Document of

The World Bank

FOR OFFICtAL USE ONLY

RqportNo. P-5055-TUN

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPNENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED PUBLIC ENTERPRISE REFORM LOAN

IN AN AMOUNT EQUIVALENT T0 US$130 MILLION

TO

THE REPUBLIC OF TUNISIA

JUNE 12, 1989

This document has a restried distion and may be used by recipients only In the performance oftheir offidal duties. Its contents may not otherwise be dbilosed withoot World Bank authorization.

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CURRENCY EQUIVALENTS(as of May 31, 1989)

Current Unit = Tunisian Dinar (TD)

US$1.00 = TD 0.9849

GLOSSARY OF ABBREVIATIONS

CAR_-? Interministerial Commission for Restructuring and DivestitureCIF Cost, Insurance and FreightCPG Compagnie des Phosphates de GafsaDEP Directorate for Public EnterprisesGC Groupe ChimiqueIFC International Finance CorporationEMF International Monetary Fund

MLT Medium and long-termPDG President Director General (Company President and Chief

Executive)PE Public EnterprisePEAL Public Enterprise Reform LoanPM Prime MinisterPPG Public and Publicly GuaranteedP205 Phosphoric AcidSNCFT Societ6 Nationale des Chemins de -Fer TunisiensSNT Societe Nationale de TransportS02 Sulfur dioxideTA Technical AssistanceTD Tunisian DinarUNDP United Nations Development ProgrammeUSAID United States Agency for International Development

Fiscal Year

January 1 to December 31

FOR OMCILAL USE ONLY

REPUBLIC OF TUNISIA

PUBLC ENTERPRISE REFORM LOA-

Table of Contents

Page No.

LOAN AND PROGRAM SUMMARY

PART I - THE ECONOMY . . . . . . . . . . . . . . . . . . . .

PART II - BANK GROUP OPERATIONS AND ASSISTANCE STRATEGY . . . . . 8

PART III - THE PUBLIC ENTERPRISE REFORM PROGRAM AND THE PROPOSEDPUBLIC ENTERPRISE REFORM LOAN (PERL). . . . . . . . . . 11Introduction. . . . . . . . . . . . . . . . . . . . . . 11The Public Enterprise Sector: Issues and Actions. . . . 12A. Systemwide Reforms .steniwideReforms..... .......... 14

(i) Legal and Institutional Reforms . . . . . . . . . 14(ii) Introduction of performance contracts and

management improvements . . . . . . . . . . . . . 17(iii) Budgetary and Financial Reforms . . . . . . . . 19

B. Divestiture and Restructuring Program. . . . . . . 21

C. Subsectoral Action Programs 'or Priority PEs . . . 25The Phosphate Sector . . . . . . . . . .. ... 26Compagnie des Phosphates de Gafsa. . . . . . . . . 27Groupe Chimiqe . . . . . . . . .. . .. . . . . . 29

Transport Sector Policy. . . . . . . . . . . . . . . 32Soci6t6 Nationale des Chemins de Fer Tunisiens . . 33

D. Social Implications of the Proposed PERL . . . . . . 36

PART IV -LOAN ADMINISTRATION. ............. .... 37

Eligible Expenditures Procurement and Disbursement. . . 37Release of Funds, Tranching and Key Conditions. . . . . 38Management, Coordination and Monitoring . . . . . . . . 40Cooperation with other Agencies . . . . . . 41Justification and Risks .... . . . . . . ..... . 42

PART V -RECOMMENDATION. . . . . . . . . . . . . . . . . . . . . 43

This report is based on the findings of an appraisal mission comprising:P. Donovan (Mission Leader) and S. Kebet-Koulibaly (EM2IE), R. Taylor (EMTTF),S. Contreras and P. Geraldes (EM2IN), S. Mitric and K. Viswanathan (EMTIN), A.Covindassamy (AS4TE) and J. Malkin (Condultant) which visited Tunisia inFebruary/March 1989.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

REPUBLIC OF TUNISIA

PUBLIC ENTERPRISE REFORM LOAN

Table of Contents(continued)

I. Key Economic Indicators .... . . . . . . . . . . . . 44II. Status of Bank Operations in Tunisia . . . . . . . . . . . . 46III. Progress Under Existing Adjustment Operations

(ASAL-1, ITPAL and SAL). . . . . . . . 48IV. Letter of Sectoral Development Policy . . . . . . . . . . . 57V. Policy Matrix for the Public Enterprise Reform Program. . . 65VI. Key Provisions of New Public Enterprise Law . . . . . . . . . 68VII. PE Sector: Macroeconomic Indicators 1983-85 . . . . . . . . . 69VIII. Aggregate PE Data - 40 major PEs, 1981-86 . . . . . . . . . 70

IX. Key 1987 Indicators for Selected Public Enterprises . . . . . 71X. Government - PE Financial Relations 1982-88 . . . . . . . . . 72XI. World Supply/Demand Phosphate . . . . . . . . . . . . . . . . 73XII. Government Financial Contributions to CPG 1980-88 . . .. . . 74XIII. CPG Production Raw Phosphate 1980-93 . . . . . . . . . .. . 75XIV. CPG Cost Structure - Variable and fixed cash costs - 1988 . . 77XV. CPG Investment Program 1986-93 . . . . . . . . . . . .. . 78XVI. CPG Personnel Evolution 1980-88 . . . . . . . . . . .. . 79XVII. CPG Staff Reduction Program . . . .. . . . . . . . . . 80XVIII. CPG Financial Performance Indicators 1988-93 . . . . . . .... 81XIX. Groupe Chimique: Production Data by Company 1986-88 . . . 82XX. Groupe Chimique Ownership Structure . . . . . . . . . . . . . 85XXI. Groupe Chimique Past and future Financial Performance

Indicators . . . . . . . . . .. . . . . . . . . . . 86XXII. Railway subsector (SNCFT) ............. 88XXIII. SNCFT's Traffic 1981-93 . . . . . . . . . . . ..... . . . . 92XXIV. Suimmary Financial Indicators of SNCFT 1985-93 . . . . . . 93

XXV. Urban Transport Enterprises (SNT) . ........ . .. . . 94XXVI. Supplementary Project Data Sheet . . . . . . . . . .. . . . 100XXVII. Disbursement Schedule ... .... ...... 101

REPUBLIC OF TUNISIA

PUBLIC E:TERPRISE REFORM LOAN

Loan and Program Sunary

Borrmar: Republic of Tunisia.

Amount: US$130.0 million equivalent.

ters: 17 years. including S years of grace, at the standard variableinterest rate.

The proposed loan would support the implementation of acomprehensive program of Public Enterprise Reform which has beeninitiated by the Tunisian authorities. This program centersaround: (i) legal and institutional reforms which substantiallyreduce the role of the Government in the public sector andclarify and streamline Government interventions in enterpriseswhich will remain in the public sector and (ii) a program ofprivatization and restructuring of public enterprises (PEs) tofurther reduce the role of the Government in the competitiveareas of the economy while addressing the social costs associatedwith these measures. The proposed loan is designed to assistthis program by identifying specific time-bound short- andmedium-term measures to address the objectives and by assistingin their implementation. The loan therefore supports (i) theimalementation of the new law governing PEs (phased strengtheningof Boards of Directors, introduction of performance contracts.abolition of ex-ante controls, increased transparency in thebudget allocation process. etc.), (ii) the implementation ofprivatization decisions and the financing of the associatedbudgetary costs and (iii) initiating the process of subsectoralrestructuring of three major PEs in severe difficulty: Compagniedes Phosphates de Gafsa (CPG) -- the phosphate mines, GroupeChimique -- fertilizer producers, and Societe Nationale desChemins de Fer Tunisiens (SNCFT) -- the Tunisian Railway.

ae1tiiti anld Risks: Major benefits include: increasing the efficiency of the economyby progressively transferring potentially competitive PEs to theprivate sector wherever the latter has the resources, expertiseand flexibility to realize the full potential of theseenterprises; in:reasing the efficiency of PEs remaining in thepublic sector by progressively introducing transparent andquasi-comnercial performance criteria, through performancecontracts; progressively addressing the social and financialcosts of privatization and restructuring of PEs. some of whichare in severe technical and/or financial difficulties. As inother major programs of PE sector reform, the main risk is thatbureaucratic and social opposition will hamper the implementationof difficult and politically sensitive policy decisions. Theserisks are mitigated by the support for the Reform process at thehighest levels in the Government. by the actions already taken,by the explicit programs underway to manage the social costs ofadjustment and by monitoring under this loan specificquantifiable measures to be implemented over a two-year period.

litinatad Disbursements: The proceeds of the loan would be disbursed in two tranches:US$70 million equivalent upon loan effectiveness and US$60million equivalent after implementation of specific actions,including an overall review of the implementation of the sectoraladjustment program.

Agprailal Reoort: None.

REPORT AND RECOMMENDATION OF TiIE PRESIDENTOF THE NTRNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED PUBLIC ENTERPRISE REFORM LOAN

IN AN AMOUJNT EQUIVALENT TO US$130.0 MILLIONTO THE REPUBLIC OF TUNISIA

INTRODUCTION

1. I submit the following report and recommendation on a proposedloan for the equivalent of US$130.0 million to the Republic of Tunisia.The loan would support the extensive program of Public Enterprise Reformbeing undertaken by the Tunisian authorities. This program consistsprimarily of the privatization of public enterprises operating in areaswhere the authorities no longer see a need for public ownersh p, and theestablishment of a legal and regulatory framework that would progressivelylead to quasi-commercial operating and management conditions in thoseenterprises which will remain in the pe-lic sector. These measures areintended to maximize economic efficiency and to minimize the budgetaryoutlays to public enterprises. The proposed Public Enterprise Reform Loan(PERL) will help the Government in the implementation of this programthrough the use of specific time-bound measures for the progressiverealization of the reform objectives. Through providing general balanceof payments support to the Government, the loan will also releaseresources which will finance a portion of the social and budgetary costsof the program, over a two year period. The Public Enterprise ReformProgram is an integral part of the overall macroeconomic adjustmentprocess aimed at promoting sustainable growth. PERL would be the fifthquick disbursing operation for Tunisia. The first Agriculture SectorAdjustment Loan (ASAL) for US$150 million was approved in September 1986.An Industrial and Trade Policy Adjustment Loan (ITPAL) for US$150 millionwas approved in FY87. A Structural Adjustment Loan (SAL) for US$150million was approved in FY88, and a second ASAL was approved by the Boardlast June. The latter operation is not yet effective. Performance undereach of the other operations has been satisfactory (Annex III). Tunisiaalso successfully completed the program agreed with the IMF under itsfirst stand-by arrangement covering the period November 1986 to May 1988.An extended financing facility was signed in July 1988, and is beingsuccessfully implemented.

PART I - THE ECONOMY A'

2. Background. Tunisia is a medium-sized, middle-income country,with a population of 7.5 million and a per capita income of US$1,210.Much of the country is arid or semi-arid. Only 3 percent of arable land

-L' This section is essentially the same as that included in the SecondAgriculture Sector Adjustment Loan approved by the Board on June 1, 1989,Report No. P-5001-TUN.

- 2 -

is irrigated and rainfed agriculture is subJect to severe year-to-yearfluctuations in rainfall. Nevertheless, nearly one third of the laborforce is employed in agriculture. Tunisia's most important raw materialsare petroleum, natural gas, and phosphates. Output of known exploitablereserves of oil and gas is diminishing because of depletion, and thelimited new reserves require costly off-shore drilling. With the rise indomestic energy demand, Tunisia is expected to become a net oil importerin the early 1990s. There is a substantial phosphate processing industry,but it is constrained by the low quality of the phosphate deposits.Tourism, however, has been developing rapidly and has much furtherpotential.

3. Tunisia has undertaken a massive effort to *velop its humanresources paying special attention to family welfare and education. As aresult, between the early 1960s and 1985, infant mortality declined fromalmost 160 to 60 per thousand, life expectancy at birth rose from 48 to62 years, adult literacy increased from 15 percent to 62 percent, andcalorie intake per capita increased from 95 percent to 121 percent ofminimum standard requirements. An active family planning policy led to adecrease in birth rates by 27 percent between 1965 and 1985.Nevertheless, as mortality declined by 45 percent over the same period,population growth has continued at 2.5 percent p.a.. The population ha8 ayoung age structure, which, together with the increasing entry of womeninto the labor force, has caused the labor force to grow faster thanpopulation. The effect on unemployment, which is currently estitated atabout 15 percent and particularly affects young entrants into the laborforce, is a major concern of the Government.

4. During the 1970s, the Tunisian economy performed strongly, aidedby oil exports. GDP growth averaged 7.4 percent per year over the decadeand non-oil exports grew at over 10 percent p.a. on the average. Allsectors did well, especially manufacturing, whose share in GDP and exportsincreased substantially. To a great extent, the rapid growth of GDP wasdue to high levels of investment, about 30 percent of GDP, which wascompatible with a respectable growth of per capita consumption and amodest level of external financing, thanks to earnings from oil. Thecurrent account deficit averaged 5-6 percent of GDP, though there was abrief increase in 1976-78 to a peak of 11 percent of GDP, which theresurgence of oil prices reduced again without necessitating cutting backinvestment or consumption. Since Tunisia attracted considerable foreigninvestment, it had no difficulty in completing the financing of thecurrent account from external sources. The country emerged from thedecade with a modest increase in external indebtedness to 42 percent ofGDP in 1979, as compared to 38 percent in 1970, and a debt service ratioof only 10 percent. Domestic inflation remained moderate, averaging 6.1percent a year.

1980-84: Deteriorating economic performance

5. Difficulties began in the earl" 1980s: although oil extractiondeclined as expected and, in addition, world oil prices fell, thenecessary economic adjustments were slow in coming. The VIth Plan(1982-86) did, in fact, propose maintaining internal and external balance301 3L

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by reducing the investment rate, increasing emphamis on exports, andslowing the growth of recurrent budget expenditurts. To promote jobcreation, it envisaged a shift to more labor-intensive investment. But,in fact, these objectives were not pursued. Instead, from 1980 to 1984,investment remained high, around 31 percent of GDP. The greater part ofthis investment was in the public sector and included a number of largecapital intensive projects yielding few jobs and low economic returns.The five year non-oil ICOR for this period was 6.0. Wages increasedsubstantially faster than productivity, further reducing the demand forlabor, Inflation rose to an average of 10.0 percent p.a., and exportsslowed. The current account deficit grew to 10.9 percent of GDP in 1984with the agricultural merchandise trade deficit representing 3.2% of GDP.These expansionary policies kept growth high; it averaged 4.5 percent forthe per.od, despite a drought in 1982 that slightly reduced GDP. But theydepended on continued external borrowing which raised Tunisia's externaldebt (public and publicly guaranteed (PPG)) to 46 percent of GDP and thedebt service ratio to 21 percent by 1984, reflecting a shortening ofaverage maturities. The Government attempted to restrain itsexpenditures; nonetheless, the overall budget deficit stayed close to6.7 percent of GDP.

1985-87: Stabilization and the start of adjustment

6. By 1985 Tunisia had begun to experience problems in obtainingexternal financing for its high current account deficit, and it becameclear that a balance of payments crisis was threatening. Accordingly,after responding with some initial restrictive measures, the Governmentbegan a process of policy revision that has broadened into a wide-rangingproces's of structural adjustment Its first step was to restrictimports- This succeeded in bringing the current account deficit down to7.1 percent of GDP, but, as usual with such controls, shortages of rawmaterials and spare parts developed, as well as biases against productionfor export. The Government also reduced its investment, which hadaccounted for most of total investment.

7. As a result of these measures, and by mobilizing donor support,the Government avoided a full scale crisis. But it recognized that it hada large external debt burden and, as Tunisia's oil reserves are runningout, the resources available to the public sector would diminish. Hence,the role of the public sector would need to contract in favor of theprivate sector. The Government also recognized that economic incentiveswere distorted c3nd that the incentive structure would need to change foran efficient and active private sector to develop. In particular, theGovernment would need to make the economy more outward oriented, reduceadministrative controls, reform the tax system, and improve the efficiencyof financial intermediation. In August 1986, it announced a programprepared along these lines, in dialogue with the Bank and IMF, tostabilize the economy and lay the basis for sustained growth. A fulldescription of Tunisia's adjustment objectives is presented in thedocument of the VIIth Plan (1987-91) and summarized in the President'sReport for the SAL. (Report No. P-4808-TUN).

3013L

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8. The commitment of the Government to economic adjustment, despitedifficult political transition problems, has led to substantial support bythe Bank and other donors. The Bank's support has included the program ofadjustment loans listed in para 1. above, based on intensive economicanalysis and policy dialogue. As also noted, the IMF has supportedTunisia with a Stand-by arrangement for the equivalent of SDR 104 million(75 percent of quota) and for purchases of: tha equivalent of SDR115 million under the compensatory financing facility. The IMF ExtendedArrangement approved in July 1988 was for SDR 207 million.

9. The Government's stabilization measures have reduced theimbalances in the budget and the external current account and haveestablished the conditions for carrying on the liberalization programbegun in 1986. The Dinar was devalued 23 per ;nt in nominal terms in1986, yielding a 17 percent depreciation in real terms over the year.Wage increases have been tightly restrained. Total investment fellsharply in 1985 and 1986 to about 23.5 percent of GDP and has remained at21-22 percent since then. The devaluation and demand restraint caused thevolt'me of imports to fall sharply, and by 1987, it was 18.4 percent belowits 1984 level. Non-oil exports responded strongly to the devaluation;their 1987 volume exceeded that in 1984 by 33 percent. Remittances fromTunisians abroad also picked up: in 1987 they were 53 percent above their1984 level in real terms. As a consequence, the current account deficitdeclined to 1.0 percent of GDP in 1987 and the Government deficit, net ofamortization, to 3.4 percent. Inflation over 1985-87 was held to about7 percent p.a. Nevertheless, external debt (public and publiclyguaranteed), continued to increase.

10. Exogenous factors considerably affected the economy's performanceand were, on the whole, unfavorable. In 1985, difficulties with Libya ledto the repatriation of 30-35,000 Tunisian workers, thus ending theirremittances and most exports to that country. The dispute has now beenamicably settled. Regional security problems also reduced the number oftourists substantially, until an amelioration of these problems, aided bythe cheaper Dinar, caused tourism to increase sharply in 1987. The dropin oil prices caused a big loss of income for Tunisia and accounted fornearly all of a 14 percent deterioration in the country's terms of trade.Agriculture ranged between extremes on account of fluctuations inrainfall. 1985 was a record year, with a cereal harvest 58 percent abovethe average of the previous five years, and 1987 was almost as good. But1986 was an exceptionally poor year and 1988 has been even worse. Theoutcome of these conflicting factors has been that GDP grew 5.7 percent in1985 and 5.8 percent in 1987, but declined 1.6 percenz in 1986. Theaverage annual growth for the three years was 3.2 percent.

The Economy in 1988

11. During 1988, the economy was affected by a severe drought and alocust invasion that together induced a 24% decline in agriculturalproduction, bringing down GDP growth to 1.5% from 5.82 in 1987. The poorperformance of agriculture and the surge in the international price ofcereals negatively affected the budget deficit that reached 4.4% of GDP.Because of a relatively good performance on the external accounts allowing3013L

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comfortable levels of imports, the temporary widening of the budgetdeficit did not put pressure on prices and inflation remained around 7%.The external re';ults were obtained in spite of the decline in oil pricesand are traced back to solid growth in revenues from tourism and exportsof manufactures. Both latter developments were supported by a policy ofmaintaining a competitive real effective exchange rate. As a result, thecurrent account was in balance and the additional resources were used toestablish a more comfortable reserve position. The ratio of debt to GDPwas maintained around 67%, while the debt service ratio came to 26%.Growth induced by a normal agricultural year and a resurgence ofinvestment should be around 4% in 198).

Stabilization and Adjustment: 1989-91

12. Despite those favorable developmaents, the challenge for themacroeconomic program remains considerable and obliges the Government totread a narrow path between growth and austerity. Population isincreasing at 2.5 percent p.a., food demand at 4.4X and the labor force isgrowing slightly faster than population because of its age structure.Economic growth must be adequate to allow income per capita to grow andprevent unemployment from ineveasing. The external constraint will betight in the coming years since the debt service ratio will remain around26 percent, while oil extraction is expected to decline by 5 percentannually, making Tunisia a net oil importer in the early 1990's. Thebudgetary constraint is tight as well; servicing of debt on governmentaccount is projected to reach 9 percent of GDP by 1991, when budgetaryrevenues from oil will have declined to 3 percent of GDP, from a peak of8 percent in 1982. kn the other hand, overall balance of payments trendsand Tunisia's reserve position are such that prudent macroeconomic policycan maintain external equilibrium and there are good prospects forobtaining substantial private foreign financing and investment in the1990s. Tunisia's policies can be viewed as a systematic preparation forattracting such capital.

13. Economic growth. Bank staff analysis indicates that Tunisia'sgrowth targets can be met. GDP growth in 1989-91 is projected to average4.2 percent annually. In agriculture, recovery from the 1988 drought willresult in a high rate of growth, 9.7 percent p.a. in 1989-91, but outputwill not reach the level of the trend set by the years 1980-87. Exportsare expected to grow at 3.4 percent p.a., implying a growth rate ofnon-oil exports of 7.5 percent a year, a reasonable rate in view of recentperformance. Import growth would be limited to 3.3 percent a year. Thenon-interest current account deficit is expected to stabilize close tozero and the current account deficit below 3% of GDP. Investment, as ashare of GDP, is projected to stay in the 22-23 percent range.Consumption would grow at 4.1 percent p.a.

14. Covernment expenditures. The lower oil earnings and higher debtservicing also affect the Government budget, though it is the objective ofthe Government to adjust to them not by increasing tax revenues, but byreducing government expenditures. The increase in the overall deficit hasbeen acceptable to the Government because of its strong external positicaand the moderate rates of inflation. But Tunisia has the objective of3013L

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reducing the overall deficit to about 22 of GDP in the medium-term.Revenues are expected to decline from 29.7 percent of GDP in 1988 to26.4 percent in 1991, including a drop in budgetary revenues from oil of1.9 percentage points of GDP. Amortization of external debt will increasefrom 3.9 percent of GDP in 1987 to 4.1 percent in 1991, thoughamortization of internal debt will remain constant at 2.0 percent. Sincethe objective is to reduce the overall deficit, net of amortization, toabout 2.3 percent of GDP in 1991, as compared to 4.4 percent in 1988,total government expenditures, net of amortization, must decline from34.1 percent to 28.7 percent of GDP. Virtually all of this decline mustresult from restraining: a) the operating budget, b) consumer subsidies,and c) transfers to cover the investments and operating losses of publicenterprises. The latter will be monitored annually as part of a programof public enterprise reform, to be supported under the proposed PERL.

15. Adjustment measures. The program of macroeconomic and sectoralpolicy adjustment supported by past adjustment lending aims at creatingconditions for the rapid growth of an efficient private sector andcontinuing increase in the outward orientation of the economy. Theprogram has been designed to establish a suitable structure of incentivesacross the economy, for which the Government has defined both specificobjectives tad the phasing to attain them in the medium-term. The processof public enterprise reform described in Section III is an integral partof this program. Decontrol of producer prices is expected to be largelycompleted by 1991, with the exception of a small number of sociallysensitive items that are subsidized. At present, 55 percent of producerprices are free, as compared to 6 percent in 1986. Decontrol ofdistribution margins has been slower, though some important ones, such asfor fertilizers, have been freed. The Government's objective is to freeat least 50 percent of distribution margins by 1991. Import tariffs bavebeen reduced to a maximum of 41 percent, and the objective is to bring themaximum to 35 percent by 1991. The weighted average tariff was reducedfrom 271 in 1986 to 231 in 1988 and is expected to decline further to 21Sby 1991. The Government is also committed to eliminate quantitativeimport restrictions, except for a few cases of subsidized or infantindustry products which will benefit from three years of supplementaryprotection.

