for industrial development, including in the northeast, but the cumbersome land registration system makes the conversion of agricultural land to industrial or commercial land a very lengthy procedure-about three years from identification of a site until the beginning of construction. The length of the procedure is also due to the cumbersome procurement methods for engineering services. 6.50 Reform. The private sector has been slow to respond to opening of competition with AlI in 1994. One reason is that the private sector, unlike AFI, cannot acquire public land and thus has to purchase much more expensive private land. In addition, private developers often lack access to finance, as the cumbersome land titling system does not allow them to register the land in time to make it available as collateral. 6.51 Deepening reform. Access to industrial land where demand is highest could be substantially improved if private sector developers had access to public land on the same terms as AFI. Furthermore, the land registration system needs to be streamlined, either by integrating the various land registration agencies or by improving cooperation among them, and by giving them the resources necessary to perform their duties, including computerized information systems. Restricting the role of the Land Tribunal to arbitration of disputes may streamline the land registration procedure. Finally, the balance in the development of industrial estates between the northeastern coastal area and the interior could be maintained. 4) POWER 6.52 Structure. The production, transmission, and distribution of electricity, as well as most of the transmission and distribution of gas, are the responsibility of a single public utility, the Societe Tunisienne de l'Electricite et du Gaz (STEG) under the Ministry of Industry. STEG has had strong financial performance for the past few years. 6.53 Performance. Industrial and service companies in Tunisia have relatively reliable access to electricity at tariffs that are average to low in international comparison (see Annex 2). Occasional power shortages occur during peak demand in summer, partly due to capacity constraints, but their incidence is Republic of Tunisia - Private Sector Assessment Update Page 60 Volume H - Main Report expected to decline when the large new independent power plant in Rades becomes operational in two years. There are also fluctuations in tension and micro-cuts that could affect unprotected sensitive electronic appliances. About half of all private enterprises, mostly larger industrial companies, own a generator, suggesting that power shortages have been a significant problem. A few large companies, mainly in the construction material industry, use gas, which is priced above cost. The surplus generated from gas sales cross-subsidizes electricity tariffs, including a social tariff for poorer households. It is estimated that the average electricity tariff would be at least 14 percent higher without the cross-subsidy, or slightly higher than the world average for industrial tariffs. 6.54 Reform. STEG's monopoly for grid generation was abolished in 1996, when the Government allowed concessions to independent power producers (IPPs). The first IPP, the power plant in Rades, will substantially expand capacity. According to the Ninth Development Plan (1997-2001), the Government envisages, in the long term, entrusting gas and electricity supply to two separate utilities, and in the meantime plans to phase out the cross-subsidy from gas to electricity. However, no steps in this direction have yet been taken. 6.55 Deepening reform. Experience with the Build-Own-Operate approach should be evaluated before it is decided whether to build new power plants under that scheme. In addition, the Government should study the options for contracting out more services to the private sector. In regard to elimination of the cross-subsidy, maintaining the social tariff would remove a potential political obstacle to separating STEG into separate gas and electricity utilities-although further breaking up these new utilities into separate, privatized, competitive companies for production, transmission, and distribution does not seem feasible at this stage, because of the small size of the Tunisian power market and the low degree of connection with the grids in neighboring countries. 6.56 In the long term, Tunisia plans to integrate its electricity network with Europe through an undersea transmission line to Italy, thus making the Tunisian electricity sector a part of the European electricity market. To be well prepared for competition with Europe in the power sector, the vertical disintegration of the power sector may be considered at that stage. 5) WATER 6.57 Structure. Urban water supply in Tunisia is the responsibility of the Societt Nationale d'Exploitation et de Distribution des Eaux (SONEDE) under the Ministry of Agriculture. There are no municipality-owned water utilities in Tunisia. Many larger industries have their own wells and do not depend on SONEDE for their water supply. About 80 percent of agriculture relies on groundwater pumped from wells operated by farmers or user groups. The remaining water used by agriculture is supplied to farmers by the regional directorates of the Ministry of Agriculture. 