RESTR I CTED FILE COPY Report No. P-84 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF TUNISIA FOR A SECOND WATER SUPPLY PROJECT June 9, 1970 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF TUNISIA FOR A SECOND WATER SUPPLY PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to $10.5 million to the Republic of Tunisia. The proposed credit would be relent to the Societe Nationale d'Exploitation et de Distribution des Eaux (SONEDE), to finance a second water supply project. PART I - HISTORICAL 2. In March 1966, the Government requested the Bank's assistance in identifying and preparing a water supply project. On the Bank's advice it engaged the services of consultants, drew up the "1968-1973 National Water Program", and created an independent national water corporation, Soci6te Nationale d'Exploitation et de Distribution des Eaux (SONEDE), which in 1968 took over the existing government water supply services. 3. In January 1969 the Bank made a loan of $15 million (No. 581-TUN) to SONEDE, with the guarantee of the Republic of Tunisia. The Kingdom of Sweden, through the Swedish International Development Authority (SIDA), simultaneously granted a credit of $5 million equivalent to the Republic of Tunisia which was relent to SONEDE. This joint operation financed high priority works whose preliminary study was completed. At that time, a fur- ther group of works called the "Second Project" was already identified. The present project includes these works, as well as additional works not foreseen at the time, mainly in tourism regions. The present project will be implemented during approximately the same period (1970-1973) as the first project. The Kingdom of Sweden, through SIDA, has again participated in the appraisal of the project and negotiated at the sBme time as the Asso- ciation a $3.5 million credit on IDA terms. 4. Negotiations took place in Washington from May 11 to 19, 1970. The Government was represented by Mr. Moncef Belhadj Amor, Director of the Budget, Mr. Zine Mestiri of the Secretariat of State for Planning and Mr. Habib Ben Yahia of the Tunisian Embassy. Mr. Taieb Ben Ghanem, Director General of SONEDE, represented the Beneficiary. The Kingdom of Sweden was represented by Messrs. Sven Ohlund and Tor Kvarnback of SIDA and Mr. Bjorn Elmer of the Swedish Embassy in Washington. 5. Following is a summary statement of loans and credits to Tunisia as of April 30, 1970: -2 Loan or Amount (US$ million) Credit Number Year Borrower Purpose Bank IDA Undisbursed 29 1962 Republic of Tunisia Education 4.9 - 380 1964 Republic of Tunisia Port Development 7.0 - 449 1966 Sociktg Nationale Development d'Investissement Finance Co. 5.0 .4 94 1966 Republic of Tunisia Education 13.0 5.7 484 1967 Republic of Tunisia Cooperative Farms 12.0 8.1 99 1967 Republic of Tunisia Cooperative Farms 6.o 4.o 512 1967 Socigte Nationale Development d'Investissement Finance Co. 10.0 4.8 573 1968 Office des Ports Port Development 8.5 7.3 Nationaux Tunisiens 581 1969 SONEDE Water Supply 15.0 14.8 606 1969 SNCFT Railways 8.5 8.5 150 1969 Republic of Tunisia Railways 8.5 8.4 S2 1969 Republic of Tunisia Highway Engineering .8 .7 648 1969 Societe Nationale Development d'Investissement Finance Co. 10.0 10.0 Total (less cancellations) 76.8 of which has been repaid to Bank and others 1.7 Total now outstanding 75.1 Amount sold 1.2 of which has been repaid .4 .8 Total now held by Bank and IDA 74.3 32.4 Total undisbursed 54.6 18.1 72.7 6. Only about a third of Loan No. 484-TUN and Credit No. 99-TUN (Cooperative farm project) has so far been disbursed. After a rather slow start the project has been seriously affected by changes in the Government's agricultural policy (cf. para. 25 below). These changes have raised serious doubts as to the extent to which the project can be implemented as originally envisaged. A Bank supervision mission visited the country in October 1969 and again in March 1970. Its findings are being reviewed and will be reported to the Executive Directors in the near future. 7. Disbursements on Credit No. 94 (Education II) have been delayed, but most expenditure under this project has now been made and requests for reimbursements will be sent to the Association shortly. Initial delays in the preparation of bidding documents account for low disburse- ments under Loan No. 573 (Ports II), but a number of contracts have now - 3 - been awarded and an acceleration in disbursement is expected. Disburse- ments under Loan No. 581 (Water Supply I) will accelerate during the coming months when all major construction work will start. Disbursement on the Railroad project (Loan No. 606-TUJN and Credit No. 150-TUN) has hardly started because the damages caused by serious floods last autumn had first to be repaired. The second loan to SNI (No. 512-TUN) has been totally committed and disbursements are proceeding satisfactorily. The third loan (No. 648-TUN) became effective on May 5, 1970. 8. In 1962, IFC invested $2.0 million in NPK-Engrais, a phosphate fertilizer company. In 1966, IFC made an investment of D 300,000 (about $571,500) in Soci'etg Nationale d'Investissement (SNI). On June 2, 1970, IFC's Executive Directors approved a second investment of $630,000 in SNI which will allow IFC to maintain its 20 percent participation when SNI will soon double its share capital. In 1969 IFC made an investment of $9.9 million ($8 million as a loan and $1.9 million in share capital) in COFITOUR, a tourism development and holding company. 