16. The restraint on expenditures is accompanied by changes in thetax system, and by measures to diversify the financial sector and increasecompetition within it. A value added tax was introduced on July 1, 1988,to replace a complicated and distorted system of indirect taxes and isbeing extended to wholesale trade this year. Even though some excisetaxes will remain for a transition period to avoid loss of revenues, theefficiency and transparency of indirect taxation will be greatlyimprove<. The multitude of direct taxes are being consolidated into twosimple taxes, one on personal incomes, with a reduced maximum marginalrate, and the other a flat rate on corporate incomes. The recentestablishment of a money market, on which certificates of deposit andcommercial paper can be traded, will help diversify the financial market.A program is also being prepared with IFC and UNDP assistance to developthe capital market over the medium term. Further diversification willoccur as the segmentation of banking is reduced and competition is3013 L

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encouraged, backed by continued action to limit concessional credits andspecial tax exemptions.

17. Apart from these measures directly affecting incentives, theGovernment is reducing the role of the public sector, attempting torestructure or privatize public enterprises (PEs), and taking a broadarray of actions to address sectoral problems. Public sector investmentis expected to drop below private investment in the coming years, and manypolitically motivated projects of doubtful justification are beingdropped. In cases where such proj"cts are too far advanced to be dropped,many are being cut back. The public sector is withdrawing or allowingprivate competition in several activities, such as manufacturing, thedistribution of agricultural inputs, and public transport. ComprehensivePE restktcturing is being undertaken for PEs of major importance, such asthe phosph.e industry and railways, and some entire PEs or PE activitiesare being divested or liquidated e.g. in mining, tourism, construction andmechanical industries. The proposed Public Enterprise Reform Loan (PERL),discussed further below is designed to support these efforts.

18. Other areas of structural reform underway include better adaptingeducation and training to economic needs, and improving labor marketlegislation; further reforming agricultural support services; andpreparing a cadastre and a program for limiting fragmentation to improveland management.

19. Social cos0s of adiustment. In Tunisia, as in many othercountries a special effort is needed to protect the poor from the initialadverse effects of adjustment, particularly those stemming from areduction in consumer subsidies and from attempts to tackle overmanning inthe previously protected public enterprises. Tunisian unemployment isofficially estimated at about 152 and it is especially severe among theyounger age groups. Unemployment is a long-term problem: because thelabor force is growing even faster than population, it is not expectedthat the unemployment rate will diminish significantly during the presentPlan period and, according to longer term projections, it will also remainhigh for the following five years. The problem would be worse in theabsence of the adjustment program which reduces the cost of labor relativeto investment. The Government is attempting to reinforce the effects ofthese relat!ibs price changes through a number of schemes to promote laborintensive investment and self-employment. The Government is alsoexperimenting with schemes to encourage firms to provide apprenticeshipsand to attract private investment in training. The underlying problem,though, is population growth, and the Government is continuing to addressthis problem directly through an active family planning program, andindirectly by changing incentives. The President has endorsed the conceptof the family with three children, and the Social Security Fund hascommenced limiting family allowances to three children rather than four.Equity and protection of the poorest are major concerns of the I misianauthorities, especially in view of the severe drought in 1988. A numberof steps are being taken to mitigate hardsuip arising from the adjustmentprogram, and the Bank is and will continue to be supportive of thesemeasures. The reduction in subsidies will be greatest on items with theleast redistributive effect so as to minimize the cost to the poor. Thereare also targeted programs for helping the poor, such as the "Familles301LSZ

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Necessiteuses" and subsidized loans for low-income housing. The socialsecurity and health care systems are well developed, though both needstrengthening. The Bank is supporting a study of the social securitysystem to determine how to ensure long-term financial viability, whilekeeping down contributions by workers. employers, and the State. Medicalcare is widely available at nominal charges, but the health system'afurther development requires that a more substantial share of costs berecovered through service charges, with exemptions for the poor. The Bankwill support the Government's efforts to develop and implement a suitablepolicy through sector work and through a Health and Population Projectunder preparation.

PART II - BANK GROUP OPERATIONS AND ASSISTANCE STRATEGY

Background

20. Lending. Since 1962, IDA has committed 10 credits to Tunisiaamounting to US$75.2 million, and the Bank has committed 81 loansamounting to US$2,112.0 million, both net of cancellations. Projectimplementation is generally satisfactory, and important policy changes andinstitutional improvements have been achieved. Disbursement delays haveparticularly affected education, technical assistance, health, and urbanprojects due to project-specific problems. These are being addressedthrotgh supervision missions and sector discussions.

21. Past Bank lending emphasized support for long-term investments ininfrastructure, social development and, more recently, agriculture andindustry. As of May 31, 1989 the sector share of the Bank Groupcommitments was as follows: agriculture 24 percent; industry 21 percent;transport 15 percent; urban 18 percent; energy 7 percent; human resources8 percent; and non-sector lending 7 percent.

22. Bank Experience with Adjustment Lending. Adjustment lending toTunisia started in FY87. A first Agriculture Sector Adjustment Loan(ASAL, Loan 2754-TUN), approved by the Board in September 1986, supportedthe Government's sector reform program and focused on prices, publicinvestment, and support services. An Industrial and Trade PolicyAdjustment Loan (ITPAL, Loan 2781-TUN), approved by the Board in January1987, focused mainly on import tariffs and price decontrol. Approval of aStructural Adjustment Loan (loan 2962-TUN) followed in June 1988. ASecond Agricultural Sector Adjustment Loan (ASAL II) was approved in June1989. Each of these loans was integrated into the Government'smacroeconomic adjustment program.

23. Performance under the ASAL-I has been satisfactory, (Annex III).Of the nine original conditions of effectiveness which included anexchange rate adjustment, first round increases in agricultural producerprices and reductions in input subsidies, seven were fulfilled by Boardpresentation and the remaining two were met on time. A second round ofprice adjustments, subsidy reductions and interest rate increases, as wellas other important measures, were taken as conditions of second trancht3013L

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release. The status of the key actions attached to the sector policyletter was also found to be satisfactory at the time of second trancherelease, except for the implementation of an agricultural export promotionstrategy which took longer than expected to complete, but which is nowfinished. The loan is fully committed and some US$108 million of theUS$150 million loan have been disbursed, as well as US$21.0 million ofGerman (KfW) and Dutch cofinanciers' funds totalling US$24.5 million.Following a satisfactory review of the overall implementation of ASAL-I,including both its macroeconomic and sectoral components, the secondtranche of US$50 million was declared open for disbursement in October1987 and the Board was so informed. The loan will close on June 30, 1989,following an extension of a year from the original closing date.

24. Implementation of the ITPAL has also been satisfactory (AnnexIII). The price and trade liberalization measures have been implementedon schedule, and a new investment code satisfactory to the Bank waspromulgated. There were some delays in the design of fiscal reform and ofan improved system for foreign exchange risk coverage. After agreementwas reached on the design of these measures, their implementation,including introduction of a VAT, the nature of which has been discussed indetail with the Bank, was supported under the SAL. Disbursements underITPAL experienced some delays associated with the political uncertaintiesprevailing in Tunisia in 1987. The sluggishness of private investment,due to weak domestic demand, also caused disbursements to lag. Thesedifficulties are now solved and disbursements have accelerated in recentmonths. As of the end of May 1989, about US$106.0 million out of theUS$150 million loan had been disbursed. The second tranche of the loanwas released in January 1389.

25. As a result of the actions taken under ASAL-I and ITPAL, theprocess of removing the macroeconomic and intersectoral obstacles toimproved agricultural and industrial performance has started. Thedevaluation of 17% in real terms by the end of 1986 helped reduce the biasagainst exports and raise the price of imported relative to domesticproducts. The lowering of tariff barriers for domestic industry coupledwith first and second round increases in Government support prices forcereals has begun to reduce the difference in protection between industryand agriculture. The reduction in agricultural input and credit subsidiesunder ASAL-I have also opened the door to a liberalization of the domesticmarket for agricultural inputs, finance and services.

26. The SAL supports the Government's medium-term macroeconomicprogram and its measures to liberalize trade, decontrol prices, increasethe efficiency of financial intermediation, and reform taxation (AnnexIII). The loan became effective in March 1989. The Second ASAL followsup on the measures undertaken under ASAL-1 and focusses primarily onfurther liberalizing the agriculture sector and strengthening essentialGovernment support services. The proposed Public Enterprise Reform Loan(PERL) discussed below builds on the macroeconomic reform program andaddresses key areas of reform necessitated by this macroeconomic program.This loan would support efforts, to institute reforms in public enterprisemanagement, to restructure some major loss-making enterprises, and todivest assets which can be transferred to the private sector.3013L

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27. Although fast disbursing adjustment loans account for about40 percent of Bank lending in the 1987-89 transition period, the strategyfor the 1990s is to shift towards investment lending and to help theGovernment improve efficiency in the provision of urban and socialservices. An Education and Training Sector Loan was approved by the Boardin May 1989 which supports structural reforms to ensure a better matchbetween education and training provision and Tunisia's medium-termdevelopment needs, as well as more cost effective and aquitable services.The planning and delivery of these training systems is being organized inclose collaboration with industrial associations. In addition, anEmployment Conversion Fund project which would support employmentpromoting changes in labor markets is currently under preparation.Projects planned in agriculture include financing of research andextension activities, credit, and part of the public investment needs ofthe VIIlth Plan. Lending for industry and finance is envisaged to improvethe competitiveness of Tunisian industry and support export development.Operations are planned to finance transport sector maintenance, watersupply, housing finance, municipal development, and health andpopulation. The Fifth Urban Project approved by the Board in May 1989 isthe first Bank operation focusing on housing finance improvements and willalso assist in the improvement of land management policies. A technicalassistance loan was approved.1by the Board in February 1989 for thepromotion of oil exploration, and is expected to be followed by an energyproject that will assist energy conservation efforts and the efficientchoice of energy sources in the medium-term.

28. Country Economic and Sector Work. The Bank's economic and sectorwork will continue to provide the macroeconomic and sector knowledgeneeded to analyze critical medium and longer term sectoral issues, tomonitor economic performance and maintain a fruitful dialogue with theGovernment. The main tasks include a study of the efficiency andincentive structure of the private sector, and a study of the prospectsand constraints for export development. A study also covering Algeria andMorocco is planned to assess the prospects for economic integration in theMaghreb. The Bank is assisting the Government to prepare its strategy forthe health sector, and is completing a study of environmental issues thatwill be an input into the Environmental Program for the Mediterraneanbeing carried out jointly with the European Investment Bank.

29. Bank Loans Outstanding. The share of the Bank and IDA inTunisia's external medium- and long-term (MLT) public and publiclyguaranteed (PPG) debt outstanding and disbursed was about 18 percent atthe end of 1988, while the share of preferred creditors was 30X. Thatyear, debt service payments on Bank debt amounted to 17 percent of thecountry's public and publicly guaranteed debt service, and the ratio ofdebt service on Bank debt to exports was 4.2 percent. Because of theemphasis on adjustment lending in the period of transition, the share ofthe Bank in Tunisia's PPG MLT debt is expected to peak at about 22 percentand its share in PPG debt service at about 24 percent in the mid-1990s.The shift towards more traditional investment financing by the Bank thatwill start in 1990 and the expected increase in the country's borrowingsfrom commercial sources will result in a gradual decline of theseindicators.3013 L

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International Finance Corporation

30. As of March 31, 1989, IFC's net commitments in Tunisia totalledUS$24.8 million. This financing has benefited the tourism sector, boththrough direct intervention in projects and through assistance todevelopment banks, and the manufacturing sector, particularly in thechemical, pharmaceutical, construction materials and tex.iles subsectors.In textiles, IFC is helping to modernize and privatize some state-ownedmills. The Corporation has also invested in the first leasing company inthe country, and in the establishment of a Belgian-Tunisian venture in thefield of engineering services. IFC is also financing, with the UNDP, astudy on the potential for the improvement of Tunisia's capital market.

PART mI - THE PUBLIC ENTERPRISE REFORM PROGRAM AND THEPROPOSED PUBLIC ENTERPRISE REFORM LOAN (PERL)

INTRODUCTION

31. As already noted, the objectives of the proposed PERL are deriveddirectly from the Government's overall objective of increasing economicefficiency by introducing greater reliance on economic incentives andreducing direct controls on the economy. During the 1970's and early1980's, the PE sector which accounts for roughly 30X of GDP (see AnnexVII), mirrored the economy wide developments outlined in Part I. First,during the early 80's, large, slow gestating investments in the fertilizerindustry, cement, sugar, car assembly, a foundry and a steelmill wereundertaken. On the infrastructure side, some large railway investmentswere undertaken with little economic justification. Overall, PEinvestment represented 57X of total investment in the industrial sectorduring the VIth Plan, with the sector's share in total investment in theeconomy increasing from 33% in 1983 to nearly 40S by 1985. Second, theoverall increase in indebtedness was mirrored in the Public Enterprises.A survey of the 40 largest PEs (see Annex VIII) shows a sharpdeterioration in profitability from 1981 (aggregate net profits of TD 39million) to 1986 (aggregate net loss1- of TD 168 million), with theirtotal debt increasing from TD 1.67 b.±lion to TD 3.17 billion(about US$ 3.4 billion at current exchange rates); moreover, theproportion of short-term debt increased from an already high 511 to 56%.Third, the liberal increases in the minimum wage through 1984 had directrepercussions on the wage bills of all PEs; wages and salaries rose from38% to 451 of value added between 1981 and 1982 for the 40 largest publicenterprises. Finally, the economy wide increase in unemploymentperpetuated the pressure on PEs to generate employment and strengthenedpolitical and social resistance to reducing employment in existingenterprises where this was technically feasible and financially desirable.Employment in the PE sector peaked at 174,000 in 1983, accounting for 30%of total estimated formal sector employment.

32. The Government's macroeconomic refotm program, which promotes anoutward-oriented strategy of growth, is based on a broad program of trade3013 L

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and price liberalization, removal of foreign and local investmentrestrictions, and fiscal and financial sector reforms. Reform of thelabor code, the key remaining component of the liberalization program, isunder active discussion with the Tunisians and is also expected to beimplemented in the coming few years. The implementation of these measuresis radically changing the operating environment of PEs by progressivelyliberalizing input and output prices, reducing tariffs and removingquantitative restrictions, reducing budgetary transfers to PEs andensuring that lending to PEs is on commercial terms. The PE reformprogram is designed to enable the sector to adapt to these new competitiveconditions by rationalizing state/enterprise institutional and financialrelations and by divesting, restructuring or liquidating PEa aswarranted. Specific measures included in this prcgram are presentedfurther below. In effect, the Program can be viewed at two levels: first,svstemwide reforms in the policy and institutional framework governing PEsand second, the implementation of these reforms at the level of individualenterprises.

The key areas of PE reforms targetted under the proposed PERL are:

A. S5temwide Reforms

(i) Legal and Institutional reforms;(ii) Performance contracts and PE management improvements;

(iii) Budgetary and financial reforms.

IL Ptgam of Divestiture and R

(i) Progressively divest Government holdings in PEs incompetitive areas of the economy;

(ii) Restructure priority PEs in the public sector;(iii) Address the social costs of divestiture and restructuring.

C. Subsectoral Action Proums for Selected Priwrty PEs

(i) Compagnie des Phosphates de Gafsa (CPG) - the phosphate mines;(ii) Groupe Chimique - five fertilizer companies.(iii) Societe Nationale des Chemins de Fer Tunisiens (SNCFT) - the

railway;

THE PUBUC ENTERPRISE SECTOR: ISSUES AND ACTIONS

33. Government strategy for the PE sector. The Government's overallobjective for the economy is to improve the efficiency of scarce publicand private resource use. Towards this end, its stated objective is todisengage itself from all PEs in competitive areas of the economy. ViablePEs in these areas are being transferred to the private sector as quicklyas feasible while non-viable PEs are being liquidated. Public servicemonopolies and other PEs which require public sector regulation willprogressively introduce performance contracts which specify bothtechnical, financial and managerial performance targets and the associatedtariff, pricing or other support to be assured by the Government. Thesererformance contracts are intended to ensure that the PE is maintained ona 13L

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a sustainable financial, managerial and technical basis, usingtransparent, objective, quasi-commercial performance criteria to theextent possible. PEs would thereby be sheltered from arbitrary orpolitically motivated State interference which is believed to have been aprimary cause of past poor PE performance.

34. Government's desire to divest itself of PEs in competitive areasof the economy is driven primarily by pragmatic, non-ideologicalconcerns. To support the financial or managerial demands of ailing orunsuccessful PEs is an inefficient use of scarce budgetary resources.Moreover, the macroeconomic reform progrim has severely limited Governmentexpenditures such that Government cannot provide the entrepreneurial andfinancial support which efficient and export oriented PEs require toestablish a sound financial structure, acquire new technology, develop newmarkets, and to promote efficient employment generation. In light ofbudgetary concerns, PE divestiture and restructuring efforts are focussingnot only on PEs which are expected to readily attract private interest, inorder to dynamize the divestiture process and private sector activity, butalso on loss-making PEs which impose a budgetary burden on the State.

35. The Government is acutely aware that this divestiture processwill be a lengthy one given that there are over 100 enterprises involvedin competitive, non-financial activities in which the State has majorityholdings, that many of these PEs are overstaffed and undercapitalized, andthat the private sector and capital markets are both relativelyundeveloped. Therefore, the Government is also focussing considerableeffort on divesting itself of minority shareholdings either held directlyby the State or through wholUy State-owned PEs. These shareholdings havelittle or no strategic or social rationale, but reflect the past pervasiveinvolvement of the State in the productive sectors which the TunisianGovernment is now determined to reverse. The Government is also focussingconsiderable effort on improving the efficiency of enterprises remainingin the public sector whether over the medium-term, pending divestiture, orover the longer term. To this end, a series of major institutionalreforms are also underway to strengthen the management autonomy of PEa,clarify PE/Government relations and place PEs on as close to aquasi-commercial operating basis as possible.

36. PE reform has been a recurring concern of the Tunisianauthorities and several attempts to forge such reform have already beenmade. Some positive results have been achieved, but the reform efforts todate have lacked an overall framework and short, medium and longer-termmonitorable objectives were not articulated. The Action Program to besupported by the proposed PERL is therefore a combination of measures todefine overall PE reform objectives and to identify priority measures tobe undertaken in the near-term. These measures support, and are fullyconsistent with, the macroeconomic framework of the Structural AdjustmentProgram which is already demonstrating Government's willingness torecuncile difficult political and economic objectives. First, SystemwideLegal and Institutional Reforms are intended to change the structure andoperating framework of the sector. Second, reforms or rationalization ofindividual enterprises will yield important efficiency improvements forthese enterprises and, in addition, these reforms are expected to have3013L

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important sector-wide demonstration effects which will be generalizedthrough the PE sector over time. The Bank's current lending strategy forTunisia envisages an industrial restructuring loan focussing oncompetitive and potentially competitive industry in FY92 which will followup on the institutional reforms and broaden the industrial restructuringefforts outlined below.

A istewmride Reforms

(i) Legal and Institutional Reform

37. Two key measures are underway which will lay the foundations forsector-wide PE reforms. First, a new law governing Public Enterprises waspassed by Parliament on February 1, 1989 which: significantly limits thenumber of enterprises subject to state controls; greatly simplifies andclarifies the obligations of PEs which will remain under statesupervision; and introduces a simple, flexible mechanism for theliquidation, divestiture or restructuring of enterprises. (Key provisionsof this law are outlined in Annex VI). Second, the role of theDirectorate for Public Enterprise (DEP) in the Prime Minister's office isbeing strengthened and clarified. It will carry out overall analysis ofthe PE sector, make recommendations on overall PE strategy and monitor theeffectiveness and consistency of sector ministry supervision of PEs (useof performance contracts, strengthened role of Board members, etc.). TheDEP will also provide the Secretariat to the Interministerial Commissionfor Restructuring and Divestiture (CAREPP); it will ensure that acceptableproposals are prepared by enterprises and their sectoral ministries andwill follow-up on the Lmplementation of CAREPP's decisions. The placementof these functions in the Prime Minister's office underlines the priorityaccorded to the PE reform, and ensures that DEP will have the necessaryleverage to operate effectively. However, in line with Government'soverall objective of decentralizing responsibility for PE management andminimizing State intervention, the DEP will remain a small unit (currentlyonly six professional staff) and will focus on its overall PE oversightand secretariat roles. This will ensure that primary PE managementresponsibility remains with the PE and that supervision remains primarilythe role of the Board of Directors and the sectoral ministry (tutelle)concerned. These institutional arrangements will be monitored duringproject implementation to ensure that the DEP continues to play afacilitative role both in monitoring PE performance and in its role assecretariat to the CAREPP. Government is determined to ensure that theDEP does not evolve into a further layer of duplicative Stateintervention. The above measures, which are discussed further below, areintended to reduce the role of the state in the PE sector as rapidly aspossible, to strengthen PE autonomy and efficiency, and to introduceoverall coherence and transparency in the treatment of PEs.

38. Limiting the role and size of the PE sector. Tunisia's PublicEnterprise Sector dates from independence in 1956. PEs were established:to enable Tunisia to gain control over key activities in the economy (e.g.utilities, banking, the media); to exploit the country's natural resources(phosphates, petroleum, gas); to open up new sectors (tourism, textiles,automobiles, mechanical/electrical industries); to encourage regional30' iL

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industrial development (Gafsa and Gabes regions); to undertakelarge-scale, capital-intensive projects, for which the private sector'sfinancial capacity was judged inadequate (cement, oil refining); and topursue various socio-economic objectives such as job creation, training,export promotion, and a more equitable income distribution. Thedefinition of what constitutes a Public Enterprise has undergone severalrevisions in recent years. A 1985 PE Law reduced the number of PEs underGovernment supervision from 500 to roughly 300, by redefining PEs as thoseenterprises in which the State held 34% or more of the shares (formerly10S). This still proved too burdensome for effective oversight. Underthe new legislation approved February 1, 1989, only those enterprises inwhich the State holds in excess of 50X of the shares either directly orthrough wholly-owned State subsidiaries, will be governed by the PE law.All other enterprises with Government participation are governed by thecommercial code. This is an important reform which reduces the number ofPEs under Government supervision by about one-third, to 200. In addition,the authorities intend to limit the establishment of any new PE or jointventure involving State participation to an exceptional basis, after fulleconomic and financial justification and when appropriate privateparticipation cannot be secured. This intention is reflected in theletter of Sectoral Development Policy, in Annex IV.

39. The 200 enterprises which remain under direct Governmentsupervision under the new law cover all sectors of the economy andinclude: 15 financial institutions (banks, insurance companies, pensionfunds); appproximately 125 commercial/industrial enterprises intended tooperate on a fully commercial basis; and roughly 65 other "etablissementspublics" with a mix of commercial activities and non-revenue generatingpublic policy functions. The Government recognizes the importance ofmaintainint a meaningful data base on the PE sector to facilitate PEperformance monitoring and evaluation. In this context, the DEP hasrecently collected annual audited financial statements for virtually allPEs for fiscal years 1986 and 1987. Aggregate 1987 figures, as well askey indicators for 50 major PEs, are set out in Annex IX.

Action sought under the PERL: During PRRL implementation, the DEP willcontinue to prepare annual economic/financial data by PE, based onyear-end audited financial statements, for Bank review. Progress in thisregard will be monitored prior to second tranche release.

40. Simplifying Government/PE Relations. The Government's objectiveis to shift from ex-ante control for individual PE decisions to ex-postevaluation of performance based on specific enterprise objectives andperformance targets set out in performance contracts to be signed with theGovernment (see below). In the past, Government oversight of PEs has beenponderous and ineffective. PE Board members have been inexperienced andunable to fulfill their required role. Government technical and financialcontrollers have had potentially crippling veto powers on day-to-dayoperations of PEs. Furthermore, performance contracts, though legallyrequired were virtually non-existent. To address this situation, the newlaw which is now being enacted governing the PE sector:

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(i) Specifies the roles and responsibilities of PE Boards ofDirectors, the sectoral "tutelle" ministries and reportingrequirements of the PE;

(ii) Requires the preparation and implementation of three-yearperformance contracts, specifying the respective obligationsof the PE and the Government.

(iii) Abolishes the financial and technical controllers of PEswhich were charged with ex-ante control of individual PEmanagement decisions;

(iv) Establishes a new group of experienced and specialized"contr8leurs d'Etat" in the Ministry of Finance, to monitorPE compliance with State laws (e.g. procurement) andsupervise overall financial management. This will shift themonitoring process from ex-ante interference in individualPE management decisions to ensuring that the necessarysystems are in place for satisfactory PE management andaccountability;

(v) Simplifies the procurement regulations most notably byraising the thresholds of bids requiring clearance by aninterministerial commission from TD 1 million to TD 5million, and abolition of an intermediate review procedure;and

(vi) Streamlines the procedures for PE restructuring, divestitureor liquidation. Each proposal is prepared by the PE inconsultation with its sectoral ministry and submitted to theCAREPP for review. The CAREPP forwards its recommendationsto the Prime Minister for a final decision. Implementationof decisions is the responsibility of the PE; the DEP, assecretariat to the CAREPP, monitors progress.