6.58 Performance. The access to water supply is almost universal for industrial and service companies in Tunisia. Supply is reliable. Industrial water consumption is metered and the linear tariff is close to the highest block of the domestic tariff. Industries thus fully pay for water, including capital costs. Although some companies complain about the high tariffs, these tariffs are justified by the scarcity of water in Tunisia, as well as by the high cost of transporting water over long distances; and they are still below the water tariffs in some major industrial countries. 6.59 Given the reliability and good quality of urban water supply, there are few major issues in this sector. SONEDE engages in a number of activities that may be contracted out to the private sector. A study on the contracting out of these services has been completed, but no action has yet been taken. In addition, a desalination plant in Djerba will be built and operated by the private sector under a Build- Republic of Tunisia - Private Sector Assessment Update Page 61 Volume H - Main Report Own-Transfer (OT) scheme. If successful, the BOT approach may be extended to other investments in the area of water transfer and treatment. 6.60 Access to water is, however, a crucial problem for agriculture, which is predominantly private in Tunisia. Irrigated agriculture accounts for more than 80 percent of the country's water use. Most agricultural water use is based on non-renewal groundwater, which is overexploited. Renewable groundwater is also overexploited in the central and eastern coastal areas of the country, leading to higher pumping costs and to seawater intrusion into aquifers, thus constraining agricultural production. In the north, irrigation relies mainly on surface water, which is less scarce, thus permitting a limited extension of the irrigated area. Tariffs vary for surface irrigation water supplied through the public canal system, but are generally much lower than urban tariffs. As local groundwater tables decline, the costs of pumping groundwater could become a constraint for irrigated agriculture in some areas of the country. 6) SANITATION 6.61 Structure. Urban wastewater services in Tunisia are the responsibility of the Office National de I 'Assainissement (ONAS), under the Ministry of Environment and Regional Planning. 6.62 Performance. Industrial and commercial wastewater are discharged into either the sewerage system or open watercourses. In both cases, strict quality standards are rigorously enforced for private enterprises, while enforcement for public enterprises is less rigorous. The costs of pre-treatment and treatment to meet the standards are often much higher than the charges paid for discharge into the sewerage network. To limit the cost impact of the strict discharge standards, the Government has established a Fonds de Depollution (FODEP), which provides matching grants for the establishment of industrial wastewater treatment plants. 6.63 The sanitation tariffs levied by ONAS vary according to the degree of pollution. Although some companies connected to the public sewerage network perceive them as high, the tariffs cover only operation and maintenance, while the capital costs are fully borne by the Government. 6.64 Reform. Experience with private participation in the sanitation sector in Tunisia has been mixed. On the one hand, contracting out maintenance of parts of the sewerage network has resulted in fewer complaints and lower costs. On the other hand, the contracting out of rehabilitation and operation of three wastewater treatment plants has not produced the expected results. The construction of a new wastewater treatment plant in Tunis West will be done under a BOT scheme, with technical assistance financed by the World Bank. 6.65 Deepening reform. The overall pace of contracting out been rather slow. An additional part of the Tunis sewerage network-much larger than the part already under private maintenance-is due to be contracted out in late 1999. However, most of the sewerage network and the wastewater treatment plants are still managed by ONAS. If some of the crucial issues concerning tender procedures and staff secondment from public to private operators are solved (see below), the pace of reform could be accelerated. 7) CROSS-SECTORAL ISSUES 6.66 While each infrastructure sector requires a different approach to reform, a number of essentially legal issues arise across sectors and need to be addressed at a higher level. Republic of Tunisia - Private Sector Assessment Update Page 62 Volume H - Main Report 6.67 First, especially for larger projects, procedures for selecting consultants are cumbersome and cause substantial delays. Procurement of consultant services above a certain threshold by the Government and public enterprises is centralized in the Commission Superieure de Passation des Marches. The benefits of centralized procurement are not disputed, but international experience suggests that the procedure could be streamlined. 6.68 Second, there is a need for rigorous pre-qualification in the selection of private operators to ensure reliability and quality of supply. This is especially important for small wastewater treatment plants and municipalities, which have limited experience with contracting out. The pre-qualification stage is often omitted because of cumbersome bidding regulations. If these regulations were changed, pre- qualification would probably be used on a wider scale. 