9. The Bank and IDA are at present considering a gas pipeline project, a family planning project, a highway construction project, an agricultural credit project and a tourism infrastructure project. PART II - DESCRIPTION OF THE PROPOSED CREDIT 10. BORROWER: Republic of Tunisia BENEFICIARY: Soci6t6 Nationale d'Exploitation et de Distribution des Eaux (SONEDE) AMOUNT: US$10.5 million in various currencies PURPOSE: To finance the second project under Tunisia's National Water Program for 1968-1973 AMORTIZATION: In 50 years, including a 10-year period of grace, through semi-annual installments of 1/2 of 1 percent from November 15, 1980 through MaY 15, 1990, and 1-1/2 percent from November 15, 1990 through May 15, 2020. SERVICE CHARGE: 3/4 of 1 percent RELENDING TERMS: Amortization over 25 years, including a 5-year period of grace, with interest of 7 percent per annum. 11. The Swedish credit of $3.5 million equivalent will be extended to the Republic of Tunisia on IDA terms and will be relent to SONEDE on the same terms. - 4 - PART III - THE PROJECT 12. A report entitled "Appraisal of the Second Water Supply Project - Tunisia" (No. PU-37a) is attached. 13. Tunisia's water resources are limited and are located at con- siderable distance from the main population centers and the principal tourist areas. The urban population is increasing twice as rapidly as total population and the rate of increase in water consumption is even higher. Tourism, mainly from Western European countries, has become a major foreign exchange earner for Tunisia, and can be expected to continue to develop rapidly. Water supply in certain cities and tourist areas is becoming a serious problem. 14. The total cost of the National Water Supply Program for the period 1968-1973 is presently estimated at about $58 million. It can be divided into three parts: a) The first part ($28.4 million) for which the Bank and Sweden have jointly lent $20 million, consisting mainly of priority supply works in the most populated areas (Tunis, Cap Bon and Sahel). b) The second part ($19.2 million) to be financed in part by the proposed credit and a new Swedish credit, con- sisting mainly of supply works for industrial centers not covered by the first project, and for tourist areas in southern Tunisia, the Sahel and Cap Bon. c) The third part ($10.6 million), consisting Of miscellaneous works and renewal operations which SONEDE is executing mainly with its own funds and some foreign bilateral assistance. This program will cover water supply needs in the areas concerned at least up to the end of the 1970's. Further works will be needed in the areas of Djerba, Sfax and Lake Ischkeul and will be started after 1973. Engineering studies for future water supply projects are included in the proposed IDA/ Swedish financing. 15. SONEDE, the beneficiary of the proposed IDA credit, is a water supply organization owned by the State, with a large degree of autonomy in its operation. It was formed in 1968 in agreement with the Bank and the Swedish Government and has been operating efficiently. Its management and staff are competent; SONEDE is introducing new salary scales which should help retain its qualified staff. 16. The Government had agreed to provide $20.3 million to SONEDE as its contribution to the 1968-1973 National Water Supply Program. However, the Government is now facing substantial additional financial requirements to repair the damages caused by the severe floods of last autumn. In the circumstances it would seem appropriate to reduce the total government con- tribution to the program to $15.7 million, part of which has already been paid to SONEDE. This contribution, together with the IDA/Sweden financing and SONEDE's own cash generation should be adequate to finance the program. Should the need arise, however, the Government remains committed to pro- vide additional financing as required. 17. The project includes eight sub-projects to expand and strengthen water supply systems in four regions and four cities of Tunisia comprising the country's fast growing tourism and industrial centers. It will mainly consist of constructing and reinforcing water transmission pipelines which will connect existing distribution systems to ground-water resources in the interior of the country. Seventy percent of the project will benefit tour- ism areas. The internal rate of return of the project is expected to be at least 11 percent; in addition the project will reduce the danger of water- borne diseases. No adverse repercussion on the ecology are expected from it. 18. The total estimated cost for the project is $19.2 million, in- cluding $11.3 million in foreign exchange. The financing to be provided by the Association and the Kingdom of Sweden would total $14 million, so that some $2.7 million (or 19 percent) of the IDA/Swedish financing would be devoted to local expenditures. Tunisia's investment requirements are large and its development program requires external assistance in excess of the foreign exchange component of development projects suitable for international financing. Hence Bank Group assistance at an adequate level could not reasonably be provided if it were restricted to foreign exchange expenditure only. In these special circumstances, I believe that the fi- nancing of some local currency expenditures is justified. 19. For this project, as for the first one, international competitive bidding would be used for all major supply and construction contracts. The margin of preference for local suppliers for purposes of bid comparison would be 15 percent or the customs duty, whichever is lower. The IDA and Swedish credit vould be simultaneously disbursed at a ratio of 3:1 for actual foreign exchange expenditures and -- on an agreed percentage basis -- for expenditure on construction contracts and goods locally produced or pro- cured. 