41. In short, the new legislation is aimed at: streamliningGovernment/PE relations; increasing managerial autonomy in day-to-dayoperations; ensuring that PE Boards play a meaningful role in establishingand approving enterprise objectives and strategy and supervisingmanagement; and ensuring satisfactory ex-post evaluation by the Governmentof PE performance vis-a-vis clearly-defined and agreed enterpriseobjectives and performance targets. Several concrete measures havealready been implemented. The DEP has established a system to monitor thefunctioning of PE Boards of Directors. In addition, some ministries haveinitiated steps to strengthen the calibre of Boards of Directors forselected major PEs. The Government has also scheduled a training programfor ministry officials, PE managers and auditors to ensure fullunderstanding of the requirements and application of the new law. Allessential decrees for the application of the new law have been issued.

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Action sou8ht *mder the PERL: Prior to release of the second tranche, theBank will review with the Government the impact of the new legislation ona selected group of PEs i.e. facilitation of procurement, relaxation ofGovernment involvement in day-to-day management of the PE, effectivenessof Boards of Directors, progress in preparing performance contracts. TheGovernment will discuss progress on the application of the law with theBank prior to second tranche release.

(ii) Introduction of performance contracts and management improvements

42. As noted above, the new legislation envisages the preparation andimplementation of rolling three-year performance contracts, specifying therespective obligations of the enterprise (in terms of performance targets,etc.) and the Government (tariff approvals, investment financing,compensation for public policy activities, etc.). Because of thereciprocal nature of a performance contract, such documents are onlyappropriate for rublic enterprises furnishing a public service, receivingGovermnzent direct financial support or governed by price controls ortariffs. While all PEs meeting these criteria are now required by law toprepsre performance contracts, the Government recognizes that it will takesome time to introduce meaningful performance contracts in mostenterprises, given the limitations of existing cost accounting andanagerial systems and the lack of clarity concerning many PEs' objectivesand their medium-term strategy. Experience elsewhere has demonstratedthat key success factors for performance contracts are: (i) that theinitial contracts be relatively simple, concise, clear documents with alimited number of monitorable performance targets (greater precision canbe added in subsequent versions); and (ii) that performance contractsfocus initially on a small number of key PEs. In light of thisexperience, the DEP has prepared a simple, mainly quantitative prototypeas a guide to PEs in the preparation of their performance contracts. TheGovernment is initially focussing on the preparation of performancecontracts for a small number of PEs which have been in severe financialand managerial difficulty in recent years and have been receivingsignificant budgetary support: (i) the phosphate mining company -Compagnie des Phosphates de Gafsa (CPG); (ii) the railway - SocieteNationale des Chemins de Fer Tunisiens (SNCFT); and (iii) the Tunis buscompany - Societ6 Nationale de Transport (SNT). The latter was chosenboth because of its particular managerial and financial difficulties andin light of the demonstration effect which a performance contract for onepublic bus company can have for these companies throughout Tunisia.Together, these PEs reported aggregate losses of TD227 million from1985-87 and received Government budgetary transfers totalling almost TD215million. Draft performance contracts have been prepared for these threecompanies. The expected content of CPG's and SNCFT's performancecontracts is outlined in Section C below; SNT is discussed in Annex XXV.In light of the uncertainties governing the Groupe Chimique's ownershipand organizational structure and the fact that its present financialcondition reflects international pricing conditions and lack of timelyaction by shareholders, performance contracts are not consideredappropriate for these companies. Once their corporate structure isclarified, they will prepare business plans for their shareholders, inline with normal commercial practices.3013L

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Actions sought under the PERL:

- as a condition of loan effectiveness, the Government willsubmit to the Bank draft performance contracts for CPG,SNCFT and SNT approved by the responsible sectoral ministryand whose principal elements are acceptable to the Bank,pri.or to their approval by the CAREPP;

- approval by the CAREPP, signature by the responsiblesectoral ministry and initiation of key actions highlightedin the performance contracts for CPG, SNCFT and SNT will bea condition of second tranche release;

- preparation and signature of performance contracts for anagreed group of additional PEs in 1990 will be a conditionof second tranche release. These PEs have been selectedfrom among those enterprises (apart from CPG, SNCFT and SNT)currently receiving substantial levels of budgetarytransfers.

43. It is recognized that many PEs require technical assistance (TA)to introduce imprevements in their financial az4 operational data, costaccounting, budgeting, management information systems and internalcontrols, as a pre-condition for meaningful performance contractpreparation. The DEP has undertaken a preliminary diagnostic survey ofseveral major PEs to identify existing weaknesses in these areas andtechnical assistance requirements to introduce the necessaryimprovements. Most of these technical assistance requirements can beprovided by local management consultants and accountants, though teamingwith international specialists may be desirable in a few enterprises toprovide sectoral/technical expertise in some highly specialized areas.Following consultation with the Bank, the Japanese Trust Fund isconsidering an allocation of Y270 million, (about $2 million) to financethese requirements.

Action sought under the PERL: Progress on the preparation of terms ofreference and call for bids for technical assistance for each PE hiringconsultants necessary for the implementation of the techiAcal assistanceprogram will be reviewed prior to second tranche release.

44. In the past, many PEs also suffered from excessive turnover ofCompany Presidents (PDGs), which often reflected politicalconsiderations. Political factors appear less likely to govern futureappointments following the political changes in Tunisia of late 1987 andappointments since that date have been dictated by merit and efficiencycriteria. The new emphasis on the introduction of multi-year explicitperformance objectives and commitments for PEs heightens the need forcontinuity in PE management. The Government is conscious of this factorand the letter of Sectoral Development Policy indicates that theappointment of PDGs will be based on professional competence and give dueweight to continuity.

45. Another important determinant of past PE management andoerformance weaknesses has been their inflexible hiring and remuneration

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policies. Over the last three years, many PEs have had hiring freezes ineffect, i.e. staffing reductions after natural attrition, and most havehad wage freezes since 1985. Nevertheless, management flexibility in thisregard is closely circumscribed since most PEs are governed by collectivewage agreements and, in the past, have been subject to substantialpolitical pressure to increase employment. PE managers are eager to seethe lack of flexibility in the wage structure addressed, but since"acquired rights" are vehemently protected in the typical PE, it is clearthat these contracts can only be changed gradually. While overall laborlegislation reforms are under consideration, these reforms are unlikely tosupercede existing contracts of PE workers. Government has begunproductivity studies which will provide a basis for establishingproductivity linked wage systems at least for some major PEs. Thisapproach seems to be accepted in principle by many PEs and thereforeprovides a basis for a modest new departure in wage negotiations. Thus,in light of its complex and highly sensitive nature, the PERL will notaddress this issue at a global level. However, increased laborflexibility is envisaged in the context of the performance contractprocess.

(iii) Budgetary and Financial Reforms

46. As already noted, the Government provides financial support to alarge number of PEs in the form of operating subsidies, investmentsubsidies, debt/equity conversions and compensation for certain "socialtariffs" (e.g. students' public transportation). Budgetary support(through "titre II" transfers in the Government's annual developmentbudget) to PEs averaged TD 388 million over the last five years(1983-88). In addition to these budgetary transfers, PEs receivesubstantial extra-budgetary financial support (direct and indirect) in theform of extra-budgetary short-term Treasury Loans, subsidies from SpecialTreasury Funds and Government-guaranteed loans (see Annex X). Oneobjective of the PE reform program is to ensure that all Governmentfinancial support to PEs is fully transparent. While individualenterprise d&ta on Government transfers are readily available, otherGovernment financial support (direct or indirect) e.g. loan guarantees,transfers from compensation accounts and other special funds are notcurrently tabulated to permit a complete picture of the total level ofGovernment support to each PE. Moreover, PE requests for Governme-tfinancing have rarely been supported with corporate/restructuring planssetting out the company's financial and market prospects. One objectiveof the reform program is to progressively ensure that all significantGovernment financial support is based on performance contracts orrestructuring programs (approved by the CAREPP) demonstrating medium-termviability and incorporating the necessary restructuring measures. In thiscontext, as noted above, the initial focus for the preparation ofperformance contracts will be on those PEs currently receiving the highestlevels of budgetary transfers. A second objective is to progressivelyreduce Government transfers to the PE sector and ensure increasingfinancial self-sufficiency. Targets for a phased reduction in aggregatePE budgetary transfers were agreed with the Bank and are being monitoredunder the Structural Adjustment Loan. In the near-term, restructuringvroframs may require increased transfers to selected PEs, e.g. for

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recapitalization, but such support will be temporary and only allocated ifsustainable medium-term viability is demonstrated.

Action sought under the PERL: To ensure greater transparency ofGovernment support for PEs, during PERL implementation, the Governmentwill prepare an annual table of all budgetary and extra-budgetarytransfers and loan guarantees for each PE.

47. For those PEs relying on Government tariff approvals, performancehas been mixed. STEG, the electricity company, has had four Bank loansand is the only PE with a signed performance contract. The terms fortariff setting, and compliance are generally satisfactory. However, ONAS,the sewage treatment agency is currently not in full compliance withtariff and financial performance agreements with the Bank, and correctivemeasures are under discussion. SONEDE, the water distribution company isalso having difficulty complying with its tariff agreement with the Bankdue in part to the impact of foreign exchange losses on its accounts.Measures to strengthen compliance are also under discussion for thisutility. Satisfactory progress on the implementation of existing PEtariff agreements with the Bank is being monitored under existing loanagreements with these companies. Railway tariffs are discussed in thesubsectoral restructuring section below.

48. Unlike several other countries, the problem of arrears betweenP>s is not widespread in Tunisia. Generally, the Government regularizesmajor cross-PE arrears on an annual basis through budgetary transfers.Major cross-debts have centered on CPG's arrears with SNCFT for transportof phosphates and this in turn has created a chaIn of arrears with thepetroleum distribution, production and refining PEs. These problems arebeing addressed through performance contracts for CPG and SNCFT.Similarly, financially troubled. PEs have resulted in strains on thebanking sector and most major banks rep2rt arrears or "distress lending"to PEs. Financial sector credit to PEa has been squeezed in the last yearreflecting the overall credit squeeze and the relatively weak balancesheets of PEs. The Central Bank is closely monitoring the implications ofPE financial problems for banks and is encouraging more prudentprovisioning of bank loans to PEs. This is a radical departure from thepast when PE loans were regarded by the Links as equivalent to loans toGovernment, even in the absence of Government guarantees. The burdenimposed by PEs in difficulty on the banking system and the arrears ofseveral PEs in severe difficulty are expected to be gradually addressedthrough the privatization and restructuring program, (see below).

Action sought under the PERL: To ensure continued monitoring of thearrears situation during PERL implementation, the Government will provideto the Bank annual data on major outstanding PE cross-arrears, as part ofthe financial data required under para. 46, and measures towardsregularizing any major arrears identified will be discussed prior tosecond tranche release.

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B - Divestiture and Restruturg ProgAl

49. Divestiture Obiectives: The Government's stated objective is toprogressively divest all PEs operating in competitive areas of theeconomy, with a few exceptions such as joint ventures with neighbouringGovernments. In the case of loss-making PEs, the Government's desire todivest these companies is primarily motivated by immediate budgetaryconcerns since once these PEs are transferred to the private sector, evenfor a nominal amount, the financial and managerial burden on theGovernment is removed. However, Government's interest in disengagingitself from PEs in competitive areas goes beyond this immediate budgetaryconcern; most of these PEs - even if profitable - are severelyundercapitalized, precluding the technological and marketing investmentsessential for effective competitiveness in the liberalizing tradeenvironment. Further Government investments to respond to these needs arenot possible g4ven present budgetary constraints, and Government has beenand will continue to be unable to effectively supervise these PEs andprovide them with the necessary strategic guidance for their efficiencyand growth. While Government recognizes that privatization will notensure productive efficiency, it considers the private sector morecompetent than the State to manage and finance activities in these areas.

Privatization Process and Progress to date

50. To date, a pragmatic approach has been used to identifycandidates for privatization, with proposals emanating from the tutelleministries or from the PEs. A technical committee of working-levelofficials examines the proposals, submitted by the tutelles/PEs, prior toformal consideration by the CAREPP. The proposals are subsequentlyreviewed by the CAREPP, which makes recommendations to the Prime Minister(PM) for a final decision. This process has been formalized in the new PElaw approved February 1, .989. The DEP serves as secretariat to theCAUPP. The CAREPP, chaired by the PM, is composed of the ministers (ortheir representatives) of Plan, Finance and Social Affairs, and arepresentative of the Central Bank.

51. This decentralized approach (whereby the tutelle ministries andPEs are responsible for preparing and implementing privatization andrestructuring proposals) is designed to ensure flexibility and pragmatism,while at the same time ensuring that there is a centralized focal point atthe CAREPP/PM to provide guidance on overall strategy for the program.The process has been highly satisfactory to date, with a minimum ofduplication of effort and time loss. The Tunisian authorities feelstrongly that it would be impossible and undesirable to centralize thepreparation and implementation of all privatization proposals at theCAREPP/Prime Ministry. One potential drawback to this decentralizedapproach is the possibility that PEsttutelles would resist privatization,with the result that few attractive PEs/holdings would be proposed forprivatization. In fact, this has not been a problem. A number oforivatizations have already been completed (primarily hotels, textilecompanies and smaller holdings) and the pipeline of proposals underconsideration contains PEs/holdings across several sectors, including anumber of attractive PEs which should be relatively easy to privatize.3013L

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Several large PEs with diverse holdings (often in activities unrelated totheir main business) are currently preparing proposals to divest theirportfolios. Similarly, with Government encouragement, several commercialand development banks (with varying levels of Government ownership) areproceeding with the privatization of their PE holdings. PDGs have beendirected by their ministers to proceed expeditiously with privatization,on the understanding that their careers would be enhanced with successfulresults.

52. The initial emphasis of the divestiture program has been onPEs/holdings in tourism (hotels), textiles, trade and construction. Todate, some 17 divestiture operations have been completed. Six hotels havebeen privatized. SOGITEX, a holding company in the textile sector, hasprivatized two of its holdings (SITEX ard SITER) in a phased processinvolving, inter alia, equity participation of IFC and foreign technicalpartners, as well as the sale of 52 of the shares to the workers (in thecase of SITEX). Recently, following extensive local advertising, threesmall subsidiaries of Batiment (a holding company in constructionmaterials) were auctioned on the Stock Exchange for TD 1.8 million, withthe auction price in one case reaching nearly 602 above the opening price,and one non-resident buyer. The Government has also liquidated somenon-viable PEs, notably a car assembly plant (STIA) with resulting layoffsof over 1000 workers, a mechanical workshop (SMMT) with about 600 layoffsphased over the last five years, and virtually all of SOTEMI's iron oremines. Some mergers of PEs/holdings with complementary activities havealso been effected to facilitate privatization in the medium-term. Inaddition to these completed operations, decisions have been taken or arein process to privatize (partially or totally) over 20 otherenterprises/holdings, and implementation is now underway.

53. Local development banks and accounting firms are assisting theenterprises in preparing the companies for sale (e.g. valuations, biddingdocuments) and with implementing the transactions. USAID has provided forfinancing of international technical assistance for more specializedvaluation and market analysis, if required. The DEP plans to issueguidelines for the preparation of PEs for privatization, which willelaborate on and clarify the requirements under the new law. Theguidelines are intended to ensure transparency and acceptableprocedures/standards in valuations, bidding documents and evaluation ofoffers. At the same time, the Government wants to retain maximumflexibility and avoid introducing unnecessary constraints in what has beenan extremely pragmatic and effective process to date. These guidelinesare desirable in the medium-term - as the privatization program becomesmore widespread - in order to maximize public credibility. Thepreparation of these guidelines will be facilitated by the experiencegained through ongoing privatizations which are continually broadening theoptions being considered and applied.

54. The level of investor interest and domestic liquidity appearconducive to continued success of the privatization program, provided theGovernment continues to offer attractive candidates which arerealistically priced. Recent discussions with private entrepreneursindicate that the candidates in which they are most interested in301 3L

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investing are generally those which the Government is working to privatizeas priority candidates. Some recent improvements are evident in theoverall investment climate. In addition to the macroeconomic reforms andtrade liberalization now underway, a new liberal investment code conduciveto foreign investment was promulgated in 1987. The new PE law also setsout a number of special incentives to enable small shareholders, PEemployees and potential investors to purchase shares in privatized PEs.The Stock Exchange, while relatively undeveloped, is being strengthenedunder an IFC/UNDP technical assistance program. Moreover, a recent surveyby a local bank indicates that there is approximately TD 3 billion ininterest-earning deposits in Tunisian banks. If even a small portion ofthese funds (eg: 5X or TD 1S0 million) could be tapped for privatization,this would easily exceed the expected equity financing requirements of theprivatization program over the next two years.

55. The expected pace of the privatization program is difficult togauge. Completed transactions to date have yielded roughly TD 50 millionin gross proceeds ranging from large hotel sales with gross revenues ofover TD 12 million each to small workshops sold for less than TD 1 millioneach. The pipeline of PEs/holdings being examined for privatization issubstantial; however, it is not possible to forecast with any degree ofprecision either the timing or value of future privatization transactions,given that these are sub-c't to negotiation with investors. Based on theresults to date and the pipeline of potential candidates, it is expectedthat a further 10 PEs or holdings can be offered for sale annually (i.e.decisions taken, valuations completed, and bids invited), but theauthorities are rightly unwilling to commit themselves to this or anyspecific number of privatizations given the uncertainties entailed in theprocess. In light of the above, Bank monitoring of privatization,progress will have to be essentially qualitative in nature. The Tunisianauthorities have indicated that: a) candidates known to be attractive tothe private sector will be proposed for privatization as a priority; b)the candidates proposed for privatization will include some which do notrequire Government financial support for debt write-offs or lay-offs ofworkers; c) privatization offerings will continue to span a wide range ofasset size and will neither be limited to very large or very smallholdings; and d) that privatization decisions will be implemented asexpeditiously as possible once a Prime ministerial decision is taken. Theabove criteria are wholly consistent with the practices of the CAREPP/DEPin the past year. Continued application of these criteria will bemonitored under the PERL.

Actions sought under the PERL:

- As conditions of effectiveness, Government will bring tosalc (i.e. completion of valuations, bidding documents andbid invitations) a group of PEs/holdings selected on thebasis of the criteria indicated above, satisfactory to theBank; and submit to the Bank for review a programsatisfactory to the Bank for a further group of candidates(PEs or holdings) proposed for subsequent privatization.

- As a condition of Second Tranche Release, Government willbring to sale a further group of PEs, based on the criteriaindicated above.

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56. Public Enterprise Fund. Many potential PE candidates for full orpartial privatization are burdened with excess staffing and excessiveindebtness. In many cases, privatization or restructuring will requirelayoffs (with associated severance pay) and settlement of some or alloutstanding liabilities. A special Fund was established in 1985/86 toassist with financing the costs associated with these privatization andrestructuring efforts. The Fund was initially financed with TD 4.3million, and was to be augmented with the surplus proceeds from the saleof PEs as well as transfers from the Government's annual Budget. In fact,the Fund is virtually depleted and replenishment has not been possible,either through budgetary transfers (due to budget constraints) or from theproceeds of privatizations to date (since no surplus has been realized ona consolidated basis).

57. The absence of adequate Government funding to finance these costsnow poses a serious obstacle to further successful privatization andrestructuring. A preliminary survey of about 20 PEs currently beingconsidered for possible privatization shows potential liabilitiestotalling TD 216 million, including TD 16.5 million in expected severancepay, TD 8.8 million in pension liabilities, TD 87 million in debtsoutstanding to Government (which will likely be written off) and TD 104million in third-party debts to commercial banks, suppliers, etc. Inaddition to these liabilities associated with PEs envisaged forprivatization, a preliminary survey of 13 priority PEs being restructuredshows outstanding liabilities in excess of TD 200 million including aboutTD 15 million in severance pay for workforce reductions, TD 5.5 million inpension liabilities, TD 66 million in debts outstanding to Government andTD 113 million due to third-parties e.g. banks, suppliers etc. This totalexcludes any fresh capital requirements of these companies. While somewritedowns of the outstanding debts can be negotiated with creditors, somesignificant payment of liabilities will be necessary, first to avoidprotracted bankruptcy proceedings, second to reflect the past explicit orimplicit understanding of bankers and suppliers that PE liabilities wereliabilities of the Government, and finally to mitigate the negative impactof these liquidations on the banking and commercial sectors. The costsoutlined above are necessarily indicative since: (a) they relate only to aportion of the PE portfolio; (b) they do not include debt write downsfollowing negotiations; (c) not all of these PEs will be privatized orrestructured in the coming 2-3 years; and (d) no allowance is made for thenet revenues from the PE sales. Nevertheless, these data serve tounderline the need for significant funding of the program.

58. Government budgetary support required to privatize some PEs infinancial difficulty is considered legitimate and cost-effective, sincethese expenditures represent once-and-for-all payments of Governmentobligations which absolve the State of any future commitments. While mostof the PEs envisaged for early privatization do not receive ongoingbudgetary transfers, in general, their excess liabilities reflect theirpast under-capitalization and the worker compensation payments reflectpast Government efforts to artificially boost employment. Hence,Government accepts its financial obligations arising from past policies,but will seek to minimize these obligations in the interests of economy,efficiency and equity. A key objective of the PERL will be to ensure that301 31

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adequate financial support is available to facilitate a dynamic, credibleand continous privatization and restructuring program through periodicreplenishment of the Public Enterprise Fund. The Fund is expected tofinance primarily: (i) worker compensation packages in the context ofprivatization or restructuring; (ii) residual liabilities associated withprivatization (pension liabilities and unavoidable third-party debts);(iii) technical assistance for implementing accounting, auditing,organizational or management improvements in PEs, or for technical orfinancial advisors to put together privatization deals; and (iv) inselected cases, minimal investments essential to successfulprivatization. The Fund is intended to serve as a catalyst to facilitateas many privatizations as possible. In certain cases, it may assist withfinancing PE restructuring (rather tban privatization), if: (i) there is a"dynamic" restructuring of an enterprise's entire operations (productionprocesses, personnel, management systems, marketing, etc.) to establishthe PE on a financially/managerially sustainable basis, rather than alimited financial ("bookkeeping") restructuring; and (ii) therestructuring includes privatization or liquidation of at least part ofthe PE's activities/assets. The Letter of Sectoral Development Policysuummarizes the uses of the Fund outlined above and agreement has beenreached that the Bank will review any Fund expenditures exceeding TD 10million.

59. The proposed disbursement profile, timing and amount of eachtranche under the PERL reflects the estimated pace of implementation ofprivatization and restructuring measures which require financing of theassociated costs by the Fund. However, the actual pace of privatizationis expected to be somewhat faster, since some PEs to be privatised willnot require financing from the Fund. The first tranche would be releasedwhen the Government has allocated to the Fund an amount at leastequivalent to the tranche release, and when other conditions ofeffectiveness are met. The second tranche would be released once at leasthalf of the first allocation is committed, an additional amount at leastequivalent to the tranche release is allocated to the Fund, and when othersecond tranche conditions are satisfied. Unspent and uncommittedallocations to the Fund will be carried over into the next fiscal year,without reverting to the Treasury.