6.69 Third, the requirement to submit relatively high performance bonds (5-10 percent), and the lack of advance payments, make it difficult for smaller firms to submit proposals. 6.70 Fourth, the secondment of staff from utilities to private operators should be allowed until there is broad private sector involvement in infrastructure sectors. As long as PPI is in its infancy, secondment is a necessary transition measure to allow the private sector to attract experienced employees. As a corollary, private operators should be allowed to freely choose their emnployees. The number of former public utility employees hired by a private operator may be made a criterion in the bidding process. It would be more beneficial to the economy if new entrants were allowed to compete for such jobs. C. REORIENTING GOVERNMENT SUPPORT TO SME DEVELOPMENT 6.71 The ability of private firms to produce and market goods and services in competitive and rapidly changing international markets is ultimately based on the capabilities of the entrepreneurs and workers to respond to changing market conditions. As in many other countries, private firms in Tunisia--especially small and medium size enterprises-face a number of challenges in enhancing their international competitiveness and entering global markets. This especially applies to onshore firms, but also to offshore firms involved mainly in subcontracting arrangements, which need to develop arms-length exports to increase value added and margins. These firms have to: (a) identify the right target market, the right product segment, and the right selling channel; (b) learn how to adapt their products to meet the price and quality standards demanded by the target market; (c) understand who their competitors are; (d) based on these considerations, launch a marketing and selling campaign; and (e) deliver the product on time and collect on sales 81 6.72 These activities require significant investments - and often up-front investments - in terms of not only financial resources, but also skilled and scarce managerial resources. A highly trained marketing staff is required to understand and service the needs of the market. A skilled technical workforce is required to translate the market needs into appropriate production and quality assurance processes. These activities are information intensive, often require years to gain a good understanding of the market, and have to be undertaken in an environment where firms are already stretched thin trying to cope with existing problems such as poor infrastructure, an inadequately trained work force, and delays in securing inputs, complying with procedural requirements, and accessing credit from a conservative banking A survey of emerging exporters in November 1998 showed that most of the exporters interviewed, especially partial and indirect exporters employing less than 100 workers, lacked: (i) adequate knowledge of export markets and its requirements in terms of product design, standards and quality; (ii) sufficient access to, and skills for, production technology required to meet international specifications, technical standards, and import market regulations for safety, packaging and labeling; and (iii) adequate expertise in market entry pricing, negotiations, promotion, and distribution strategies. Republic of Tunisia - Private Sector Assessment Update Page 63 Volume H - Main Report system. As a result of these problems, not only small and medium producers but also some large Tunisian producers do not actively cultivate export markets, and therefore do not make significant efforts to enhance their competitiveness. They cannot afford to add more demand on their limited cash flows. Even if they are willing to make some upfront investments in developing their capabilities, this may not be justifiable because they cannot achieve economies of scale and scope. 6.73 Recognizing these needs, the Government has put in place several programs in an attempt to improve the private sector's ability to compete on world markets. In particular, the Government introduced in 1995 the comprehensive "mise a niveau" program to help Tunisian manufacturing industry to adapt and upgrade its methods and practices of organization, management, innovation, training, technology, distribution, marketing, communications, and research and development. Both offshore enterprises, mainly in the textiles and clothing industry, and onshore enterprises which produce for domestic markets, are eligible for support under this program. lhe authorities have committed a very large amount of public resources through the Fonds de Developpement de la Competitivite (FODEC), funded by firms' contribution to competitiveness improvement and upgrading. 6.74 The program is managed by the Comite de Pilotage (COP'IL), which is responsible for approving the enterprises' proposed "mise a niveau" plans. It is attached to the Ministry of Industry and is composed of 16 members representing the Government (5), the employers' group UTICA (5), the banks (5), and the labor union UGTT (1). COPIL is chaired by the Minister of Industry or his designate. The implementing Agency is the Bureau de Mise a Niveau (BMN). 