20. Water rates were raised from an average of 32 millimes to 60 mil- limes in 1968 as a condition of the Bank loan. After completion of the project SONEDE should earn a minimum rate of return of 5 percent in the years 1973 to 1975 and of 6 percent thereafter. This target would require one further rate increase to 70 millimes in 1973 on the basis of present sales forecasts. SONEDE and the National Electricity and Gas Corporation (STEG) have now negotiated a plan for discharging liabilities existing be- tween them and mainly stemming from the previous collection of water charges by STEG. The agreement iB to be executed before the Credit Agreement would become effective. -6- PART IV - LEGAL INSTRUIMNTS AND AUTHORITY 21. The Draft Joint Financing Agreement between the Republic of Tunisia, the Kingdom of Sweden, the Association and SONEDE, the draft Credit Agreement between the Republic of Tunisia and the Association, the Recommendation of the Committee provided for in Article V, section l(d) of the Articles of Agreement and the text of a Resolution approv- ing the proposed Credit are being distributed to the Executive Directors separately. 22. The contents of the various agreements conform substantially to the pattern of agreements used for water supply projects, and in par- ticular that of the Loan Agreement for the Water Supply I Project (Loan No. 581 TUN). To reflect the joint financing arrangements, matters of common interest to the Association and Sweden are contained in a Joint financing agreement: the draft Association Development Credit Agreement and the Swedish Credit Agreement contain the financial terms and other matters of primary interest to the Association and to SIDA respectively. 23. Particular attention is drawn to the provisions of the Joint Financing Agreement requiring Tunisia: (i) to take all necessary steps to acquire or enable SONEDE to acquire the ownership or the right of occupancy of all land needed for the Project (Section 5.05); and (ii) to ensure to SONEDE the use of ground water resources in certain areas (section 5.07). PART V - THE ECONOMY 24. An economic mission visited Tunisia in January/February 1970 and reviewed the current position and prospects of the economy. Its report was circulated to the Executive Directors on May 5, 1970 (EMA-22a). 25. At the beginning of 1969, the Government decided that all agri- cultural land should be incorporated in production cooperatives. Private land was included into new cooperatives or adjacent ones, changing the area and development plans of existing cooperatives. Skilled manpower already scarce was spread even more thinly in an attempt to manage the enlarged program. As the new cooperatives were created, discontent amongst farmers grew rapidly and, in September 1969, the Government reversed its policy. Former landowners were permitted to withdraw with their land from the co- operatives, and a large number of cooperatives was dissolved. These changes in policy disorganized the agricultural sector. While the potential bur- dens on public finance and skilled manpower has been removed, the problem of modernizing Tunisia's agriculture remains. 26. Weather conditions and floods also affected the economy adversely in 1969, and the increase in gross domestic product in real terms was only 4.5 percent. However, expansion in the petroleum, manufacturing and tourist sectors was satisfactory. Domestic savings rose as a result of an improve- ment in Government finance. The over-all balance of payments showed a - 7 - surplus, despite an increase in the trade deficit, as public capital inflow rose substantially. The projected growth of GDP in 1970 is about 7.5 per- cent. A balance of payments surplus is expected to result again from high public capital inflow. 27. The internal and external financial position calls for further efforts to improve economic performance, particularly to raise domestic savings, exports and investment productivity. Some measures have been initiated to strengthen financial control in the Government and preliminary steps have been made towards re-organizing a number of state-owned enter- prises. Projects for which investment decisions had not yet been taken are being re-examined. 28. The external debt burden remains high. About 25 percent of ex- port receipts on goods and services were devoted to the service of external debt in 1969 including 21 percent on public and publicly guaranteed debt alone. Payments on the present debt in the coming ten years will be large and limit the scope for assuming further debt service obligations. Ex- ternal assistance on concessionary terms should be maintained at least at the present level, and Tunisia's short and medium borrowing should be re- duced further, in order to prevent the debt service burden from becoming excessively large. Repayments on short and medium term debt (18 months to 10 years) will total $40 million in 1970 while, under its current stand-by agreement with the IMF, the Government has undertaken to contract during the same period not more than $36 million of new debt in this category. In these circumstances Tunisia's creditworthiness is limited, and assist- ance from the Association appropriate and justified. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 29. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 30. I recommend that the Executive Directors of the Association approve the proposed credit. Robert S. McNamara President