C - Subsectoral Action Pograms for piority PEs

60. As already noted, the Tunisian phosphate mines (CPG), the fiveFertilizer Companies (Groupe Chimique) and the Railways (SNCFT) place verysubstantial demands on the Tunisian economy. These PEs also manifest someor all of the most severe difficulties of any Tunisian PEs, i.e. pasthistory of extensive overstaffing, uneconomic investment programs,multiple an;l often incompatible objectives, inadequate Governmentfinancial support, etc. Each of these PEs plays a critical role in theTunisian economy. However, their problems are so severe that they canonly be addressed over time. The PERL aims to ensure that this process ofreform commences on a realistic and sustainable basis, that managementresponsibility is reasserted, Government/PE relations are clarified andeconomically viable and internally consistent objectives are pursued. The3013Lt

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balance of payments support proposed through the PERL has afforded thenecessary leverage to work at the cross-ministerial level essential tobegin the politically and socially difficult restructuring of these keyPEs. Extensive project analysis has been carried out for each PE, and therestructuring programs proposed address technical, managerial andfinancial issues. Details of the enterprise analysis underlying theconclusions presented below are available in the project files. Anoverview of the phosphate and transport sectors, each PE selected, and theactions sought under the PERL are presented below.

b. Pheosbate Sector

61. The financial crisis in the fertilizer/phosphate sector reflectsinternational price developments. Phosphate rock prices have been on along-term declining trend from 1965-86 (from $45 to $ 24 per ton in 1985dollars) except during the 1974-80 commodity boom (high $102 per ton in1975). Real prices are expected to increase slightly to regain their 1985real level by 1994 reflecting gradually increasing long run productioncosts, but the timing of this price increase is highly uncertain givenexisting oversupply of phosphate rock. World market prices for phosphatefertilizer in 1986 were at their lowest level in real terms in the postWorld War II era and were below cash production costs even for efficientproducers. This price decline reflected flat or declining demand forfertilizer in US and European markets and only modest growth in effectivedemand in other markets (see Annex XI). On the supply side, there isexcess capacity in the industry resulting from investments undertakenduring the commodity boom when diammonium phosphate reached $562/ton in1985 dollars - some 330X higher than its 1986 level. Supplyover-capacity is expected to be absorbed by the early 1990s.

62. Phosphate production in Tunisia began with the export ofphosphate rock. When world competition made it difficult to tradeTunisia's low grade rock, in the early '50s, the country embarked onprocessing rock locally, and gradually developed a fertilizer industry,which absorbs about 80X of local raw phosphate. This strategy workedsatisfactorily while phosphate and fertilizer prices were relativelyhigh. However, in 1982 phosphate and fertilizer prices started to declinein nominal terms and this decline accelerated with the dollardevaluation. Raw phosphate mining is comparatively costly in Tunisia.The phosphate ore is of below average quality, requiring relatively morecomplementary inputs (imported sulfur) per ton of final product; mines aresmall, numerous, and scattered over a distance of 120 km; most of theproduction comes from technologically obsolete underground mines, or fromopen cast mines which require substantial stripping for rock extraction;and the mining area is located 140 km from most of the chemical plants andfrom the sea. As a result, Tunisian FOB phosphate cost in 1986-87 wasabout US$ 55/ton of P205, as compared to about US$ 47/ton of P205 for costefficient competitors (1986-87 world FOB prices were US$ 45 to 50/ton ofP205);

63. These disadvantages are structural and cannot be eliminated, evenin the long run. Under these conditions, Government believes thatex nsion of the phosphate sector would be uneconomic and even future

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replacement of existing capacity should only be undertaken after carefulanalysis which demonstrates economic and financi-l viability underconservative future price assumptions. However, in spite of thesestructural disadvantages, Bank staff analysis has confirmed that thecontinued operation of most existing phosphate and fertilizer producingunits is economically and financially justified because these units covertheir variable costs and are projected to make an increasing contributionto their fixed costs - principally debt service, which is Governmentguaranteed and will be payable whether the companies remain in operationor not. In light of their major budgetary demands, the Government wouldfavorably consider any reasonable divestiture proposed for thesecompanies. However, Tunisia's natural disadvantages in the sector, theexisting world over-capacity, the excessive debt burden of the companiesand the sensitive social environment of the Gafsa area precludeprivatization as a realistic option at this time.

COMPAGNIE DES PHOSPHATES DE GAFSA (CPG)

64. Background: The natural disadvantages of Tunisian phosphate mineshaw been compounded by past poor management practices at CPG through the1970's and early 1980's, which encouraged unnecessary hiring of unskilledlabor, and extensive investment in technically obsolete, but labor intensiveunderground mines, rather than in the less labor intensive and more costeffective open-cast mines. Despite its increasingly high labor costs - thewage bill went up from 331 in 1980 to 46S of sales revenues in 1984 - theCompany was able to operate with minimal financial support from Governmentuntil 1982. By 1983-84 however, CPG had to face lower prices and stifferinternational competition with 50S excess labor, obsolete technology, severedebt overhang and weak internal management (until recently PDG turnover at theCompany was extremely high). As a result, Government financial supportreached unsustainable levels during 1983-87, with budgetary allocationstotalling over TD 200 million for the period, (see Annex XII for details onthis budgetary support since 1980). Against this background, starting in1986, CPG engaged in a comprehensive restructuring program to improveproductivity. Although some progress has been achieved, significantimprovements remain to be implemented *n some critical areas. The Bank hasactively participated in the preparation of a draft performance contract forCPG, which defines the measures to be implemented, identifies specificproductivity and financial performance targets, and specifies the- level offinancial support to be provided by the Government. The key measures includedin this performance contract are outlined below.

65. Mining program. CPG's mining strategy has, in the past, been lessthan optimal, mainly because of insufficient planning and of the social andpolitical implications of implementing a more cost efficient strategy for ahighly unionized, strategically located workforce which produces the rawmaterial for the country's third largest foreign exchange earner. However,the company has, in recent years, made some commendable attempts to improvemine development planning and reduce production costs with Bank support underthe recently completed Mining Technical Assistance Project. Annex XIII givesa description of key features of CPG's past and future mining strategy andillustrates the significant decrease of the underground mines' share in total30131

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production from 62% in 1980 to 37S in 1988. Despite these improvements, therestill remain important productivity gains to be achieved. Further expansionof open-cast mine production would reduce production costs which are three tofour times higher in underground mines (Annex XIV provides comparative costdata for four illustrative mines). CPG's draft performance contract defines aleast-cost long-term mining plan. The plan will involve the closure of themost uneconomic underground mines and will bring the share of undergroundmines in CPG's production down to 292 by 1991. The draft performance contractalso provides that no further mine development will occur at these three sitesafter 1990. The Bank estimates that the mine closures could be completed by1995.

66. Investment strategy. In the late 1970s and early 1980s, CPG incurredhuge investment outlays (about US$ 200 million for 1976-82) which were ofteninappropriate and largel.y financed through debt, some of which was in foreignexchange. CPG's proposed investment program is outlined in Annex XV.This program has been reviewed in detail with the Bank and is considered theabsolute minimum to ensure the efficient production of the volumes ofphosphate rock required. It will amount to about US$ 80 million over1989-1993, mostly for maintenance and rehabilitation; parallel financing tothe PERL is being negotiated with the African Development Bank for the foreignexchange cost of these investments.

67. Workforce Reduction Program. To reduce operating costs, CPG has cutits workforce by 242 from 14000 to 10700, since 1984 (see Annex XVI for staffevolution since 1980). Although the company could meet its production targetwith a workforce of about 7000 under optimal conditions, an immediate staffreduction to the optimal technical level is not feasible, as the mines supply30-401 of the employment in the severely disadvantaged arid Gafsa region. TheGovernment and CPG have developed and begun to implement a staff reductionprogram that will bring the workforce down to about 9400 by 1992. The programIncludes an early retirement scheme for 628 workers over the next two years.A second early retirement program for a further 1000 employees over 1991-92has been identified by CPG and endorsed by the tutelle. However, in keepingwith previous such programs, this will require approval from other concernedministries (e.g. Ministry of Social Affairs) as well as from the powerfulminer's union to avoid major social unrest in the Gafsa region. Governmentwill give careful consideration to the program and seek the union's agreementbefore implementation in 1991. In addition, and to pave the way for the mineclosures, in 1988 CPG established, upon Bank recommendation, a task forceinvolving key employment agencies to identify training and redeploymentopportunities for excess workers. The task force has identified a further 725staff for redeployment over 1990-92 for a total estimated cost of TD 7million. The program is designed to help selected staff in establishing smallbusinesses in the Gafsa region and has been elaborated and will be implementedwith technical assistan%e from Charbonnage de France. CPG is also planning tospin off some of its non-critical maintenance facilities to selected workerson a lease-back basis. The redeployment program will provide technicalexpertise and financial assistance in the form of severance packages (about 18to 30 months of staff salary). Annex XVII provides the planned staffreductions and the annual estimated costs of the program. These staffreductions are to be implemented as an integral part of CPG's performancecontract. Severance pay and the cost of the redeployment effort are expected

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to be financed through the Public Enterprise Fund, since this workforcereduction program has been elaborated in the context of the closure of severalmines.

68. Present and Future Financial Performance. CPG's cash flow in 1987was about TD 15.5 million while debt service payments were TD 43.5 million.Its cash situation became so tight that it had serious difficulties infinancing recurrent operating costs, and the shortage of spare parts inhibitedthe efficiency of mining operations. The company experienced significantimprovement in its financial position in 1988 due to a 9% real increase inphosphate prices in dollar terms. Cash flow increased to about TD 31 millionwhile debt service amounted to about TD 40 million. Future financialperformance hinges upon the timely implementation of the staff reductionprogram and upon future phosphate prices in dollar terms. The latter areprojected to increase annually by 2.5 - 3% in real terms to reflect theincrease in long term costs of production. CPG's forecast key financialperformance indicators over 1988-93 are summarized in Annex XVIII and indicatethat, provided the staff reduction program proceeds as planned and financialinjections of TD 73 million are assured during 1989-93, the company will coverits working capital needs by 1991 and progressively reestablish a soundfinancial structure by 1993. In light of present market trends which suggesta supply/demand equilibrium by the early 1990's, the above price increases areconsidered realistic, however, a sensitivity analysis was carried out toassess the budgetary implications assuming that phosphate price levels are 32lower in real terms. The results indicate that financial injections of aboutTD 83 million could be necessary to cover working capital needs and a furtherTD 52 million to re-establish a sound financial structure by 1993. Financialperformance indicators for the sensitivity case are also shown in annex XVIII.

Actions souRht under the PERL:

- Submission to the Bank of a draft performance contract for CPGapproved by the sectoral ministry and whose principal elementsare acceptable to the Bank is a condition of PERL effectiveness.

- Approval of the performance contract by the CAREPP, signature byCPG and the sectoral ministry, and initiation of key performan:emeasures detailed in the contract, is a condition of secondtranche release of the PERL.

GROUIPE CRHMIQUE

69. Background. Groupe Chimique (GC) was created in 1982 to coordinatethe activities of Tunisia's five largest fertilizer companies most of whichwere established between 1952 and 1979. The technical performance of thefertilizer industry in Tunisia has been impressive and the industry wasprofitable until the precipitous price declines of the 1980s. Now, afterseveral years of depressed prices in which the companies were forced to seekdebt financing on extremely unfavorable terms, instead of the recapitalizationwhich is long overdue, the Groupe's financial situation is critical. Thecompanies' equity base has been wiped out and, for the first time, GC had toseek financial assistance from Government to cover its debt service301 3L

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obligations and prevent the accumulation of arrears to suppliers in 1988. Theweak capital structure of GC reflects long standing differences betweenforeign and local shareholders -- a situation which Government hopes toresolve fully in the coming year. Bank staff analysis has confirmed thatcontinued operation of the fertilizer plants is strongly justifiedeconomically, given that their debts are Government guaranteed and that theyare major foreign exchange earners. However, Bank analysis also concludedthat in order to reestablish a fully creditworthy GC, financial transfers orrecapitalization totalling some TD450-500 million over 4 years would berequired. Clearly, attaining this objective is not feasible except over thevery long term. The Bank has, therefore, helped identify intermediateobjectives which are attainable, albeit with considerable budgetary andmanagerial effort, in the next 2-3 years. In this context, the keyrestructuring objectives for GC under PERL are: (a) to establish an explicitagreement on the amounts and timing of Government financial injections togradually restore the Groupe's financial equilibrium and ensure that themassive financial problems of the Groupe do not impose costs on other PE's(e.g. the phosphate mines) or the banking system through the build-up ofarrears; (b) to reorganize the independent companies into a single enterprise,thereby, realizing important administrative economies; and (c) to ensure thatthe GC and Government address the air and sea pollution problems arising fromthe industry. Key aspects of GC's operations are discussed in the paragraphsbelow in relation to these objectives.

70. Management Staffing and Operations. Most Tunisian fertilizerproducing units are well managed with technically competent staff. The totalworkforce is about 5200 and there is no evidence of significant overstaffing.The companies of the Groupe operate 11 plants in Gabes, Gafsa and the Sfaxarea (see Annex XIX for details on plant age and capacity); they use phosphateproduced by CPG and imported sulfur and ammonia to produce a wide range offertilizers for the export market. Production facilities are modern and costcontrols are generally effective. Because Tunisian phosphate requires moresulfur and ammonia per ton of output than other phosphate, the consumption ofthese inputs represents up to 801 of operating costs for Tunisian producerscompared to 70-75S elsewhere. Consequently, there is relatively little scopefor technical efficiency gains as controllable costs (personnel andconsumables) represent only 20 S of cash operating costs. However, with Bankassistance, GC has identified some cost saving opportunities which are beingpursued.

71. Organization and Ownership Structure. Although the TunisianGovernment is directly or indirectly the majority shareholder in all fivecompanies, each has a different ownership structure (see Annex XX). Four ofthe companies are 492 owned by Kuwaiti interests while the Abu DhabiInvestment Fund holds 40. in the fifth one. The diverse ownership structure,the unwillingness of the foreign partners to recapitalize the Groupe, and theabsence of a strong coordination body constitute major weaknesses for GC.These have resulted in costly duplication in such areas as maintenance andResearch and Development facilities and in sub-optimal planning of operationsat the Groupe level, as well as prohibitive financial charges. To remedythese shortcomings, a merger of the four Tuniso-Kuwaiti companies wasenvisaged in 1986 and agreed in principle by the shareholders. Duringnegotiations. the Bank obtained confirmation that final agreement on Kuwaiti3013L

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withdrawal from the four companies has been reached. Effective implementationof the merger now hinges upon the completion of the statutory and legalprocedures required by Tunisian commercial laws. Similar agreements are beingsought from the Abu Dhabi shareholders with whom Government has startednegotiating. Successful conclusion of these actions will facilitate areorganization of sectoral operations, which are currently being reviewed inthe context of the preparation of a long-term development strategy for thephosphate sector.

Action souaht under the PERL: Preparation of specific measures envisaged torationalize the Groupe's organization and operations and satisfactory progresson the implementation of the proposed merger will be reviewed prior to secondtranche release.

72. Past and Future Investment Strategy. During the 1975-1978 priceboom, GC engaged in a large capacity expansion; a policy that was pursuedthrough the mid 1980s despite the price slump (a new 330,000 tonsuperphosphoric acid plant came on stream in 1987). These untimelyinvestments led the companies to contract substantial amounts of debt - mostof which is in foreign exchange. Government recognizes that future capacityexpansions should only be undertaken based on a careful assessment of thefinancial and economic viability of these investments under conservative priceassumptions.

73. Past and Future Financial Performance. GC's past and future keyfinancial performance indicators are sunmarized in Annex XXI. GC was quiteprofitable until the early 1980s; however, because of the supply imbalance onthe international marke.s and the significant drop in phosphate fertilizerprices between 1975 and 1987, the Tunisian companies which were marginalproducers even at the 1975 prices, incurred massive losses (cumulative lossesamounted to TD 287 million in 1987). These were repeatedly financed throughdebt, often short term and sometimes in foreign exchange, and as a result thecomp&nies are now in a critical financial situation. Interest expenses onshort-term loans amounted to 11% of sales revenues in 1987 and 7X in 1988.Bank price forecasts anticipate steady increases in fertilizer prices in realterms over 1989-1991 of about 11 - 12% for GC's main products which will,however, be partially offset by proportional increases in the prices of themain inputs (e.g. phosphate, sulfur and ammonia). Given GC's present debtoverburden, the projected net cash flow after debt service will beinsufficient to adequately cover its working capital needs. The Groupe willtherefore require substantial financial assistance from its shareholders inthe next three years. Since the financial injections necessary to reestablisha creditworthy GC far exceed the budgetary resources available, the Groupe'sfinancial rehabilitation can only be envisaged as a gradual process.

Action sought under the PERL: A satisfactory financial rehabilitation planfor 1990-91, that will help reduce short-term debt financing and preventfuture accumulation of arrears to suppliers will be prepared and discussedwith the Bank prior to second tranche release. Bank financial forecastsindicate that additional financing of about TD 127 million in 1990, TD 60million in 1991 and TD 52 million in 1992, will be necessary to avoid furtherdeterioration of GC's financial situation.3013L

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74. Pollution. GC's operations have created acute envircnmentalproblems, particularly in Gabes and Sfax, which are urgently in need ofresolution. Tons of phosphogypsum are discharged daily into the sea whilesulfur dioxide effluents (S02) permeate the air in both cities. Governmentrecognizes the urgency of the situation and has already taken important stepstoward resolving these issues, including the closure, last November, of thesulfuric acid unit located in the center of Sfax, and the implementation ofsome technical alterations to the existing facilities to appropriately disposeof the gypsum on land. In Gabes, the problem is most pressing because of thelarge number of plants. A detailed feasibility study for the gypsum disposalhas been completed and GC has invited bids for the construction of a dischargeconveyor on land. Pre-feasibility studies to address the S02 issues areunderway. During negotiations, Government confirmed its commitment to GC'senvironment protection program and indicated that the S02 and gypsuminvestments will be implemented once concessional financing is secured.

Action sought under the PERL: Government will ensure implementation of thegypsum and sulfur dioxide investments based on satisfactory environmentalstandards. Progress on implementing GC's environmental protection programwill be reviewed prior to second tranche release.

75. Phosphate Transfer Price. Since eighty percent of CPG's phosphateproduction is transformed locally by Groupe Chimique the transfer pricebetween the two companies is critical to the financial performance of bothPEs. In the past, the international price appropriately adjusted to reflectthe quality of Tunisian phosphates has provided a transparent market basis forthis price. However, this formula lapsed last year and external shareholdersin GC have applied extreme pressure to obtain a more favorable transferprice. To date the authorities have resisted this pressure. In keeping withthe objectives of maximizing the commercial orientation of PE's, the PERL willmonitor this transfer price to ensure that it continues to be based onobjective criteria. Signature of a new convention is not foreseen untilagreement is reached between the Tunisians and the remaining foreignshareholders on the overall financial restructuring of the Groupe. However,Government indicated, during negotiations, that the transitional pricingformula for 1989 would continue to be based on CPG's export price,appropriately adjusted for the poorer quality delivered to the Groupe.

Action sought under the PERL: An appropriate transfer price convention isexpected to be signed in 1990.

Trnspot Set Pocy

76. Faced with rising budgetary demands from the transport sector andincreasing evidence of inefficiencies and incompatibility of objectives, theTunisian authorities have recently begun to focus subst-antial attention onclarifying their role in this sector. The Government's effort toward domestictransport ratinnalization hinges on the following key elements of the newtransport policy: (i) ensuring that transport pricing reflects long-termmarginal costs in an increasingly competitive environment; (ii) enhancingfinancial transparency of the sector by improving cost-accounting practices,and establishing the application of economically sound principles for thecalculation of the compensation for services provided below cost, including3013L

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Government subsidized social services; and (iii) gradual withdrawal ofGovernment from the provision of road freight services, and promotion ofroad/rail competition in inter-regional transport.

77. The implications of this new transport sector policy are profoundand widespread. Already the national transportation company for freight hasbeen restructured as a competitive operation, and has been offered for sale tothe private sector. Major barriers to private entrepreneurs' entry into theroad transport industry are being removed. The Ministry of Transport is inthe process of concluding an agreement with two private companies to serviceabout a dozen bus routes in Tunis. The Government now considers that allsocial services imposed on the transport companies by Government policy mustbe reimbursed at full economic cost. Finally, there is a greatly increasedawareness of the short, medium and long-term costs of uneconomic transportinfrastructure investments. The Ministry of Transport is significantlyreinforcing its Planning Unit to enable this unit to assure coherent,objective evaluation of new project proposals. This is especially importantas Tunisia begins preparation for the VIlIth Plan for 1992-96.

78. However, transportation companies are well known throughout theworld for the difficulties entailed in enterprise restructuring especially atthe political and social level. Tunisia is no exception, but the approachbeing undertaken is to commence a program of reform which over time, on aquantifiable basis, will yield tangible efficiency gains. The introduction ofperformance contracts is the tool which will establish the transparency ofobjectives and reciprocal obligations. The national railway company has beenidentified as the priority enterprise to introduce such a performance contractin the near-term, since it is a monopoly which will continue to requireGovernment regulation, it carries out important public service functions, itmust undergo an important reorientation of its activities in light of theoverall liberalization of the transport sector, and it is the largest companyin the sector which requires substantial budgetary support.

SOCIETE NATIONALE DES CHEMINS DE FER TUNISENYS (SNCF1)

79. Background. Although the railways' main justification in theTunisian economy is in bulk traffic transportation (phosphate, iron ore andcereals), general cargo and passenger (main line and suburban traffic) stillaccount for 162 and 111 of total traffic in the country, respectively. Therailways' participation in passenger traffic reflects the fact that tariffshave been maintained artificially low to enable the railway to compete withroad transport in market segments where the latter has clear comparativeadvantages. SNCFT's past investments (ranging from TD 30 to 60 million peryear) have been heavily biased in favor of uneconomic passenger services, andthis pattern has persisted in the VIIth Plan. Bulk traffic and general cargotariffs are generally adequate to cover long-run marginal costs. Trafficprojections for 1993, mnder a progressively cost-related tariff policy, wouldentail a decline in railway participation in main line and suburban passengertraffic to 4% and 51 of the total traffic, respectively, and a consolidationof the railway role in freight movements, with emphasis on phosphate and otherbulk traffic. Current railway management is generally competent. Although,to date, it is not sufficiently motivated by economic or efficiency objectivesit has prepared a staff reduction and retraining plan reflecting a recognition3013 L

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of the need to improve operational efficiency. Because of insufficientpassenger tariffs and inefficiency in operations and maintenance, railwayrevenues barely cover working expenses and SNCFT relied on Governmenttransfers to finance its debt service (TD 12 million in interest and TD 28million in principal) in 1988, capital investment not covered by long-termloans (TD 23 million), and working capital needs (TD 1 million). The heavydebt service reflects expensive and economically doubtful past investments.The proposed restructuring of SNCFT would aim at reforms to gradually reduceSNCFT's dependence on the Government budget, through improvements in railwayinvestment strategy, tariff policy and operating efficiency.

80. SNCFT's performance contract is central to this restructuringeffort since this document is the tool which will permit both the enterpriseand the authorities to articulate a set of coherent objectives and themeasures intended to achieve them, in the context of the new transport policyoutlined above. SNCFT's performance contract has the following objectives:(a) establishment of a transparent financial and service relationship betweenSNCFT and the Government and major railway customers such as the CPG (SNCFTtransports 100X of CPG production which represent 932 of SNCFT's bulktransport); (b) tariff adjustments in line with the broad transport policyobJective (see above); (c) gradual phasing out of Government compensation fortariffs below long-run marginal costs, except for social traffic for whichfull cost compensatory payments should be made by the Government to therailway based on clear and explicit criteria. Although SNCFT's costaccounting system is capable of producing most of the information needed forthese calculations, it is overly complex and does not produce timelyinformation. The Bank has proposed that the SNCFT performance contractinclude the establishment by SNCFT of a task force for improving SNCFT's costaccounting system. Draft terms of reference, including a timetable for thetask force prepared by the Bank are currently being discussed with SNCFT; (d)investment planning based on agreed economic criteria; (e) managerialaccountability through a set of monitorable performance indicators; and (f)Government commitment to the above objectives and its obligations to SNCFT. Amore detailed description of this program and indicative data on SNCFT'straffic, operating, and financial indicators are provided in Annexes XXII-XXIV.

Actions sought under the PERL: Submission of a performance contract includingthe elements outlined below approved by the sectoral ministry is a conditionof PERL effectiveness.

- Corporate strategy: SNCFT will progressively concentrate onthe services for which it has comparative advantages, such asbulk traffic, within a gradually more competitive environment,while continuing to play its social role in suburban transport.

Investment Program: SNCFT's investment program will belimited to the minimum essential investments to achieve theabove strategy. A minimal program for the VIIth Plan periodwould require investments of some TD 163 million compared witha total of about TD 214 million formerly planned for 1987-91.Non-priority components will be cancelled.