6.75 Overall, the program targets 2,000 firms over a 5-year period out of 4,000 eligible enterprises. A total amount of 2.5 billion TD is expected to finance the mise a niveau, of which 60 per cent would be allocated to modernize enterprises and 40 per cent to strengthen the basic and technological infrastructure, and to improve the interventions of institutions providing support and promotion. The financing of the program is partially provided by the enterprise and the financial sector at market rates. The Government's contribution is provided by the Fonds de Developpement de la Competitivite. It takes the form of a premium based on the structure of the financing plan for the "mise a niveau" of the enterprise. The firm applies for a loan to the bank of its choice, and the premium is granted only to finance bankable investments. 6.76 The program has recently been strengthened in order to (i) better reach SMIs (ii) increase intangible investments, in particular through pilot activities undertaken by a Task Force "PM]". This Task Force, created by the Ministry of Industry, gathers API, Technical Centers, Euro-Tunisie Entreprise and consulting firms (iii) strengthen the strategic positioning approach, supported by the recently created CEPI (Centre d'Etudes et de Prospective Industrielles). 6.77 Beyond encouraging results of the program so far (Annex 5), international experience (in the case of Slovenia, for instance) has shown that this type of program is likely to be more successful when government intervention is reduced to a minimum, and focuses mainly on providing financial support of the diagnosis phase to SMEs which otherwise could not afford it. 6.78 Most of these support programs (with the exception of a few schemes like the mise a niveau) have focused on supply of services, rather than private sector demand. The Government's approach assumes that the market for business development services is vveak or nonexistent: that the demand for services by small enterprises is low because of their inability to pay, and that such services cannot be provided profitably so that services must be provided directly by governments. This approach is likely to create distortions in business service delivery markets, crowding out private providers and constraining coverage by the amount of subsidies available. The experienLce with some of the recent programs in Republic of Tunisia - Private Sector Assessment Update Page 64 Volume II - Main Report Tunisia, has shown small enterprises are indeed capable and willing and able to pay for services which help them become more competitive and profitable (e.g., services of technical centers) or that there is potential to develop local consulting market (e.g., mise A niveau program). Some of most important programs are described in Annex 5. 6.79 International experience shows that SME support programs could be more effective if they: * focus on products rather than institutions in developing innovative service products tailored to different segments of the small enterprise population; * aim to remove the key constraint: information - recognizing that small enterprises need specific information leading to business transactions, as well as knowledge of the potential payoff from investing in business services; * forge partnerships with the private sector in building upon existing private sector initiatives and using private firms for more effective delivery of business services; and * emphasize a performance-based approach to business services in developing comparable indicators of financial performance, business services market development, and impact. 6.80 Some of the recent programs, such as EMAF (see Box 6.3) have incorporated these principles, but most others could be re-directed. H;E~~~~~~o 6.:Epr ake=otsFn Republic of Tunisia - Private Sector Assessment Update Page 65 Volume II - Main Report 7. LOOKING AHEAD 7.1 The AAEU and the adherence to WTO rules, along with dismantling of the MFA, mark a turning point in Tunisia's economic development. Building upon this, fundamental changes are needed in the country's approach to encourage private investment and to realize its strong potential for accelerated, export-led growth in the new international economic environment. 7.2 To continue its successful economic performance, Tunisia will need to articulate and implement a comprehensive strategy for sustained growth aimed at easing the internally driven and directed model of governance, and addressing an array of policy and structural constraints to private sector competitiveness and productivity. Key elements for such a strategy are brought together in this report and summarized in the proposed reform agenda in the Executive Summary to this report. 