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- Tariffs: In the case of SNCFT, long-term marginal cost,calculated on a replacement cost basis, is slightly above theaverage cost. Cost recovery at the long-term marginal costlevel is therefore, sufficient to ensure SNCFT's financialviability. SNCFT's tariff policy should enable (i) freighttraffic to continue covering its long-term marginal cost(tariff increases in line with local inflation); (ii) mainline passenger traffic to progressively approach long-termmarginal cost recovery (i.e. including investment andmaintenance costs). According to mission projections, for a502 coverage to be reached by 1993, annual tariff increases of61 above local inflation would be required. jvernmenttransfers would meet the difference between the actual tariffand the cost; and (iii) suburban passenger traffic togradually cover variable operating costs, reaching 100Xcoverage by 1993, with the Government providing explicitlyfor the difference between tariffs and long-term marginalcosts (tariff increases slightly above local inflation). Thebasis for calculating tariff increases would be agreedexplicitly in the performance contract including the basis forcalculating the compensation payable to the railway forproviding social services. A similar practice would governany other services provided by the railway below cost atGovernment request.

- Increasing labor productivity: SNCFT's staff reductions inmainly administrative areas would amount to some 200 staff peryear. However, SNCFT would have to recruit some 50 high-leveltechnical and analytical staff per year to upgrade the qualityof its skill mix. As a result, there will be a net laborforce reduction of some 150 each year. This corresponds to aproductivity increase of about 3% p.a. In parallel, SNCFTwill design and implement a retraining program to reallocatestaff from redundant positions to fill essential positions asthey fall vacant.

- Increasing railway operating efficiency: A set of operatingefficiency indicators would be included as an integral part ofthe performance contract. SNCFT is implementing appropriateoperational and managerial measures to achieve theseindicators.

- Approval by the CAREPP of the performance contract includingthe above elements and satisfactory initiation of theseelements is a condition of second tranche release.

81. The overall impact of the measures proposed above would be toimmediately reduce the budgetary demands of SNCFT for investment purposes andto improve its cash generating capacity. This strategy would result inreductions in annual budgetary support from an estimate of close to TD 75million to about TD 55 million per annum in 1988-93. As debt serviceobligations associated with past uneconomic investment are repaid, the levelof these transfers will decline considerably more rapidly. The Bank proposes3013L

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to follow up on the adherence to the above commitments through a TransportSector Investment loan in FY92.

D. Soeial im0lications of the proposed PERL.

82. As noted in Part I, the Tunisian authorities have paid closeattention to mitigating social costs and protecting Tunisia's mostdisadvantaged groups. Social programs in Tunisia are relatively well advancedand will continue to be a Government priority warranting and receivingsustained World Bank support. While the major social implication of theproposed PERL relate to employment issues - either through early retirement.lay-offs or restrictions on new employment, these costs are being mitigated ina number of ways. First, as illustrated by the car assembly plant closure andin the case of the proposed mine closures in Gafsa, such closures are onlyundertaken in Tunisia when it is clear that the costs to the economy ofcontinued operation of these facilities is no longer sustainable and theconversion of the facilities to other uses is not feasible. Once this pointis reached, closures typically are phased to mawimize the notice to employeesand ensure full exploration of employment alternatives. Second, redeploymentof workers on a preferential basis - after retraining if necessary - is thefirst preference of the Government in the event of plant closures. Earlyretirement is proposed for those close to retirement age with the budgetarycosts of their social security payments being assumed by the State.Redundancy payments without redeployment is the least preferred approach, andis only proposed when all other alternatives have been explored and fail toyield solutions. In the case of privatizations, new owners are eneouraged toretain workers and their willingness to do so is often explicitly taken intoconsideration in finalizing the sale price. The choice of enterprises to beprivatized or restructured and the pace of these measures reflectsGovernment's sensitivity to these social costs. The PERL has been preparedwith the authorities while fully recognizing this sensitivity and therefore,the selection of enterprises and the timing of their privatization orrestructuring has been, and wilL continue to be, determined by the nationalauthorities to ensure that they fully reflect the social and political contextin which these decisions must be made. In summary, therefore, the objectiveis not to avoid social costs due to plant closures or privatizations, but tominimize these costs, to manage their impact and to compensate workersadequately when redeployment is not feasible.

83. The precise social implications of the privatization andrestructuring program are difficult to quantify since the terms of a finalsale (including the number of workers to be retained) and the pace of salescannot be determined in advance. However, to provide indicative orders ofmagnitude, a review of 21 possible candidates for privatization, all of whichare currently in some financial difficulty, reveals an excess of about 4000workers. The privatization of enterprises not in financial difficultyinvolves much fewer redundancies as seemingly excess workers can frequently befully absorbed as capacity utilization rates increase following privatizationand the injection of new capital. The restructuring of public servicemonopolies or other PEs remaining in the public sector entails greater excessstaffing problems. A preliminary review of 13 such enterprises suggestsoverstaffing of about 3200 workers (including CPG's excess labor alreadydiscussed). However, not all of these workers will be laid-off at one time3013L

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and the Public Enterprise Fund is designed to ensure adequate compensation forlaid-off workers in the context of the proposed PERL. Successful efforts arealready underway in Tunisia to promote artisanal and other small entrepreneursand funding (loans and grants) for these programs is available. Up to TD 2700in loans and TD 300 in grants (equal to over two years of earnings at theminimum wage) can be provided to new entrepreneurs to assist in setting uptheir own business. However, in spite of the above, the difficulties inlaying-off PE employees cannot be underestimated. They are generallyaccustomed to wages, work conditions and benefits which are considerably morefavorable than in the private sector. They are sometimes located in areaswhere alternative employment opportunities are extremely limited. Finally,their acquired work habits are seldom viewed as an asset by potentialinvestors.

84. In light of the above factors, the social cost of PE reform must beaddressed at two levels. In the short-term the critical elements are: toensure that new hiring in PEs is extremely restricted; to implement earlyretirement and redeployment programs in those PEs where they would yield thegreatest efficiency gains and at a pace which reflects the specific localconditions; and to ensure that existing employment promotion agencies focus asa priority and in a coordinated fashion on displaced workers of selected PEs.The pilot redeployment effort underway in the severely disadvantaged region ofGafsa in the context of the CPG restructuring is a valuable, albeit modest,attempt to address redeployment needs at an appropriate pace, while learningcost effective methods which may be applicable in other underprivileged areas,or for other severely overstaffed PEs. In this way, significant staffreductions can be achieved at a modest cost over a reasonable time-frame. Butin the medium and lon er-nm Tunisia must intensify its efforts to outpace thegrowth in its labor force by the growth in productive employment generation.The overall economic reforms underway lay the macroeconomic basis for thisobjective. In addition, as already noted, the Bank is studying with theTunisians the labor legislation reforms necessary to better promote labormarket flexibility, reduce the costs of new employees and improve thecoordination and the effectiveness of employment promotion agencies. Thesemeasures would be followed up by the Bank under proposed lending for anEmployment Conversion Fund Project in FY91.

PART IV - LOAN ADMUNISTRATION

Eilb1e Exuenditures. Procurement and Disbursement

85. Eligible Expenditures. The proposed loan of $130 million wouldfinance the foreign exchange cost of imported goods. Not eligible forfinancing under the loan are goods financed from other sources and thosespecified in a list of excluded items. The exclusions are military orpara-military goods, nuclear reactors and parts, and luxury goods such astobacco, precious stones, jewelry, and gold. Petroleum products would befinanceable up to an aggregate ceiling of $26 million. Foodstuffs would befinanceable up to an aggregate ceiling of a further $26 million.

86. Procurement. International competitive bidding (ICB) in accordancewith World Bank guidelines would be used for contracts of $5 million or more.30131L

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Other imports would be procured following usual commercial practices of thepurchaser which involve quotations from prospective suppliers wheneverpossible. For procurement through ICB, bids, bid evaluation reports andcertified cories of contracts would be presented to the Bank prior tosubmission of the first application for withdrawal of funds. For otherprocurement, prior to submission of the related withdrawal application theBorrower will furnish all information and documentation that the Bank mayreasonably request in respect of such procurement.

87. Disbursement. The Central Bank would be responsible for theadministration of the loan. Disbursements from the loan account would be madeagainst 100 percent of the foreign currency expenditures for eligibleimports. Withdrawal applications for disbursements on contracts of goodsprocured under ICB would be fully documented. In all other cases,disbursements will be made on the basis of Statements of Expenditures (SOEs)from the Central Bank detailing individual transactions in a given period, andcertification of payment and of eligibility of the transactions for loanfinancing. Supporting documentation for disbursements under SOEs would beretained by the Central Bank until at least one year after the Bank's receiptof the final audit report for the operation. A revolving fund (specialaccount) would be established at the Central Bank with an initial deposit of$20 million. Replenishments would be made monthly or when half of therevolving fund has been utilized. The loan is expected to be fully disbursed24 months after effectiveness. The closing date would be December 31, 1991.

88. Accounts and Audits. The Central Bank would maintain records ofall transactions under the loan in accordance with sound accountingpractices. All accounts (including the revolving fund) would be auditedwithin 6 months of the end of the Borrower's fiscal year by independentauditors acceptable to the Bank. Audit reports would include a separateopinion on claims submitted to the Bank on the basis of SOEs and would statewhether the claims were made in accordance with the terms of the LoanAgreement.

Release of Funds, Tranchmg and Key Conditions

89. The proceeds of the loan would be made available for withdrawal intwo tranches, of $70 million and $60 million respectively. The first tranchewould be released upon loan effectiveness, and the second one would becomeavailable upon fulfillment of agreed conditions, expected to be aroundDecember 1990. The specific actions already taken and key elements to bereviewed are described below:

Measures already undertaken in the context of the Bank/Tunisian dialogue onPublic Enterprise Reform

- Approval of the new law and issuance of key decrees governingpublic enterprises.

- Identification of priority enterprises requiring technicalassistance in corder to prepare a business plan or a performancecontract.

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Strengthening of the DEP with expertise in privatization tofacilitate the privatization process.

Application of more than a dozen divestiture decisions taken bythe CAREPP albeit in the absence of an overall legal framework.

Preparation of an indicative list of enterprises which shouldprepare programs of privatization or restructuring in the coming12 months, and the expected budgetary implications of thesemeasures.

CPG: established a task force to study personnel redeploymentpossibilities and proposed a redeployment program for 725 peoplein the coming three years.

SNCFT: decided on a minimum investment program cancelling orpostponing all investments originally approved for the VIIthPlan but for which an up-to-date economic justification is notavailable.

Groupe Chimique: completed necessary studies to alleviate gypsumpollution of Sfax and Gabes production units and launched bidsfor the required investments.

Loan Effectiveness (First Tranche Release)

Conditions covenanted in the PERL Legal Documents

- Submission to the Bank of the performance contracts for CPG,SNCFT and SNT approved by the responsible sectoral ministry andwhose principal elements are acceptable to the Bank andsubmission to the Bank of a list satisfactory to the Bank of PEscurrently receiving substantial budgetary transfers which willprepare and sign performance contracts in 1990 (para. 42).

- Government will bring to sale (i.e. completion of valuations,bidding documents and bid invitations) a group of PEs/holdingsselected on the basis of criteria satisfactory to the Bank, andprovide to the Bank for review a program satisfactory to theBank for a further group of candidates proposed for subsequentprivatization (para. 55).

- Allocation of an increase in the Public Enterprises Fund, atleast equivalent to the value of the first tranche (para. 59).

Second Tranche Release

A. Conditions covenanted in the PERL Legal Documents

- Approval by the CAREPP, signature by the responsible sectoralministry and satisfactory initiation of key actions highlightedin the performance contracts for CPG, SNCFT and SNT (paras. 42,64 and 82), and approval by the CAREPP and signature by the

3013L

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sectoral ministry of performance contracts from an agreed groupof PEs (para. 42).

Government will bring to sale (i.e. completion of valuations,bidding documents and bid invitations) a further group ofPEs/holdings satisfactory to the Bank based on agreed criteria(para. 55).

Allocation of an increase in the Public Enterprise Fund, atleast equivalent to the value of the second tranche release andcommitment of at least half of the first allocation to the Fund(para. 59).

B. Elements to be reviewed with the authorities prior to SecondTranche Release.

- Preparation of annual economic and financial data by PE based onyear-end audited financial statements (para. 39).

Satisfactory progress on:

- The application of the new law in a selected group of PEs (para.41).

- Hiring of consultants necessary for implementing -.he technicalassistance program (para. 43).

- Preparation of a table of all budgetary and extra-budgetarytransfers and loan guarantees by PE to ensure full transparencyof financial support, including major outstanding PEcross-arrears and measures towards regularizing any majoroutstanding cross-arrears identified (paras. 46 and 48).

- Preparation of specific measures envisaged to rationalize theGroupe Chimique's organization and operations and theimplementation of the proposed merger of the companies (para.71).

- Preparation of a financial rehabilitation plan for GroupeChimique for 1990-91 that will help reduce short-term debtfinancing and prevent future accumulation of arrears tosuppliers (para. 73).

- Addressing the pollution problems (sulfur dioxide and gypsum) ofGroupe Chimique (para. 74).

- Finalizing a price convention between CPG and Groupe Chimique(para. 75).

ManaEeneu, Coordination and Monlhning

90. The Public Enterprise Reform program would be managed under thefeneral coordination of the Directorate for Public Enterprises in the Prime

- 41 -

Minister's Office, which will be assisted by the Ministries of Plan andFinance, National Economy, and Transport, and by the Central Bank. TheCentral Bank will be responsible for the coordination and monitoring ofdisbursement related aspects. Progress reports on the implementation ofagreed key elements of the adjustment program would be prepared by thegovernment (through the Directorate for Public Enterprises), prior to eachtranche release.

Coperaton with other AEencies

91. In view of the broad nature of the measures envisaged under the PERL,the range of Public Enterprises involved and the critical importance of thereform measures entailed, the World Bank's involvement in this program hasbeen complementary to and cooperative with the support provided by a number ofother agencies. While these complementary relations have required closecoordination and continuous communication efforts by all concerned, they haveserved to strengthen the overall dpport of the donor community for theTunisian Public Enterprise Reform program and to focus the attention of eachagency on clearly identified priorities. The involvement of some of theseagencies in the reform program has already been mentioned in the foregoingtext.

-The Japanese Trust Fund, in consultation with the Bank, isconsidering an allocation of Y 270 mil-ion to finance the technical assistancerequirements of priority Public Enterprises to enable them to prepareperformance contracts or business plans, as required.

-The United States Asency for International Developement (USAID) hasfinanced a series of seminars in Tunisia on the rationale and methods forprivatization. USAID is also financing technical assistance to the DEP forthe implementation of the privatization program, and to the stock exchange fordevelopment of the capital markets.

-The European Investment Bank has, in consultation with the Bank,provided a loan of ECU 17 million to finance priority maintenance andrehabilitation requirements of SNCFT, the railway.

-The African Development Bank (ADB) is providing a loan of about$40 million equivalent to CPG to finance priority investment and maintenanceneeds of the phosphate mines. The ADB project appraisal was timed to coincidewith the appraisal of the proposed PERL and this close coordination willcontinue through project implementation.

-The United Nations Developement Programme (UNDP) is also financingtechnical assistance to strengthen Tunisian capital markets. It is currentlylaunching a technical assistance project which is expected to include acomponent for the Public Enterprise Sector. UNDP is coordinating closely withthe Bank to ensure that this component will be fully integrated with thereform prcgram.

-The International Monetary Fund (IMF) accorded an ExtendedArrangement to Tunisia in 1988 in which Public Enterprise Reform washighlighted as a key structural reform which would be monitored under the3 0 a;3

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Arrangement. The PERL has been prepared in close consultation with the IMF,and both agencies are in agreement on its approach and priority.

-The International Finance Corporation (IFC) played a key catalyticrole in the privatisation of the first textile company in Tunisia in 1986,including attracting a foreign investor. IFC has indicated to Government itswillingness to pursue similar operations in the future and an IFC staff memberparticipated in the PERL appraisal, to ensure that all promising candidatesfor privatization were identified and that IFC could commence discussions withpotential partners for selected privatizations.

Jutfigat'in and Risks

92. The Public Enterprise Reform Program represents a major effort by theTunisian authorities to radically reorient the public sector towards anefficient dynamic and competitive environment. These wide ranging measuresaddressing institutional, legal and budgetary reforms as well as an activeprivatization program, the introduction of performance contracts and majorrestructuring of priority PEs in severe difficulties lay the basis forprogressively achieving the Government's efficiency objectives for the PEsector. The monitorable, time-bound measures agreed upon in the context ofthe proposed PERL ensure that the objectives enunciated will be translatedinto practice in key PEs. Their positive demonstration effects are expectedto ensure that these practices will be generalized throughout the sector overtime.

93. The Government is fully committed to the objectives of PE reform andhas already demonstrated its willingness to proceed with the program byapproving the new PE law and by implementing PE privatizations, liquidationsand restructuring proposals even in the absence of a clear legal framework forthese measures. The main risk associated with the reform program is not,therefore, whether the program will proceed, but rather the pace ofimplementation. It is for this reason that several key steps inimplementation of the reform program were sought and achieved prior to loanappraisal and negotiations and therefore first tranche conditionality relatesprimarily to the allocation of appropriate resources to the Public EnterpriseFuad and the approval of key performance contracts by their sectoralministries. Disbursement of the remainder of the loan will be linked directlyto the pace of PE divestiture and restructuring action as well assatisfactory implementation of the new PE law and agreed performancecontracts. In this way, the pace of implementation will be monitored both ata quantitative and a qualitative level.

94. A second risk is that the main bottlenecks to privatization andrestructuring efforts i.e. realistic valuation of assets, availability ofbuyers, resolution of labor problems, could delay the program either becauseof Government's unwillingness to sell assets at market prices or to face thesocial and budgetary costs of labor redeployment, or because the privatesector (domestic or foreign) is unwilling or unable to purchase availableassets at "market" prices. Experience to date indicates Government'swillingness to progressively address such bottlenecks and private sectorinterest in the assets to be privatized, as well as the necessary financialresources, are already in evidence. The work program of enterprises to be

30 I St.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4

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restructured or privatized is expected to be significantly larger than thetotal number of enterprises which can actually be restructured or privatisedduring the next 2-3 years, in order to provide sufficient flexibility in theappropriate choice of enterprises and thereby to maintain a momentum ofreform. Clearly implementation of this component will require closemonitoring, as reflected in the second tranche conditionality.

PART V - RECOMMENDATION

95. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank and I recommend that the Executive Directors approvethe proposed Loan.

Barber B. ConablePresident

June 12, 1989Washington, D.C.

SOISL

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TLISIA- EMInOIC IiSICATU.......... .................. .

If+IW P i dtt.) S1w Per copita or in uS, 1180

. ....................... .......... ................................................................... *v-**-*^-.-* ..............................- ^s*.-*......... -hA. Om of cram oDitet Prodet 11. Crosth fttW$ pa arnc)(frm awrs pric da) (r cott price data)

. ........ .... ......... ................ ---- *........ .............. -.... *----*+

190 17 19ll im 1987 19go 19867)1973 I 910.7 19W Igo.... .. . .... .... ....

Gress Oastfic prodt 3.. 100.0 100.0 105.0 10.0 100.0 100.0 7.2 6.4 3.5 5.8 1.5Net Irdirect Ta 12.2 13.6 13.5 13.3 12.7 13.0 .. .. ..Agrisjltare 19.4 19.? 14.1 13.3 15.3 11.7 6.6 2.1 4.2 17.5 -23.9Inflry 20.8 21.3 31.1 2.9 23.4 Z3.8 6.6 7.4 2.7 0.3 3.5(of 6idch wujndfswiqn) 7.7 9.3 11.8 13.1 13.1 13.9 10.4 11.0 6.1 4.3 6.3Sefoces 47.5 453 41.3 "4. 43.6 46.3 6.0 6.3 4.1 6.2 7.5

aesotre Iamn -13.1 .2.5 -5.4 -7.2 -1.2 0.0 .. .. .. ..exports of sF3 18.8 26.1 40.2 30.8 35.0 42.2 10.9 9.9 2.4 14.0 19.5Inpots at uWs 31.9 26.5 45.6 38.0 36.2 42.1 5.2 11.9 -1.3 -4.2 16.2

total Expwdurnes 113.1 10.5 1S.4 IO.2 101.2 100.0 5.5 ?.3 2.0 -0.8 *O.S

Total CnAupian 85.5 81.2 76.0 83.8 80.3 80.9 7.6 7.5 3.9 1.4 1.4Private C uspitcn 73 66.0 61.5 66.5 64.0 66.4 8.0 7.5 3.7 1.3 1.3Oaerat GsNrnWmt 1S.0 15.1 14.5 17.3 16.3 16.5 5.9 7.7 4.? 2.2 2.0

Grom Ostfet It tnnt 27VA 213 29.4 21.5 20.9 19.1 1.5 6.? .3. -9.5 -8.9Fixed Ireo st 27.5 20.5 23d3 24.0 2033 20.6 3.3 . -3.3 -3.4 1.0OnIU* in Stodbo 0.1 0.8 1.1 -0.5 0.6 1.6 .. .. .. ..

Graos Ocoestie SsWne 14.5 18.8 24.0 16.2 19.7 19.1 6.0 36 -3.0 29.0 -2.4Net Factor Inom -2.8 -3.6 -3.4 -4.8 -4.9 -5.0 .. .. .. ..net Cu nt Tronas 0.0 3.3 4.0 4.1 5.0 5.2 .. .. ..Gross Naticial swimu 11.? 18.5 21.6 15.5 19.9 193 5.6 3.7 ; 3.9 3V.0 2.5In mUhita of WC 19SS 1973n 190 196s 19 19w(a tcttc 1980 Pricae ) .... .... .... ... ...

Orm Camstie Prodict 1361 2250 3541 4215 4526 4595 7.2 6.4 3.5 5.8 1.5Capei to inport 29t 669 1425 1311 1501 1806 11.1 10.2 -0.6 14.5 20.3TeOM Of Truk Adjustmn -1 -e1 0 -235 -262 -300 . . . .Gros Osemte mnJm 130 2166 3541 4043 4266 4295 7.1 6.5 2.5 5.5 O.iGross NaticrI Produet 133? 2172 3447 4086 4319 4300 7.1 6.4 3.3 5.7 1.4Gross atia Incll 1219 2090 314 38649 4057 4400 7.0 6.5 2.2 5.4 0.6

(1000--- -*W-vi198D * 100)................ ........... inftaticn Ratos( pa.)----C. Pric Icde ces 1910 19t2 19a 195 19W 198t 190-73 19n3-80190-MO 1W 1980Conhuw Prices (IFS 66) 100.0 1463 1S6.0 147.1 179.1 190.6 3.3 6.8 8.7 7.2 6.4"oetne Prie (IFS 63) 100.0 150.2 161.0 170.1 174.6 3.7 6.6 8.2 2.6 ---.-toplfict P DOefleor 100.0 151.6 158.9 166.3 176.8 187.9 3.3 8.7 8.2 7.6 6.3laplicit Expenitures Deft. 100.0 1511. 161.8 173.2 187.6 201.0 3.7 8.6 9.3 8.3 7.20. other lndicts: 1960-73 1993-a8 1i00-6............................... ....... ....... .......Growth atew(X p.*.):

Pqotatlon 1.9 2.5 2.6Labor Ferc" . * 3.0Grose 4att. mm p.c. 4.9 3.9 -0.4Private Comupio p.c. 6.0 4.9 1.1

1e ElastidcitylIrrts (G4IFS) / W(RO 0.? 1.9 -0.4

Nrginml Savinr Ra tiarm natitl Ssill 30.5 37.6 -10.9Wross Dastfe SNr 25.4 33.0 -8.7

Ir (period ara): .. 4.6 9.0

Share of Total 190 1973 1980 1WLabor Force fm.

AgriaJItIe 49.1 39.7 35.0 29.6nistry 21.4 28 36.4 31.6

servfie 29.5 31.S 2.6 38.7Total 100.0 100.0 100.0 100.0............ ...................... r---- ............................. - --.- ............................ E 0--

IEC "At5

- 45 -TIWISIA

LUIASX A EW6 IC IQICAT0

~~~~~~~~~~~~~~~~~~~~~~~~~~~......... .. ... ........................................... . ................................... PE20f 2

Vlum 11d Volta at tAt prfas (millfiw US$).............. ,w Igo................ ...................................

E. Iftdiu o g rts 16 1s 1 9J 1W lS 190 19 1911 196 1W I9go................. . . ._ . . .0 . ... ... .................. ...

X.RIEL 10.0 7iL1 10.4 76.5 73.0 61.8 131 797 75 4 so 3.LPUOPIEB 100.0 a.A 86.6 77.4 80.0 71.0 55 36 33 n 3¶ 31

.. .. .... .. * .. *. .. ... S. . ... ...

D100.0 1n.9 13. 1.S43 167.0 Z.0 90 67 an a 1175 143 179Ra"Ns 100.0 147.9 14.8 145.6 19.0 167.0 96 9 1n 156 181Ttatl Em t Ka 100.0 99. 9.1 109.6 119.6 1.A 95 1601 17l9 1745 213? 90

P. ftdwulso Irta

;eai 100.0 146.5 1133 140.0 133.0 197.6 33 46 33 342 312 551PAnt .d w i 1.0 53 5.6 59.6 73.1 61.8 19 373 370 25 318 243oth. a pab 100.0 180.8 115.7 100.3 100.8 125. SSS 5S 5 42 65 m 930oter Ito god 100.0 120.1 10.9 112.1 112.0 131.2 1099 993 J89 1030 1100 1341Catpfl g$ 100.0 141.3 103.1 6.2 62.5 70.9 42 N9 40 6 520 616Toutl 1r CIF 100.0 113.3 96.0 97.5 91.? 110.4 365 35 27 41 304360

C. Teu of Tr 19ao 1961 196 196 1W 195............................... ....... ....... ....... ....... ....... .......

UAh. E5 M Pric l 100.0 75.9 73.6 67.4 74.5 77.6Nort. usa Prif n 100.0 7s.a 78.8 2.1 85.1 91.6msd. Ta of Tru 100.0 96.4 93.4 8.0 84.5 01.5

US sutlta (at arruit price):

N. Samma Cf Ppw 1 1W 1.. 19. 196. 1W 1985............................... ................................. .... ..... .... ..... .... .. ..... ..... ..

Expas of cm U516 Ws XU 2m 70 2 3V 4M2ftdids (Pf) a395 1801 1129 176 2137 Z590"I-Fact. Savlrn 1125 920 971 954 1237 1642

t ports of God & NM 3961 369 3207 336 3490 4227mdiwd as (FM 353 3030 350 2744 2 3USN-P S tor gvice 5m 429 637 680 626 744

Resue Satin 49 -9 -so? 442 -116 6

Not Per In -M 251 .352 .485 .9 -S02(Toa Intart ) I/ 25 264 269 331 358 420

aet 0Arft Trutfr 348 317 210 359 48 SW(Wwuk rsettu ) 303 317 271 362 41 51U

Ourr AC let bfe Off. Tre -414 -675 -S89 -705 -9 23Ibt 0fficifaTrwsfer 42 29 37 41 35 52 .......................................

Otr A/C lt after Off. Trtf -372 -646 -52 -6 -63 75 1/ Total int1est p_wts ireltiPFM, *W rutte* 1W 2 UerV-

Las-Tem Capitl lf Ia 602 617 472 424 130 180 tem dbI.Dlreet Irwegu 23 20* 140 1S5 92 111Nt LT L. (OR$do ) 356 359 308 215 62 40Odoer Lt lnft (Nt) 10 82 a 4 -24 9

Total Other Ito (net) -136 S0 -33 48 49 94Net Stort Tau uCatt -45 38 13 45 0 48Caitatl FlA Ml. .8 12 -46 3 49 46Eur" "adufPa1 0 0 0 0 0 0

Oti n t Uuer -__ 150 113 192 -116 -319Not Craedt ftm DW -31 0 0 176 53 20

dohr Sneus atui -4 150 113 17 -169 -369

A sire of IDPsRssainatsu -5.4 *11.7 -6.1 -7.3 -1.2 0.1In"""estoP ft V 2.9 3.3 3.3 3.? 3.7 4.2Arrat AcM Salce. -4.7 -10.9 -7.1 -8.0 -1.0 0.2

NM ah1 RIt:buea acl. Oold Clt. usO) 59 401 233 305 526 699Reava fret. Gold (.1t. ) 70 4ff 29 378 616 965Officfal X-ate (LOMAU) 0.41 o.78 0.86 0.79 o.3 oa6tidix Ral ff. XK- Sm 1930 100.00 97.25 96.74 82.10 71.24 69.81MP (awittS of arm U 8742 am a0 49 9654 1o0

…...................................................................................................................................tIC OUI//8

- .-AN 3 ;

THf STATUS OF BANl 6ROWIONS IN NSA

A. STATIH1NT OF BANK LOANS AND IDA CREfITS

(As of May 31. 1989)

Loan ~~~~~~~~~~~~~~~~~~ ~~US$ M4illion AmountCredl or (Loss CtTc l ti*1ons )Nube r l a Unisoursed

Forty-seven Loans and Ton Credits Fully Disbursed 780.11 75.16

1797 1980 Offico desPorts Nationaux Third Port 3S.20 0.89

1961 1961 Republic of Tunisia Fourth Education 21.00 5.881969 1981 Reublic of Tunisia Small-Scale Industry Development 30.00 2.6319 1981 Rpublic of Tunisia Northwest Rural Owevlopment 17.S4 2..092005 1981 Republic of Tunisia H"lth and Population 8.50 2.6420S2 1982 Rpublit of Tunisia Grain Oistribution and Storage 33.40 1.012108 1982 Republic of Tunisia Fifth Highway (Rural Roads) 35.50 7.532157 1982 Repulic of Tunisia Irrigation Development 15.30 2.032223 1963 Reublic of Tunisia Urban evelopmnt III 25.00 .712230 1983 Republic of Tunisia Education V 27.00 14.672234 1983 Republic of Tunisia Central Tunisia Irrigation 13.70 4.862255 1983 Republic of Tunisia Urban Sewrage III 34.00 20.082289 1983 Republic of Tunisia Sfax Flood Protection 22.30 .0.242346 1984 Republic of Tunisia Mining Tochnical Assistance 7.80 2.112360 1984 Republic of Tunisia Seventh Water Supply 50-00 27.232429 1984 Republic of Tunisia Second Urban Transport 33.00 19.522455 19U4 Soci6t4 tunisinne do

lEloectricit6 et du Gas Fourth Powr 21.52 3.62502 1985 Republic of Tunisia Northwet Agricultural Production 8680 7.492522 198 Repoublic of Tunisia E*port Industries 32.50 18.392554 1985 Republic of Tunisia Second lectricial

and Mnical Industr'es 32.50 22.132573 1985 Reblic of Tunisia Irrigation Nanaget Improvemt 22.00 16.222605 1966 Reic of Tunisia Gabes Irrigation 21.70 12.5727s 1987 R public of Tunisia Energy Conservation 4.00 3.872736 1967 Republic of Tunisia Fourth Urban Omlopment 30.20 22.942754 1967 Republic of Tunisia Agricultural Sector Adjustrent 150.00 3S.042781 1987 Republic of Tunisia Industril & Trade Policy Adjust. 150.00 44.262865 1968 BUT UNT tV 30.00 21.862870 1988 Republic of Tunisia Fostry Oevelop met 20.00 17.652896 1988 Republic of Tunisia Hi s atintenance

& Rehabilitation 63.00 62.992911 1968 Republic of Tunisia Second Small & Nediwu Scale

Ind. Devlopment 28.00 28.002962 1988 Republic of Tunisia SAL I 150.00 115.013023 1989 RepublIc of Tunisia PetroleM Exploration /A S.50 5.S030S4 1989 Republic of Tunisia Education VW Training 7k 95.00 95.003064 1989 Republic of Tunisia Fifth Urbab k 5.00 58.

tOTAL 2.112.07 75.16 719.69Of whtich has be repaid 49. 63 13

Total fow Outstanding 1,613.44 61.91_ot Sold 39.56,of thich has b"n repaid ZLM 16.88

Total now held by lank And IDA 1,596.56 61.91

Total Undisbursed 719.69

I Not yet effective.1 Not yet signed

479Wps4/20/69

- 47 -

AN r IPage 2 of 2

B. STAT!MT OF rFC !WNVfSTNTS !_N MT.?SIA

(as of March 31. 1989)

liseal A unt ot USI YilI-om

1962 M Engrais fertilizers 2.00 1.50 i.5019 n/78 SOeMt Nationals dlnvestissommnt

(now ECt) Oev. Finance Co. 2.30 2.30199 COnT Tourism (now SlT) 0v. Finance Co. 0.00 2.2 10.201973 Socidt6 Touristique St ttliIre

ON SA Tcuriso 1.60 0.3 1.901974 Idustries Ch #im du floer Chemicals 0.6 0.001975 SoCIti 4 Etudes St do

Odvl p9emlt do Sousse-fNrd Tourism 2.50 0.6 3.10I'0 Suii1i Nisienne de Leaing Leasing Co. 3.40 0.5 3.90196 SocltO Riire do SPath Fluor

Iet do Sarytine (Flubafr) MiDing Co. 0.3 0.30I9C6 Socitd Industrililo des Textiles

(St) Textiles an Fibers 5.0 3.2 8.20197 dwya S.A. Phanaeuticals 2.0 0.3 2.30196 Roass Edilisaia Industrializsata

(RUT S.A.) Prefabricated Panels 1.3 0.4 1.70196 Cemitt Engineering Enineering Services - 0.04 0.04I9J Socidt6 des tIustries Textiles

44unies S.A. (SlITR) Textiles Fibers .JA 4.4Total Gross Comitmets 28.45 14.38 42.83

Less caneollations. Teminations.Reamewts an Sales I21 ..LM

Total Comitments Hold by IFC 132 LLL3

of which Undisbursod 2 L..1

fro kvijaj

-*8 - A.N%EX :!:Page 1 of

TUNISIAPUBLIC ENTERPRISE REFORM LOAN

Progres Under Existing Adjustment OperationsFirst Agricultural Seetor Adjustment Loan (ASAL-D

Policy Area ConditionalitY Progress to Date

MACROECONOMIC Currency adjustment, announcement Actions takenof first round of importliberalization and budget cuts

Confirmation that the Government Confirmation receivedhas taken all necessary measures toremove restrictions on imports ofspare parts for use in industry,agriculture, hotels, hospitals andother services, raw materials andsemi-finished products for enterprisesthat export at least 25% of theiroutput, and capital goods forinvestment projects approved byAPI, APIA and the Tourism InvestmentBoard after October 1, 1986

Bank confirmation of satisfactory Satisfactory progress confirmedprogress in implementation of theoverall program

COORDINATING Establishment of Interministerial Committee establishedCOMMITTEE Coordinating Committee

PRICrNG AND UARKETING

Cereals and Inputs Revision of administered producer Targeted adjustments achievedprices for cereals and inputprices to achieve targetedadjustments and subsidy reductionsfor the 1986/87 and 1987/88 cropseasons

* ASAL-r also supported a broad range of uncovenanted measures designed to bring aboutprogress in the five major areas of the MUASAP. Of some 70 actions recommended forearly implementation under the %ITASAP, 45 have already been fully implemented.

30l 3L

_ .6 _ ANNE X -; Page 2 of 9

TUNISIAPUBLIC ENTERPRISE REFORM LOAN

Pr,Ss Under Existing Adjustment OperationsFirst Agrieultural Sector Adjustment Loan (ASAL-I)

Policy Area Conditionality Progress to Date

SUPPORT SERVICESCredit Confirmation that FOSDA FOSDA loan allocations

loan allocations for the 1987 frozen at D 13 millionbudget have not exceeded in 1987 budget; interest ratesD 13 million, and that action increased for medium andsatisfactory to the Bank has short term creditbeen taken to start implementingthe Government's policy to establishby 1991 agricultural interest rateswhich cover the financial costs,operating costs at reasonableefficiency and a reasonable shareof the risks of agricultural lending

Input Marketing Updating of fertilizer retail Fertilizer retail marginsmargins for inflation, selling by liberalized ahead of schedulepublic sector of fertilizer at in August 1987prices adequate to fully cover thecosts of purchase and distributionand announcement of fertilizerretail margin liberalization to takeeffect as of January 1, 1988

Farm Mechanization Full cost charging for mechanization Full cost charging achieved.services. Authorization for the Imports authorizedimport of 52 of the annual needs oftractors in the range manufacturedin Tunisia

Researcher Increase in the remuneration of Career status andRemuneration agricultural researchers to an of agricultural researchers

adequate level following guidelines upgraded through adoption ofacceptable to the Bank "Statu.t de chercheurs"

Extension Designation of lead extension Direction de la Vulgarisationagency for rainfed areas with created in Direction Generaleappropriate responsibilities and de la Production Vegetale andpersonnel, to achieve gradual designated as lead extensionunification agency for rainfed areas

NATURAL RESOURCES

Fisheries Liberalize domestic fish marketing 'Margins liberalizedmargins

* ASAL-1 also supported a broad range of uncovenanted measures designed to bring aboutprogress in the five major areas of the MTASAP. Of some 70 actions recommended forearly implementation under the MTASAP, 45 have already been fully implemented.

30 1 3.

- 50 - l.k'NEX : IrPage 3 of 9

TUNISIAPUBLIC ENTERPRISE REFORM LOAN

Promess Under Existinx Adiustment OperationsIndustrial and Trade Policy Adiustment Loan (ITPAL)

Policy Area Corditionalitv Progress to date

r. MACROECONOMIC MEASURES

Macroeconomic t&87 budget satisfactory to 172 reduction in real exchangePolicies the Bank as condition of rate in 1986, maintained since

effectiveness. Satisfactory then. Except for low level ofprogress in implementation investment, macroeconomicof macroeconomic and industrial performance in 1987 was good.sector program as condition of The severe drought of 1987/88second tranche release. Action will have negative impact onprogram for liberalization of growth in 1988.interest rates to be discussedwith the Bank.

Nominal wages were frozen in1983 and SMIG and SM&G wereraised slightly in 1986 and 1988.

Toward end 1987, measures weretaken to strengthen economdcgrowth and encourage privateinvestment (tax amnesty, lowerinterest rates, etc.)

II. FOREIGN TRADE REFORM

Quantitative Phasing out of all QRs by 1991 Elimination of QRs for:Restrictions except for some infant industries (a) most raw materials and

that may receive quantitative semi-manufactures, except poorlyprotection for up to three years. integrated industries;

(b) capital goods except forinfant and poorly integratedindustries; and(c) semi-manufactures and rawmaterials for enterprisesexporting more than 15S of theiroutput.

Customs Raise minimum duty to 152, reduce TFD has been integrated into theTariffs maximum duty to 50%, reduce by tariff structure, reduction of

6 percentage points duties between the maximum rate from 2361 to 412261 and 552 by January 87 and by and rationalization of tariff9 points by January 88. structure.Incorporate Custom Formality Tax(TFD) in duties. Action program toachieve effective protection of 251by 1991 to be agreed with Bank.

.^ i.

- ;1 - ANNEX ::.

Page 4 of 4TUNISIA

PUBLIC ENTERPRISE REFORM LOANProaress Under Existing Adjustment Oprations

Industra and Trade Policy Adjustment Loan (ITfPAL)

Policy Area Conditionalitv Progress to date

tll. PRICE LIBERALIZATION

Producer Prices Prize controls in well established Simplification of controlindW.atries to be phased out by 1988. mechanism by merging homologationOther producer prices to be and auto-homologation withliberalized in 1989-91. More liberte contr6lee. 602 offlexibility in the system of control producer prices (weighted byof non-liberalized industries. production value) are now

decontrolled.

IV. FISCAL LIBERALIZATION

Taxes Submission of a draft VAT to VAT system adopted in July 1988Parliament before second trancherelease.

V. INVESTMENT INCENTIVES

Investment Promulgation of a new Investment Investment Code abolishingLiberalization Code satisfactory to the Bank and investment controls, except for

establishment of Approvals Committee investments requiring specialindependent from the Industry incentives was approved ir.Promotion Agency by second tranche Summer 1987.release.

VI. EXCHANGE RISK GUARANTEES

Forwarding Adoption of improved system of New system adopted in AugustExchange Risk exchange rate guarantee by second 1988.

tranche release.

.

52 - A.NEX '!;Page 5 of 4

TUNISIAPUBLIC ENTERPRISE REFORM LOAN

Prooess Under ExistinZ Adiustment OperationsIndustrial and Trade P Adustment Loan (ITPAL)

Policy Area Conditionality Progress to date

VII. INDUSTRIAL EMPLOYMENT

Social Security Discussion with Bank of changes Actuarial study of Soc. SecCharges needed to reduce employer's finances being done by the

contribution to Social Security Government and ILO.before second tranche release.

Wase Ewmloyment of consultants to Consultants (ILO) hired.Determination assist Min. of Social Affairs to

help entrepreneurs relate wageincreases to productivity bysecond tranche release.

Labor Agreement on timetable for Measures to reduce costLegislation introduction of labor legislation of labor discussed with the

reforms by second tranche release. Bank; some already implemented.

VIII. TOURtSM SECTOR

Sector TORs for study of situation antd TORs for a study were approvedDevelopment prospects of Tourism Sector to be in Summer 1987. Draft study

approved by Bank before loan being prepared.effectiveness.

30 1 3

53 - ANNEX ;:_

Page 6 of 9TUNISIAPUBLIC ENTERPRISE REFORM LOAN

Proxress Under Existin Adiustment OperationsStructural Adiustment Loan (SAL)

Policy Area Conditionality Progress to date

MacroeconomicPerformance Satisfactory review to Overall economic

be carried out before performance satisfactorysecond tranche release in 1988.

Foreign Trade Reform

Quantitative Reduction of at least QR elimination on scheduleRestrictions 15 points (relative to

June 1988) in theweighting of restrictedimports before secondtranche release.

Custom tariffs Preparation of programto achieve objectivesfor 1991 to be monitoredunder macroeconomicreview

Safeguard Employment of consultants Consultants employedmeasures for a study on

transparent antidumpingmeasures beforeeffectiveness. Reviewand implementation ofstudy conclusions bysecond tranche

Price Liberalization

Producer Prices Percentage of fullydecontrolled goods tobe raised to 70% bysecond tranche release

- 54 - ANNEX r;ITUNJrS[A Page I of 9

PUBLIC ENTERPRISE REFORM LOANProg Under Existing Adjustment Operations

Structural Adjustment Loan (SAL)

Policy Area Conditionalitr Progress to date

Price Liberalization, Cont'd

Improvement of Draft law agreed withDomestic the Bank on domesticCompetition competition at the

production anddistribution stage tobe presented to Parliamentby second tranche release

DistributionMargins Margins of goods Margins representing 102

representing at least had been liberalized before102 of production to be Board presentation. Noliberalized for the release difficulties foreseenof the second tranche

ConsumersubsidieOi Before second tranche Drought and low economic

release the Bank would growth in 1988 havereview performance in raised the volume of1988 and the measures subsidies beyondcontemplated to achieve expectations, but overallthe agreed ceiling in satisfactory progress.1989. Semi-annualreviews as part ofmonitoring

101 1L

- 35 - AN'JNEX tr

TUNLSIA Page 8 ofPUBLIC ENTERPRISE REFORM LOAN

Progress Under ExistiM Adiustment ODerationsStructural Adjustment Loan (SAL;

Policy Area Conditionality Progress to date

Allocation of FinancialResources

Interest Rates Circular announcing Circular published inincrease of effective September 1988cost of preferentialrates to at least 72 tobe issued by loaneffectiveness; circularannouncing a furtherreduction of one thirdin the gap betweeneffective cost of 7X andthe money market rate tobe issued before secondtranche release.

Consultants for a Consultants hiredreview of inter-bankcompetition to assesspossible eliminationor raising the cap onspread to be hired byloan effectiveness;review to take placebefore second trancherelease

Treasury Bonds Taxation system ontreasury bonds to berationalized and the yieldon bonds to be increasedto compensate for theelimination of theirfiscal advantages, beforesecond tranche release

mtZ Lr

- S6 - ANNEX ttrTUNISIA Page o

PUBLIC ENTERPRISE REFORM LOANPreuss Under Existing Adjustment Operations

Structural Adjustment Loan (SAL)

Policy Area Conditionality Progress to date

Foreign ExchangeRisk Adoption of a new New system adopted in

foreign exchange risk August 1988.guarantee system basedon market mechanisms;review and eventual:justment of the

operation of the newsystem in agreementwith the Bank by secondtranche release

Tax Reform

Tndirect Taxes Introduction of VAT law VAT law adopted in Julyby loan effectiveness. 1988.Extension of VAT tolarge wholesale tradersby second trancherelease.

Hiring consultants for Consultants hiredstudy on eventualextension of VAT toretail trade by loaneffectiveness; agreementon the program forimplementing studyresults by second trancherelease

Direct Taxes Submission to Parliament Draft law reviewed by Bankof new, single law in March 1989, to be sentcovering taxes on to Parliament shortlyindividuals and on legalentities by loaneffectiveness; law to beapplied to income earnedin 1988 prior to secondtranche release

101 1Li

-57 A NNE= tVPage I of 8

TRANSLATION OF FRENCHORIGINAL

Mr. Barber ConablePresidentThe World Bank1818 X Street, N.W.Washington, DC 20433U.S.A.

Public Enter2rise Reform ProgramTunisia: Sectoral Development Policy

Dear Mr. President:

As you know, since 1986 Tunisia has been engaged in an extensiveprogram of economic reform and structural adjustment, in response to the needto adapt to the post-petroleum era and to meet the challenge of internationalcompetition.

Our program, described in the Seventh Plan documents, has receiv4dcontinuous support from the World Bank in the form of two Agriculture SectorAdjustment Loans (1986 and 1989), an Industry and Trade Policy AdjustmentLoan (1987), and a Structural Adjustment Loan in 1988. The InternationalMonetary Fund is also supporting our macroeconomic adjustment policy, mostrecently through an Extended Fund Facility.

Since mid-1986, our main macroeconomic reform measures havefocussed on: (i) liberalization of foreign trade and domestic prices;(ii) relaxation of financial and banking controls; (iii) promotion ofefficient foreign and local investment in the industrial ssetor; (iv) taxsimplification and reorganization; (v) rigorou control of the publicinvestment and operational budget, and (vi) adopting an exchange rate whichpromotes and strengthens Tunisian export competitiveness.

The macroeconomic reforms undertaken and underway - particularlytrade policy and pricing reforms, as well as the rigorous management ofpublic sector finances, have clear implications for the Public Enterprise(PE) Sector of the Tunisian economy, and we have therefore identified thissector as a priority area for sustained reform. The Government's PublicEnterprise Reform Program centers around one overall objective, namely torealize the greatest economic returns possible from our scarce human andcapital resources. The thrust of our Program is to disengage the State fromdirect involvement in competitive areas of the economy when the privatesector is capable of assuming this role, and to introduce quasi-marketmechanisms, such as performance contracts, to assure the efficiency ofnatural or public service PE monopolies. The establishment of any new PublicEnterprise or public participation will therefore be on an exceptional basis

- AN &NEX_ IvPage 2 of 8

only, following detailed reviev of the rationale, to ensure that it isconsistent with this overall objective.