7.3 Accelerated Growth Strategy: Need for Major Structural Change. Macroeconomic projections for a base case and an accelerated export-led growth scenario indicate that achieving 7 percent real growth by 2004 will call for a 10 percent expansion of total investment. The rate of increase in private investment would need to be even higher at around 12 percent, allowing an increase in the share of private to public investment. It also implies increased long-term capital inflows, including FDI. Which would need to grow to over $600 million per year. 7.4 A policy agenda for accelerated private sector led growth. As previous sections of this report indicate, the heightened international competition will require Tunisia to develop a stronger, more dynamic private sector. In turn, this challenge calls into question the effectiveness of the country's internally driven and directed model of governance, in a new global and competitive environment. In addition to a complex set of investment incentives, the remaining structural bottlenecks involve tax and other administrative issues, difficulties in access to finance by SMEs, insufficient supply of skilled workforce required to meet the challenges of globalization, high cost of telecommunications and marine transport, and insufficient supply of industrial land. To give private investors confidence, the Government would need to be aggressive in removing these bottlenecks and reduce its own involvement in economic activity. 7.5 The principal measures to increase private investment could include: * Simplification of investment incentives to encourage private investment. * Re-orientation of the role of government in the economy, away from an approach based on control and public sector implementation. Instead, the government could play an even more important role as facilitator and regulator. This will call for: (a) a strong commitment to accelerated privatization; (b) reduction in market intervention and regulation; (c) delegation of the delivery of private sector support programs to the private sector. * Further improvements the business environment for private sector activity, to remove inequalities in market access and opportunity, especially for Tunisian SMEs and foreign investors in some sectors, and to reduce risks and transactions costs of doing business in Tunisia. * Acceleration of the financial sector restructuring and deepening of capital markets to ensure adequate private sector access to bank finance for investment and operations. In the meantime, addressing lack of access of SMEs to investment and working capital finance putting in place market-oriented risk capital schemes. * Addressing a number of structural constraints over the medium to long term: improvements in infrastructure, skills, and private sector institutions. Republic of Tunisia - Private Sector Assessment Update Page 66 Volume II - Main Report 7.6 Pace and Sequencing of Reforms. The above issues have been discussed in previous chapters and specific policy and institutional options to address these issues proposed. These are summarized in the matrix: " A policy agenda for accelerated private sector led growth", displayed in Volume I of this report, which links the main objectives of reform and structural change in the above areas to a sequence of policy actions that could be taken by the Government in the short-term (immediately or within a year), the medium-term (within one to three years), and the long-term (within three to five years). Setting and maintaining an adequate pace of reform and restructuring will be key to achieving the ambitious growth targets. Republic of Tunisia - Private Sector Assessment Update Page 67 Volume II - Main Report REFERENCES Behious, M. and M. Nabli, 1999, "Financial Liberalization and Financing Constraints on the Corporate Sector in Tunisia," paper prepared for the International E,conomic Association Twelfth World Congress, Buenos Aires, Argentina, August 1999. Choksi, A., M. Michaely and G. Papgeorgio. 1991. Liberalizing Foreign Trade, Lessons of Experience in the Developing World. Oxford University Press. Dadush U. and K. Murrell. 1997. Trade Liberalization and Private Investment: The Case of Tunisia, World Bank. Demigurc-Kunt, A. and V. Maksimovic, "Stock Market Development and Firm Financing Choice," World Bank Economic Review. Vol. 10, 1996. Demigurc-Kunt, A. and V. Maksimovic, "Law, Finance, and Firm Growth", Journal of Finance, 1998. Djankov S. and B. Hoekman. Towards a Free Trade Agreement with the European Union: Issues and Policy for Egypt, in A. Galal and B. Hoekrnan (eds.). Egyptian Center for Economic Studies (ECES) and Center for Economic Policy Research (CEPR). 1997. Regional Partners in Global Markets: Limits and Possibilities of the Euro-Med Agreements. Graham Bannock and Partners Ltd., 1997. Credit Guarantee Schemes for Small Business Lending, Volume I- Main Report. Haddad, A., 1999, "Tunisia: Export Potentials in the Services Seclior," Background Paper for the Republic of Tunisia - Social and Structural Review (World Bank). Halvorsen, R., 1996. Fiscal Incentives for Investment in Thailand, in Anwar Shah (editor). Levine, R. and D. Renelt, "A Sensitivity Analysis of Cross-Country Growth Regressions, The American Economic Review, Vol. 82, No. 4. (Sep., 1992), pp. 942-96:3. Lynn R. et al. 1996, "Tunisia in the Global Economy," International Economics Departrnent, Analysis and Prospects Division, the World Bank. Nash J. and V. Thomas, 1991, Best Practices in Trade Policy Reform, Oxford University Press. Spar, D., 1998, "Attracting High Technology Investment - Intel's Costa Rica Plant," Foreign Investment Advisory Services, Occasional Paper 11. USAID, 1999, "Tunisia: Investor Roadmap." World Bank, 1996, Global Economic Prospects World Bank. 2000. Republic of Tunisia - Social and Structural Review.