The Tunisian authorities have taken or plan to take a number ofmeasures, which we summarize in the remainder of this ietter, to bring abouta real, sustained reform of Tunisian Public Enterprises. On this basis, wehereby request World Bank financial support for this Program, through aPublic Enterprise Reform Loan (PERL), since we view World Bank support as animportant complement to these measures.

MAIN COMPONENTS OF TRE PUBLIC ENTERPRISE REFORM PROGRAM

1. SYSTENWIDE REFORMS

Lezal Reforms: A revised Public Enterprise Law has recently beenapproved by the Chamber of Deputies and the decrees required to implementthis law have been issued in April 1989.

This law:

(i) reduces the number of enterprises to be governed by the PE lawfrom over 300 to about 200. The new law will apply tonon-administrative public agencies, enterprises in which theState, or wholly State-owned public agencies hold more than502 of the shares; and approximately 20 enterprises identifibdby decree, because of their special character (such as jointventures with neighbouring countries); all other enterpriseswill be governed by the commercial code.

(ii) Clarifies the roles and responsibilities of PE Boards ofDirectors;

(ii) Specifies the limitations on the PE actions requiring approvalof the sectoral ministry and those to which this ministry mayexpress reservations, with a view to increasing the autonomyof the management of Pen and to limiting State involvement inPE maagemant;

(iv) Introduces a system of triennial performance contracts whichwill specify reciprocal obligations of the State and PEa,

(v) Abolishes the financial and technical controllers of PEs whichwere charged with ex-ante control of individual PE manageoentdecisions;

(vi) Establishes a new group of high calibre "controleurs d'Etat"in the Ministry of Plan and Finance, to monitor PE compliancewith state laws (e.g. procurement) and supervise overallfinancial management. Their primary responsibility is toensure that the necessary system are in place forsatisfactory PE management;

- 59 -

ANNEX IVPage 3 of 8

(vii) Simplifies the procurement regulations most notably by raisingthe threshold of contracts requiring clearance by aninterministerial commission from TD 1 million to TD 5 million,and abolition of the intermediate review procedure formerlyexercised by the Departmental Commission; and

(viii) Streamlines the procedures for PE restructuring anddivestiture. Establishes an advisory body - InterministerialCommission for Restructuring and Divestiture of Enterpriseswith Public Participation (CAREPP) - under the Prime Ministerwho takes all decisions in this regard. Each proposal will beprepared by the PE in consultation with its sectoral ministryand submitted to the Commission for review. Implementation ofPrime Ministerial decisions will be the responsibility of thePE; the Directorat G6n6ral des Entreprises Publiques (DEP) inthe Prime Ministry (as Secretariat to the Commission) isresponsible for monitoring progress.

Institutional Reforms: Under the new law, the Tunisian authoritieswill strive to reinforce the autonomy of PE managers, while at the same timestrengthening the capacity of the relevant sectoral ministries to monitor PEperformance. In this context, several measures have been defined of which anumber have already been put into action.

We are seeking to improve the composition and performance of PEBoards of Directors. A system to monitor the participation of members atBoard meetings is already in place. Moreover, recognizing the key roleplayed by the company President (PDG), it is our policy to ensure that PDGappointments place priority on professional competence and that their tenureis sufficient to allow continuity in their plans.

The establishment of performance contracts has already begun. Afirst group of about a dozen of the most important PEs have been selected tosign a performance contract during the next two years. We plan to extendthis system to all commercially-oriented PEs subject to public serviceconstraints, tariff-setting or requiring significant State financialsupport. In view of the importance of effective management informationsystems to permit the preparation and monitoring of a performance contract, aprogram has been formulated to improve internal management systems andcontrols in a group of priority enterprises. The implementation of themeasures foreseen should enable these enterprises to prepare satisfactorybusiness plans and performance contracts over the next three years.

The improvements in the Boards of Directors, the strengthening ofmanagerial accountability and the progressive implementation of the newlegislative framework should permit the rationalization of State/PErelations. In the context of the new Law, the Government is also seeking toimprove sectoral ministry oversight of their PEs, protecting consumers andsafeguarding national assets, while avoiding interference in day-to-daymanagement of the enterprises.

- 60 - ANNEX 'VPage 4 of 8

To ensure that the.new Law is effectively implemented, the DEP willperiodicallY monitor progress in its implementation and recommend anynecessary amendments to the CAREPP. The budget and staffing of the DEP willbe maintained at an appropriate level to permit it to carry out thesefunctions in a satisfactory manner.

In the context of the PERL, the World Bank will periodicallyreview, with the Tunisian authorities, progress achieved on key measuresenvisaged under the Law concerning: (i) Boards of Directors, (ii) performancecontracts, (iii) improvements in management and information systems and (iv)rationalization of sectoral ministry supervision of PEs.

Bud&etarv Reforms: An important aspect in more rigorous managementof PEs is the strengthening of discipline in the budgetary allocationprocess. The progressive introduction of performance contracts will play animportant role in this regard. It is the intention of the Tunisianauthorities that by 1992 all significant budgetary allocations tocommercially-oriented PEs will be based either on an approved restructuringprogram or a performance contract which specifies both investment andoperational budgetary support. This approach has commenced with those PEswhich place the greatest burden on the budget, and by end-1991 it is expectedthat 60% of all budgetary transfers to those PBEs will be based on such anapproach.

The Ministry of Plan and Finance will prepare a detailed table ofiall budgetary allocations to each PE (capital subscriptions, investment andoperational subsidies, debt repayments, onleanding, Treasury loans, transfersfrom the Compensation Fund and all other special funds). In the medium andlonger term, we expect Government transfers to the PE sector to decline.However, in some cases, PEs will require higher budget transfers in the shortterm than in the past in order to stabilize their financial structure andundertake minimal essential investments. Any such expenditures will becarried out subject to the overall constraints of the macroeconomic frameworkto which we are committed. The Government will prepare, for review, anannual table of key financial and economic indicators for all PEs, based onyear-end audited financial statemeats. In addition, the Government willcontinue its efforts to identify and eliminate major arrears between PEs.

2. PROGRAM OF DIVESTITURE AND RESTRUCTURING.

The Tunisia authorities have expressed their intention toprogressiv&ly divest PEs in competitive areas of the economy. Thiscommitment relates not only to PEs wholly or largely owned by the State, butalso to enterprises ti which the State has a minority shareholding.

Several constraints limit the pace at which this decision can beimplemented, principal among which are:

a) Limited industrial and cocmercial prospects of assets whichare often of poor quality, due to weak self-financing capacityand have had poor performance in the past.

-61- ANMX tVPage 5 of S

b) Limited domestic private investor capacity, due to thedifficult economic conditions of recent years, and poorlydeveloped capital markets.

c) Limited interest by external investors in PEs to be privatizeddue to lack of adequate understanding abroad of the Tunisianeconomic adjustment program.

d) Social difficulties combined with salaries and benefits whichoften exceed those in the private sector.

The Tunisian authorities are working to ensure that theseconstraints do not restrict the momentum of the divestiture effort. Severalmeasures have already been taken and these efforts will be intensified; inparticular:

a) Recognizing the limited marketability of many PR assets, saleterms and conditions will be realistic and flexible, based onfinancial and technical evaluationas. Sales of assets orshares will be transparent, with public bid invitations at theinternational level if necessary.

b) All modalities of divestiture are being considered, includingleasing with an option to buy, partial or totalprivatizations, sales to workers, management contracts as afirst step to divestiture etc. Payment terms will benegotiated on a case by case basis to take account of thefinancial capacity of the purchaser.

c) The social costs of the divestiture program are beingaddressed through the redeployment of excess staff orappropriate compensation if alternative employmentopportunities cannot be identified in a reasonabletime-frame. To the extent possible, we will encourage new PEowners to retain the existing workforce.

4) To ensure adequate Zunding for the divestiture program, theGovernment will make periodic resource allocations to thePublic Enterprise Fund corresponding to the value of the PERLtrAnch releases based on the pace of the divestiture andrestructuring program and the associated financial needs.These needs will include the redeployment or compensationcosts for workers, and the settlement of liabilities whichcannot be covered by the proceeds of the assets on sale. Inaddition, the Fund may finance, if necessary, studies andtechnical assistance to implement the program. The Fund isintended to play a catalytic role to facilitate therestructuring of a signiticant number of PEs. The majority ofits resources will be used to facilitate divestiture. TheFund could also be used for dynamic, comprehensive,sustainable restructuring of selected PEs. In general, theFund is not intended for investment financing. However, very

-62- A4NEX IVPage 6 of 8

limited investments indispensable for the success of aprivatization or restructuring may be finAnced from the Fund.The Bsak vill be informed of any operation which requires morethan TD 10 million in Fund financing.

In spite of these efforts, it is not possible to predict the paceat which the divestiture program can be implemented with precision. Ourintention is to monitor implementation closely to ensure that the Statefacilitates this process to the greatest extent possible. We have requestedthat the World Bank loan in support of this program be disbursed according tothe pace of the implementation of these restructuring and divestituremeasures.

3. RESTRUCTURrNG OF PRIORITY ENTERPRISES.

We have also asked the World Bank to assist with the restructuringof three priority enterprLses, i.e. the Compagnie des Phosphates de Gafsa(CPG), the Groupe Chimique and the Societ4 Nationale des Chemins de FerTunisiens (SNCFT); the key measures being addressed in each of these PEa areoutlined below.

Compasnie des Phosphates de Gafsa (CPG):

CPG hag prepared a performance contract covering the period1989-1991 which specifies the overall objectives of the company over themadium-term, regarding production, technical efficiency, financialperformance and manpower requirements. To re-establish medium-term financialviability, CPG is undertaking an important cost reduction program, involvinga progressive shift in production from underground mines (which presentlyamouat for 381 of total production), to open-pit mines, which are moreeconomic and less labor intensive. The social implicatioas of this strategyare significant and will require substantial State support which is specifiedin CPG's performance contract. Beyond the 628 early retirements envisagedbetween 1989 and 1991, we intend to take the necessary measures to redeploy afurther 725 workers in the context of a program of personnel reconversion inmining area and resignation incentive packages to alleviate the socialpressure in the Region and to generate new employment opportunities. Thefinancing of these omsures is already envisaged. Given the volatility ofthe phosphate markets, particular attention has been paid to ensure that thecompany's financial condition will not deteriorate further, and financingwill be provided to avoid an arrears buildup or excessive short-termborrowing. This performance contract will be approved by the sector ministrybefore year-end 1989 and will be signed in early 1990. It will be revised atthe end of each year to reflect sectoral developements.

Groupe Chiakue

The companies of the Groupe Chimique have experienced seriouslosses in the past several years, due to the particularly unfavorableevolution of the price of fertilizer in the international market. Theirexcessive dependence on short-term commercial debt to finance theirstructural deficit has caused a further deterioration in their operations.

-63 - A&NNU IVPage I of 8

We recognize the severity of the situation and the urgent need for financialrestructuzing, but in view of our budgetary constraints and the negotiationsunderway with the foreign shareholders, we plan to seek transitionalfinanial arrangements for the present year to cover their cash requirementsand to put in place a certain number of safeguards to avoid any furtheraccumulation in their arrears to creditors. In addition, by the end of thisyear, we plan to define a medium- and long-term strategy for the fertilizersubsector and to identify appropriate objectives and specific restructuringmeasures for the coming two years. We also recognize that the presentorganizational structure of the Groupe could be rationalized to increasemanagerial efficiency and we plan to elaborate a plan of action toward thisend.

Moreover, we believe that the ecological problems caused by theoperations of the Groupe at Sfax and at Gabes should be resolved as a matterof priority. In this context, we plan to undertake investments amounting tosome 15 million dollars for the Gabes area to discharge the gypsum ladenwaters in an inland site, which will not pose environmental problems, insteadof in the sea as at present. [n addition, we are researching least-costinvestments to limit sulfur gas discharges. We are currently seekingconcessional credits to help finance these efforts and hope to commence thiswork in 1990 at the latest. The discharge of sulfur gas in Sfax and ofpolluted water into the sea have been important factors in the deteriorationof the environment in this area. We have therefore closed our sulfurinstallations of SIAPE B as of November 1st, 1988 and we are presentlyundertaking certain technical adjustments which will enable us to dischargepolluted water on land in this area also. In light of the severe financialsituation of the Groups, and of this period of budgetary austerity, thesemeasures represent a very serious effort and serve to underline theimportance which we attach to the protection of the environment.

SNCJT

The Government policy for the transport sector aims at minimizingthe cost of transportation to the economy. To this end, our priorities are(i) the liberalization of the transport market for private operators;(ii) freedom of modal choice by users in the context of an overall strategywhich favors the transport mode with the greatest comparative advantage; and(iii) the alignment of tariffs with the long-term marginal costs of each modein the medium-term. The transportation legislation has already been amendedIn 1988 to address the first two points above. This policy also aims totmprove the productivity and fimancial performance of public enterprises inthe sector. The Tunisian railway has now and will continue to have a veryimportant role in the development of our country especially for bulk goodsand for pacsenger transport in the urban areas, and along the North-Southcorridor. A further objective of this policy is to reduce financialtransfers to the railway and to rationalize their allocation. We thereforeplan to reorient the railway toward its comparative advantage based on realeconomic costs. To this end, a performance contract is being preparedbetween the SNCFT and the Government which will be approved by the sectoralministry before the end of this year and will be signed at the beginning of1990. This performance contract will clarify the role of the railway as well

- 64 - &VNEX tvPage 8 of 8

as its relations with its sectoral ministry. The principal objectives ofthis contract are the following: (i) introducing transparent relationsbetween the railway and the State as well as with the railway's mostimportant clients, notably CPG; (ii) a progressive introduction of a tariffpolicy toward the coverage of long-term marginal cost by each major traffictype, which should permit a progressive reduction in subsidies; (iii) theintroduction of specific rules to calculate the payments which the railwaywill receive to compensate for revenue losses due to social or nationalinterest operations which do not cover their long-term marginal costs and forthe costs of public services; (iv) a gradual increase in the productivity ofthe railway and in particular of its employees, which would permit areduction in the overall workforce by an average of about 150 per year; and(v) introducing investment planning based on criteria for economicviability. The Government is committed to respect the above objectives andto met its obligations under this performance contract.

The sectoral ministries concerned and the DEP will monitor closelythe implementation of these performaace contracts which will be reviewed bythe World Bank in the context of its periodic reviews of the program.

In summary, we believe that the measures proposed and those whichare already being implemented represent a difficult but significant reformprogram which warrants World Bank support. We recognize that theimplementation of these reform measures will require sustained attention atthe highest levels of Government. The Tunisian authorities are deeply ;comitted to this continuous effort.

SIGNED BY MOBAMED GUANNOUCHI

June 2, 1989

Moha_ed GhannouchiMinister of Plan and Finance

Republic of Tunisia

l10$ L"-)5

tUPISIA pniiic wiTpPPisi emuD OdPUdLICI IIlQ

PtiL lC?IOiS/CGitiRlItiE$(Legal coditions coceumuted for effectiveess and tranche relemse are arted with ao

oUIJC?lt AUtl0lS tUtl to hAtE tricttilESS StElOD t1lCl EIUSI

A. LIAIUtCLiStI?ioL RmOPs Pnblic Enterprise La passed Feb I189: eitew the awct of tk nw PI La on a

reus aber of Pk nader Covt sperision representativ grop of Pis. and discus

replacts tincial ad techical coatrollers with the bask tht effectiveness of the

prtevlostly uercised en-ate coatrolsi pith seo lau tad its application

controlers 4 etat to tonitor PR fi acisalumnaemet"elans promet rtntrictioa ow pih

- strealints decion-ab la ptrsM forrtstricturIng ad 1 ivStitretclarities uature of 6ovnment supervisiospecifies composition/fctions of E boards

°

COspilation of 1986/? ni fina leC/e ic Preparation of adurlcooifiaaacal dta

data by Directorate of Publit Enterprises i by P bsed on year-end udited tienical

Prime liister s Offfict statemts

PLrparationlsignature of Prototype Performuae Contract IPCl prepredpertformne contracts IP-Csifor mjor Ph frelimliary draft P-Cs prpared bi 0 Submission to an for review draft P-Cs * lpproval by cAm signture by is uad

CiP fphospibatesi S9Clt (rallwa and Slt (bus) for CP. SlCl and Sat - epproved by reponible sectoral wiistry. ad

res iosale sectoral tinisDitr prior to initiation of tey attiess is P-Cs for

approal by cam, teo P-Cs elemetS to CM. SiCm ad Sitbe satistactory to the DabD

Preliminary Adetificitioa of second TOOup of t tonfirmtiot of second groip of PS to prepare 5 Pepatation and signtor of P-Cs for thre

Ps to PreparSAig P-Cs ih ti9P. 1991 ad sig P-C i 1990 aud 1991: Ps to he Pl frc second group

aed 1992 selected fro relatedlaonopoly nn recciucag

sbaktatial bdetary traosfrs

- Isprove illS aceautin. internal Preliinary diawstic s"rey of tecuhical COapletion of toos and call for bids for laplemestation of areed TA prograu

controls, ete in priority nP assistasce rquireots coitleted for sir Ph areed TU progrta

C. isD6NTIi"PlEdNCAII IPI;faES C.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~w.

Increared tranparency of Agreent dtriDg negotitations on toratconteot Submissito of #an tab le of all budetar ICovernent f.ooial spprt of data to be prepared/subaitted ad estra budgetary trafners. and lOan

ieaoutetet fo.r *tctt '

Ellmiute I cros-arrears and Periodic budgetars provision by Govermat to Idotfisatln ;.f Uaj.r arrears betwn Pin

tesare finacial discipline eliminte mjot arrears betwn Ps ad rontinued rettlesent of jot artrars

tUIiSIA PUlSLIC EE?E!PII i\liOII L011POiLICY IAl,II

illL Ittli#/OIDlOOtlOllLltl15I.egal conditionm COteDaoted for etteetineoec6 Nd trauche release are urted lith aD t )

OIJICI'iTE attiCS Till! TO DiE - - ------.-.-.----.--.-.-.--fEPicYiYiEs SeCOID TIIICM i"MSI

P. DiliEStitliRl

progreive divestiture of Ovor a doae diwestitares coepleted to date t strlt to pint of sale li.e. walsations * Briy to point o ale 1i e. *elatlenPis/holdius ih cowetitime aOeas (priarli hotels, teatiles. and cotstructionl ee pleted ad bids isseued) a grout of epleted nd bids ioitetd a fttihtr group of

PEs/holdino satisfactory to the bat; and Pns/holdints natisfactry to the Bakhe l La strealined decision-taklig process; "nbit to the pabt for mel" a frtherlotulized ioter-sininterial emission (CAil"Pl Iroup of candidates fPis/koldiogsl troposedto review prieatistioa/restractarls proposals for subsequent prisatization afor Prime liaisteriai decision

Costinumw pipeline of dossiers being prepredbg nt a.d sector mioistries for Cui? reviewfor possible future privatiution

Guidelines beint prepred for Fllsinistriesr: iapletattioD of restrwcturialu/rivatiaatioleg naintioo. biddinl dhcuets ad proedumtl

Allocate sufficecot rnsourc to Letter of Slttoral Deselop eet Polity spcities Athotiatiot of iocnra is the hed a Coeitet of at least OS$ 35 siltlohUble iEtrprist land to address objectiees/eiigible espeses under by an amwot at least eqpivaleot to equivalent Iree Pblic Eterprise Fund; adsoial costs ad set liabilitiets hblic terpise fad fint tranebe release autborizatioa of intrease i the fndassociated with privatiatioa by an t at least equinaleit to secondtserance. peuoio lilabilities, trncbe releaeothr debts, etel

tWlISll PNi)iC gItIliWRSI SitOE ilOSPoi olLICI 111111I9ero laP41LCL l un

gLegal conditions coveunted for effeetlvetess aid tra4thb releana crt nrled *itb u ' I

eililG:a C lacti ls l T n3 c UAtl --- - - - .- - -IFFICTIRSS Sil011D t111101 liSIt

1. slilStCtO ctio PIADS

1. CHP (Pbospknteu)Prepatatio. sit4ature and Prelimionr draft P-C prepared by CPG maagement SSubission to the Bank for revies draft * Approvii of P-C by CIP?. sIgosture hi CP

implemeatation of performace P-C for CP6, approved hi sectoral minittr nd sector#l mlnisttn, ad Ilitiation of

cotfact IP-Cl Completed detailed pertomel redeploinat stadi prior to approval by ChUiP; ket elemots kel pertorance wnuren spec(ifed i t-C

to be satisfactory to th Iank

2 Uroupe Chiique Ifertilinerslletstnctere Group. a tfiances. igreesent reached on vitbdrawal of foreip Preperation aed review *ith Sa of

organiztiot and operations patner rom four empaies satisfactory fimainlal relabalitatiot patn

for It3D-91 to reduce stort-trm debtfInancig and present toture arrearsecwmlation

Satistfctory progrers oA the isplemntatioa,of tie serger d tbe foor t?olso-nmittcomnies of CCC and specific mtre toratioaliz# i C s orgniao tion ad operations

Address pollutin problema Stuites copleted to address gpum pllotion lose Satifactory progress on impleseUtatlio of

gIp a"d sulfur dioside isrtaeate

Istabllsb/laitain market-basd Sati6tattorn fomlra adopted for 1!11 Signattre of traefdr price convention

trasfer price far pbopokate betim CPM and CC

NW Irailaw* Preparation, sipature ndl Draft prelimiury P-C prepared by SM ' Submisio to Sank far resiem draft P-C t ipproal of P-C hi CAMP. signature bi

isplentation of pertorumace unmaemten for SC. appred by sector ministry. SICt ad sector miistry. and initiation

cottatt li-CI ptior to approval by CAS1PP. toi eleients of let P-C measre leg: diffeential

Redation it SOMs 191-S9 ionvetment progfr" to be satistactory to the Bask triff intreas. operating efficiency

frot tD214 millioe to tl163 million targ.ts, jnaetsent Critateialt itl

4 SIt tCwomCipanyl- epatiot. sigutore and Draft preliminary P-C prepared by o * Sobmission to antk for rviews draft P-C Ipprotal of P-C hi CIIUP. cnature ti

implemestito of perfornew wnagement for Sit, approved by sector mistrt. SIT ad sector minlstr. and mlpleentatiun

cottract lP-Cl pri ir to approval by ClAMIT; k1 eienvnt of Ise t-C masures (es levstmet stategy.

to be satisfactory to the Bak Copeaut4r rr4tD6 tS ftor Wsil tarifft.

Cteratina offirlency tatretni

- 68 -

TtNISIAPUBLIC ENTERPRISE !EFORM LOAN

KU PROVSIOMS flM PLC ZTUMS9 LM

zLEST D VZSIOVS 07 MM LAW coONS

a. SOOn cr LUV. AMD PL defined as all. entasprses Ln Whlch ths State hoLds la Reduce numer of etnterpuiues covetedDOWUII? OP PQ8LIC excess of 50X either di ectly ot through wholly-oed by PR Law fm otver 300 to 200. by

tSSEPRSS subsLdieties (towert PR vw had 3SX threshold). cde toln vht ceastitutes a publLc

Also Licludes 22 *aditional 1ntprtseas of strategic *nterp-tss tr nSstSt remaiLder toLoportane with GCvt shsreholdin between 34-502 to be cqpan? Code"ovmred by re Law tempotarily (until 121 s91) while boLnrestucture

S. DAm$ OF D0C?ORS* Ceopositiom Smpewieen¢d eusrentlretired pubtic serwns. or private tacresed *sbast ean h4&-caibve.

sectec persons with prLer public epertence esperienceld erd members

- Responsibilitie*s SLilar to prvate secter Seards: approvl of the So legaL change lt r_sposbilitless

argasmsational structure end p.rsanwel rammeratioa rSmtDs La practice. *reatet _ giei to beevieviapprcvel of plans budgets p (egpetatil/ ieam_t) pl sed oe atrengtagnin *eeads to play

financing plan. perfternce conracts, ptocurement and increased setl tin estblihlb ad

audSted fLnnea statemens. appowtavg PI abjeotiveletratege andmoantorin _smaet peufwene

C. GOVUR3KZ RZVIV AMD ollOwine Approval by Ps oa%rd. no reuire to esubLt in preatSce. Covt wnil fecus elry an

APROYAL OF PS PLAS preposed peuforeaune contacts. epatinglSnveatect budets s requirig Go"t tinmerl1 support.

AND bUDCSTS and finacig plan for approval by sector misstry (in Also will shit from revievwlpprovalconsultation with the Ministry of Plan and Lence). of anuaal budgets to negotastion of

pergfeoa_ conrtcts.

0. GOVEaNzU COWNOLLUS Abolition of ftnmacSal and tee dchna 1ontrolL.rs (fxowerLy Shifts Governmeat contrels fro eu-anteauthorized to x rcise *u-ante oeatrels en PI expenditures) eeto -pest, with *phais en ensuriLntstabsihes new *cotroleuve d'Stra to cmnitor PS that the ncssary Sytm a,e inomlLncec with State Laws (cg: procure mnt) and supervie place for atisfdtcy Pt m*n8 _ nt

oevrall financa managnt. and accuntab lity.

E. PROCUS00Z6S bles thr_shLd et erats requALrn clearance by Lnter- Inreased pocurement autonom to Ps

inisteria1 eoaeisln fror ai 1 mill in to ID S illion. Boardlecacgaan. Simplifies procedures

Abolihs toemnedit., review prcedure.

P. RISTRUC29IUX AND etebtlses Intor-LainSJerLal cis"oSto revi eCrw Greatly simplif les dieiammkift andPRSIVAM"IV rmetu* turd an privatizstion proposals and make LMplsenttion proe ss for

recpandtions to Prime minister for tsnl decision. privatLiatian envsage to Previous LaW

0. I L ADtT ALL whollo ne sut hav externl audit. Cnfirms 19S3 deore strengtheningaudt prowtsionalrquirmnts.

- 69 - kv vrt

TUNIS IAPUBLIC ENTERPRISE REFORM LOAN

PE SECTOR; KACROZC0fIC INDICATOItS

(million dr:)

I83 1.4 1985

A. GOP

PIS 3190.* 3712.5 40X5.2

Total EosayW 10270.$ i18".7 l851.0

Z PNsITetal 31.1 31.2 31.4

I. asws a-

pas 582.4 722.0 770.9

Total coaeomy 1728.8 2101.3 1953.7

S P*; I?otaI 33.7 34.4 39.4

C. Demotie CvedLt

Pb 1027.8 1234.9 1349.9

Total 8comy 2711.9 3284.0 3774.0

3 PKeITotal 37.9 37.0 33.8

D. Extemnal Debt (US$)

Pas 1172.3 104.2 119".9

Total economy 3800.8 3752.0 4380.1

: PbIT?te 30.8 38.9 27.3

3. IUple

pas 1742" U 140981

Total pecua SecGto 590342 no

X PbI/oxm Sectec 29.3

Semees Iatluz Mational de statLstLques

lxtem al debt dta: vLd ank Debtor LetLa System

Domatle iedt "tata Ceatrnl Bn

- 70 -ANNEX VIil

TUNISIAPUBLIC ENTERPRISE REFORM LOAN

Asr ate Pt Data - 40 Najor PRO

(millIen dLmgas)

Ml U1 1962 19M5 1964 195 19M4

lMplaymnt 104037 107004 109293 109u0S 108064 107326

Value Added 534.6 570.2 702.2 614.6 796.6 79M.

Flonwsue 1198.8 1388.4 172.6 1642.2 1964.8 1950.4

anponta 29".3 332.3 373.4 411.1 406.0 297.2

Net Pofit (Lose)

A11 40 M J 39.5 (12.2) (50.2) (4.6) (31.4) (146.3)Uw!.u4dIa 01 PMs (11.9) (71.1) (103.2) (4.6) (122.O) (221.5)

Cash 1elw 174.5 135.3 124.5 200.5 160.0 41.9

Total Debt 1474.6 2037.3 2495.? 2722.4 2837.9 3165.8

of *Lobs

Sb.ot-tem 858.1 1029.4 1295.4 1438.4 1534.0 1743.1

Long-txim G16.7 1007.9 1200.4 1284.0 1303.9 1402.8

znestsmt 247.9 455.1 37t.3 468.5 355.1 279.9

Tranafers to PUs 66.6 107.7 100.5 124.7 135.1 1174.

LoaS and equLtloe nJ *a rzty)

TSam.D.ati s 71.5 76.6 94.3 15.2. 115.0 111.9

Smwoua MLuL*txy of 11ams and 1a.um.

- ,1. - ,,-:_:

TUNISIAPUBLIC ENTERPRISE REFORM LOAN

UT 1987 IUDZCtS gm S U PuLC u lStsCeIllin dOls)

Eataupvtie Motivltt lapoyeel Total Total ReVeOue lot ValUe WWdiptot jUdgeat4t3as"te Debt Pstoits Added Tsaufee IaSnmests

A. Indusa:g1Cm"o (107) (192-44)1. SA! ftSlis 1981 304.2 259.5 77.7 -9.5 0.7 0 0.22. SAhA fertill 11 295.5 317.4 110.2 -32.3 4.1 0 1.93. ascels Cobs* feettlixe 260 84.2 59.1 34.9 0.1 3.8 0 04. tea fectiliso: 525 129.5 128.4 57.5 -10.4 3.3 0 4.15. CAI cn 8$3 29-5 24.9 28.0 -0.1 . 5.0 0 06. SC Bhset c 747 78.1 75.2 33.7 -8.1 7.8 0 a7. SC Gabes e55 55.3 17.1 27.3 0.2 8.7 0 0S. cloK c804 74.9 52.4 22.- -8.5 4.3 a 09. 5SCC cet. 389 1S1.4 1S5.2 29.4 -13.3 8.1 0 2.9

10. S1 7oued ate.U 2352 99.9 55.1 98.7 2.3 25.1 0 2.011. SOcUEA shlp coautrrcpairzs 1095 10.7 12.4 6.1 -1.9 2.9 0.5 5.512. SCIA pale production 1099 47.5 34.1 38.3 1.3 7.' 0 2.813. CST susae 253 85.0 61.9 8.A -1.7 -2.a 0 10.114. office Calee *Gain mth"tla 1537 298.0 254.0 5.2 57.815. OQ vegetable U 9 120.$ 96.8 11.2 -14.1 0 016. 3 LUh= met 1mosrtsildtr 131 4.09 15.2 52.0 -8.0 2.1 0 017. Offic Cm,c. r holeal- ala/srtailla. 721 134.6 82.7 123.1 7.7 21.4 0 0Is. 03 artissnal v,*4- 1433 17.4 15.0 10.8 -1.9 8.1 0.5 ' .2I9. phrmscis Phamceutioc.ls 1367 100.5 114.8 92.8 -9.1 2.5 0 0.9

-. gt",,/I"au20. S P oil production 321 284.8 144.8 78.1 3.9 81.4 4.0 110.221. 5TR oLl ref nra 503 122.3 70.0 213.0 -0.7 7.8 0 0.522. 5NW1 oil diactibvtion 480 142.0 11s.8 209.4 1.8 15.2 0 a25. CPG phosphate -tnalu 11908 259.4 274.7 105.2 -30.5 50.7 21.7 102.7

C. T:enspot

24. $NC S Os"1e 9588 4*09.9 280.3 53.7 -21.9 37.7 4*.9 31.2S. 5Nt Tuas. boa 5024 42.7 42.9 24.2 -2.2 14.5 *.9 42.028. 5M.t TuAht mtre 945 230.2 167.6 5.9 -0.8 5.2 18.0 90.027. 5m tr:oekl 178t 20.8 11.8 17.1 -0.7 9.9 0 028. Tu"s Aix aitLZIa 4295 287.6 94.7 102.0 . 48.4 134.0 0 5.129. CTU shuppLAg 1419 199.0 146.1 70.; 2.9 18.0 0 15..30. StN StavedeLa 1498 18.0 15.4 15.0 -0.1 15.5 0 0U1. am31 poXt" 1407 154.9 91.1 18.2 1.1 15.9 5.9 14.932. hEThI ntte-tlt? b"o 108s 15.9 . 11.2 11.1 -1.9 8.7 0.9 *.7$2-44 STSa (12 mIe) geleoma bualtvuchln 7051 115.4 104.5 83.5 -2.5 37.' 0 '.'

D. OtlLtte

45. 0Go" eiea 22am 202.0 80.2 10.5 -2.4 5.4 11.9 93.448. 80333 ate 4555 559.2 197.1 ".7 -3.3 00.5 14.0 104.147. 5180 eIeosla"ty 7959 1027.1 587.4 231.7 -28.7 135.4 0 9.5

3. guicultusa48. COP fl/ior_slptoteaas 2448 39.2 $5.5 11. -1.9 $.1 0.4 I.$49. 0on LVtoeck 1443 27.9 24.3 10.4 -5.9 2.2 1.4 11.8$0. 0OS fa"Aft 220 116.1 73.4 31.7 -4.9 22.5 0 1.0

Tota Abowe (50) 6488 835. 4 4103.1 2827.4 -55.5 740.3 147.4 1015.5STa ALL 13. (192) * 12iO18 10820.3 7434.3 3139.1 -142.9 9e8.9 122.0 2094.5

Total ou-VIaMMOL 1 (183) 114885 6208.9 5009.9 2727.5 -154.9 87. 4 14.0 1987.5

* IoLudes boefth aieia_ltgst "d oa LLy-suiaat" Us.sm 0I2O (PrIm LslatUY) aid Ninltxg of Plan mh VInne

- 72 -ANNEX X

TUNISIAPUBLIC ENTERPRISE REFORM LOAN6overwllt - Pe Financial Relations

(itllion diners)1982 1983 1984 196S 1986 1987 1988

1. fin lotl Support to Pas

A. sudgetary TransforsTitre I (1) 47.0 S2.4 S9.8 67.9 72.0 70.2 74.4Titre 11 (fii 232.0 268.2 283.4 343.7 286.1 322.0 359.0

Total ludgetary Transfers 279.0 320.6 343.2 411.6 3S8.1 392.2 433.4

S. Off-Budget Transfers/FinaicingPrets d Tresor (iii) 29.4 36.1 85.3 41.9 39.9 36.0 25.0Prets Retrocedes (iv) 13S.1 178.3 176.2 116.4 178.1 187.0 200.0Special Funds (v) 3.5 7.1 10.6 22.5Cuaranteed Loans na 1S0.0 192.0 171.0 S0.0 102.0 130.0

Total Off-BudgetTransferu/Finhncing 364.4 453.5 322.8 275.1 335.6 3"7.5

III. PE Payrents toGoverrtnet:

DivIdends 5.1 0.3 2.4 0.5 0.5 2.6 3.0Principal Repaysents 11.0 10.5 13.2 33.1 26.2 54.2 S0.0tnterest Repayments 3.0 8.3 9.6 9.7 9.1 43.6 26.0Taxes/Duties (vi) 76.4 103.7 121.9 138.7 121.4 127.3 na

Total PE Paysents to Govt 9.S 122.8 147.1 182.0 157.2 227.7

-3t. Outstanding PE LoarsOming to Gover m nt

Budgetary Loans (titre Il) 128.0Preto du Tresor 154.0Prts Retrocedes 930.0

Total 1212.0

IV. Outstanding Guaranteed Loans 127n.0

V. Pt Low Anrrers to Govenuantl4sotray Loans 49.0

PreSs da Tresor t8.0PreSs Sotrocedme 296.0Total 422.0

(i) In Govern ent s operating budget data for Pts onlytii) ln Govt s inve stment budget; includes swA ntion (operating and fnvestment), equity,

loans and debt/equity conversions

(fii) off-budget local currency loans to Pas(iv) towein lo ns contracted by Government and on-lent to PtE; dramv directly by PEs(v) copeematfton for student transport; excludes consmar subsidies through Caisse de

Coopwnsation, peid to PEs(vi) for 40 nejor PEs

Source: Ninistry of Plan and Finance.

- 73 -

ANNEX xI

PUBLIc rNIIPRISES REFORM LOAN (PERL)

WORL SPLY/1EMANID FOR PHOSPHAT FRTILT2ER(million tonnes P2 05)

AverageGrowth Rate

197 18Dlq5Ig8 I99 200 1987-2000_

(X)

West and South Europe 5.0 6.1 5.4 5.3 5.3 5.5 0.3Eastern Europe and USSR 4.8 8.6 9.7 11.2 12.1 14.2 1.6Far East 1.6 4.6 6.4 6.5 9.5 14.86 4.0Africa 0.3 1.0 1.2 1.1 *1.7 2.4 '.9

Total World Desand 19.8 30.8 34.3 33.0 40.3 50.9 2.4

Production Caopeity

Total WorldProduction Capacity 20.6 33.0 37.1 37.0 41.4 53.5 2.6

Source: World Bank Intemnational Economica Department

- 74 -

TUNISIAPUBLIC ENTERPRISEREFORM LOAN

GOVERNMENT FINANCIAL CONTRIBUIONS TO CPG1980 [M1988

1980 1981 1982 1983 1984 1985 1986 1987 1988- ---- -- (Million TD)…- ---------------

Governaint directContributions - - 7.0 7.8 22.6 15.1 33.2 23.5 39.5

Ce*earl Jank - - 2.0 8.7 13.4 3.6 8.4 10.0 -

Debt Conversion - 0.7 17.4 40.0 - _

TOTAL - - 9.0 17.2 53.4 58.7 41.6 33.5 39.5

Source: Compagnie des phosphates de Gafsa

3014L/1 I

- 75 - ANNUEXXtz1Page 1 of 2

TNNAPIBIIC KNrEIIPfiIEFORM LOAJ

CPG PRODUCTION RAW PHOSPHATE 1980-1985

1980 1981 1982 1983 1984 1985(thousand tons)

Production from UndergroundMines 4,815 4,180 3,589 3,765 3,191 3,038

Production from Open Pit Mines 2,965 4,301 3,843 5,308 4,907 4,236

Total Raw Phosphate Produced 7,780 8,481 7,432 9,073 8,098 7,274

Underground Mines Productionas a S of Total 622 49S 482 412 392 42X.

Source: Copegnie des phosphates d Gfsab

X014 L/1 2

-76 - A X&ttPage 2 of 2

TUNAAPlBUC ENTERPRISE REFORM IOAN

COMPAGNIE DES PHOSPHATES DE GAFSA

MAG PROGRAM 1988-1993(Thousand Tons)

1986 1987 1988 1989 1990 1991 1992Actual Actual Provisional - Projctions-

Underground Mines

Redeyef Old 0.80 0.93 0.60 0.55 0.40 0.35 0.25Redeyef Erg L. 0.00 0.00 0.25 0.40 0.50 0.50 0.50Moulares 0.80 0.88 0.76 0.85 0.85 0.85 0.85N'Rata 0.65 0.65 0.65 0.65 0.60 0.50 0.45Metlaoul 0.41 0.42 0.39 0.36 0.30 O.25- 0.15M'Dilla 0.46 0.42 0.40 0.26 0.26 0.15 0.15Sebib 0.46 0.57 0.47 0.55 0.55. 0.55 0.55Kalsa Khasba 0.25 0.23 0.16 0.16 0.16 0.16 0.16

Total Underground Mines 3.83 4.10 3.69 3.78 3.61 3.31 3.06.

Ouen Pits

Kef Schfair 3.34 3.21 3.28 3.60 3.60 3.60 3.6JOur 1 Mhecheb 1.04 1.74 1.50 2.00 2.00 1.50 1.00Oued El Khafsa 0.10 0.34 0.42 0.60 0.60 0.60 0.60M'Dilla/M'Zinda 0.42 0.51 0.39 0.00 0.00 0.00 0.00Moulares 0.21 0.20 0.16 0.20 0.20 0.10 0.05Redeyef 0.18 0.21 0.20 0.20 0.20 0.20 0.40Redeyef s/traitance 0.00 0.00 0.00 0.00 0.50 0.30 0.00Kef Eddour 0.20 0.31 0.22 0.30 0.70 1.00 1.50Jellabia (afflmts) 0.00 0.00 0.00 0.10 0.40 0.70 0.70

Total Open Pit 5.48 6.52 6.15 7.00 8.20 8.00 7.85

GM TOLUNDERGRouND + P01N PIT 9.31 10.62 9.84 10.78 11.82 11.31 10.92

Underground NinesProduction (S) 41 39 37 35 31 29 28

Source: Compagnie des phosphates do Gafsa

3014Ltl 3

- 77 _ ANNEX XIV

TUNISIAPUBUCETERRSREFORM LOAN

CEM COST SUCTURE - VARIABLE AND FDKED CASH COSTS - 1988(DiaariToa)

Undertround Mines Open Pit MinesHigh Cost Low Cost High Cost Low CostM'Dilla Moulares Moulares Oum El Khecheb

Variable Costs

Personnel 3.26 1.19 1.07 0.33

Otherv' 3.32 0.95 2.9 1.21

Sub-Total 6.58 2.14 2.36 1.54

Fixed Costs

Personnel 3.17 1.58 1.24 0.42

otherL' 2.45 0.53 0.14 0.16

Sub-Total 5.62 2.11 1.38 n.58

TOTAL COSTS 12.20 4.25 3.74 2.12

~' Includes other cash operating costs.

20 14 Iu 1

- 78 -

T . s~~~M XV

PUDUC DTMRPREE REFORM LOAJ

,oapagai, ttt Phospates it Gatsa1381t913 luesat t Piopas

l106 118? 11M 118 1990 111 1192 1113

Price ade: t1.00 1.03 1.14 1.21 1.28 1.x 1.44 1.52On" Lw ta 341.009 3817,20 382,t09 401,IS4 421,14 441,264 "I0' 414,44lmal dactatio all 11.043 19.454 20,113 21,151 21.310 22,813 22,31 22.311

lamact plu 1986 191 1ots 1981 10is 1111 li11 1113U bery le.ref 0 a 1O,00 2,612 0 0 0 8

a Pcej.ctalI S7 0 1,500 0 0 0 0 0 0a Ie,aI on sdi ra. ° 0 0 0 0 0 a

a kut.ui iuchfai 0 500 1,000 0 I 0 0* Ieeett lJeblu 0 0 0 2,500 0 0 0 0a kcsaituoaial ikipant 0 0 0 1,843 3,1700 4,000 4,000 4,013S Deh waaey let Itdevt 0 1,700 1,800 7,300 1,006 3,706 0 0a latwhi atsue aind Dent. 0 31800 3.100 4.600 S,000 5,000 5,000 5,000I Por I&cfout 0 1,700 2.100 2,0 2.60 2.600 2,100 2,601

a elace.at atd isc. 0 1,500 1,500 3,000 3,000 2.00 2,000 2.000otal 0 18,200 15,000 25,455 22.300 17,300 13,600 13.501

Soucce: Compagnie des phosphates de Gafsa

- 79 - ANNEX XV\

TUNISIAPUBLIC ENTERPRISE REFORM LOAN

CPG - PERSONNEL EVOLUTION1980- 1988

1980 1981 1982 1983 1984 1985 1986 1987 1988

Total Workforce (Thousand) 13.3 13.8 14.0 14.9 14.0 13.5 12.0 11.0 11.0

Wage Bill (Million TD) 24.1 29.2 35.3 43.4 48.1 48.0 46.7 45.0 47.5

Wage Bill as a 2 ofSales revenues 33% 36S 401 431 46S 482 43S 432 33%

Source: Compagnie des phosphates de Gafsa

3014L/10

- 80 - ANNEXILJaL

PUDLIC ENTE RI REFORM LOAN

COAGN.IE DES pHOSPHATES OE GAFSA (CPG)

STAFF REDUCtSON PRO.RA.

YEAR Staff E.R. Redoployment N.R. & Annual staff Staff E.R. 1/1-1-N Phase MiSCe, reduction 31-12-N Phase #3

1989 10.764 343 0 45 388 10,376 0

1990 10,376 28S 100 47 432 9,944 0

1991 9,994 0 300 59 359 9.S85 S16

1992 9.635 a 32 _ .20 _

TOTALS 5 1 222

N.B. E.R. - Early retirementN.R. - Nonmal retirement

1/ Government could not commit to implementing the E.R. Phase J3 prior todiscussions with the mining unions and the Hinistry of Social Affairs.

ESTIHATEO COSTS OF THE REDEPLOYMENT PROGRMA1959 - 1991

Number of AmountYEAR _ EmlOX22S (Million TO it

1990 100 1.1

1991 300 2.7

1991 .Li

TOTAL 725 7.0

aI 1988 Tunisian Dinar

Sourco: Compagnie des phosphates de Gafsa

3014L/lS

- 81 ̂ AJFEX 3;X.L

ZUNIBIIPUBLiC EN=fPRISE REFOBM LOAN

C,ONpAGNIE DES PHOSPHAT DE GAESA

FINANcIAL PERFORMANCE INDICATORS 1981-1993

TABLE 1. BLALSE-

m a2 199 2i im 1993(TD mllion) - ----

Net Income (Loss) (11.9) (12.7) (9.6) 8.2 30.3 43.0Gross Cash Flow 30.9 30.8 32.6 52.7 71.0 80.0Debt Service 39.7 44.7 34.8 33.5 31.9 30.8Goverment FinancialAssistance 39.5 31.6 22.8 6.9 6.1 5.5

Current Ratio 0.4 0.45 0.47 0.49 0.63 1.05Debt Service Coverage ratio 0.78 0.69 0.94 1.57 2.22 2.6

TUmNISIAPUBLIC ENTENPRISE REFORM LOAN

COMPAGNIE DES PHOSPHATE DE GAFSA

TABL_2. SENSITIVITY: 3X LOweR PRICES In REAL TERNS

;2 ma 19m9 1 l22 a19921(TD million)

net Income (Los) (11.9) (17.0) (14.5) (3.0) 12.2 18.4Gross Cash Flow 30.9 26.3 27.5 41.0 52.2 55.5Debt Service 39.7 44.7 34.8 33.5 31.9 30.8Government FuinncalAssistance 39.5 36.6 27.8 18.9 23.1 28.5Curraent Ratio 0.4 0.45 0.47 0.49 0.63 1.05Debt Service Coverage ratio 0.78 0.59 0.79 1.22 1.64 1.8

- 82 - A'4X XZXPage 1 of 3

TUNISIAPUBLIC ENTEIIR1E REFORM LOAN

GRO_E CHIMIQUE: PRODUCTION DATA BY COMPANYT98-19i88

A. SOCETE INDUSTRIELLE D'ACIDE PHOSPHORIQUE ET D'ENGRAI

Operates three plants in Sfax and La Skhirat: Siape A, B and SIARS 11, inservice since 1952, 1964 and 1988 respectively.

1986 .987 1988

Installed Capacity

TSP 550 550 550Phos. Acid - 330 330

Production

TSP 552 551 500Phos. Acid - - 236

Capacity utilization

TSP 100l 1001 901Pho.. Acid - 0. 721

L. WDURIE CHIMIQUE DE GAIS (CG)

Operates one plant in Gafe& In service sine* 1985.

1986 1987 1988

Installed capacity (TSP) 400 400 400

Production 369 420 424

Capacity utillzation 921 105S 106S

30 t4L/'S

- 83- NNEX XIXPage 2 of 3

TUNISIAPUBLIC ENTERPRISE REFORM LOAN

GROUPE CHMIIQUE: PRODUCTION DATA BY COMPANY1986-i988

C. ENGRAIS DE GABES (EG)

Operates 2 plants in Gabes, EGI and 2, in service since 1974 and 1986respectively.

1987 1988

Installed Capacity

MAP O00 200DAP 400 400NPIK 500 S00

Production

MAP 55 58DAP 109 186NPK 128

D. SOCIETE ARABE DES ENGRAS PHOSPHATES ET AZOTE (SAEPA)

operates two plants in Gabes: SAEPA 1 and 2 in operation since 1979 and 1983respectively.

1986 1987 1988Installed Cavacitv

P205 270 270 270DAP 330 330 350AN 330 330 330

Production

PaOS 255 299 269DAP 343 362 360AN 174 194 218

Capacity utilization

PaOS 942 I1I% 99.62DAP 1041 1101 1032AN 53S 59S 661

- 84 _ - 84 ~~~~~ANNEX XIX

Page 3 of 3

TUNISIAPUBLIC ENTERPRISE REFORM LOAN

DIDUSTRIE CHDIMQUE MAGHREBINE (ICM)

Operates three plants in Gabes: ICM 1, 2 and 3 in service since L972, 1974and 1982 respectively.

1986 1987 1988

Installed Capacity

P205 400 400 400DCP 40 45 45

Production

PaO5 372 334 345DCP 35 40 55

Capacity utilization

P205 93S 842 86%DCP 881 89 1221

Source: Groupe chimique

30 14L/24

- 85 -A.,E

TUNISIAPUBLIC ENTERPRISE REFORM LOAN

FERTILIZER SUBSECTOR

GROUPE CHIMIQUE: OWNERSHIP STRUCTURE

…------SIAPE…------- -- -(TD millions) (%) (TD millions) (%)

Tunisia 15.5 51 10.2 51Tunisian Government 4.3 14 2.6 13Central Bank 6.7 22 3.8 19Compagnie Phosphates Gafsa 3.2 11 0.6 -Others 1.3 4 3.2 16

ForeignP.1.C. Ki-ait 14.8 49 9.8 .49

Total Paid-up Capital 30.3 100 20.0 100

----- ICG-- - -Engrais Gabes (EG)-(TD millions) (2) (TD millions) (2)

Tunisia 10.2 51 3.6 51BTKD 3.3 17 0.5 7STUSID 2.5 12 0.5 7SIAPE 2.4 12 0.6 8

1CM 0.1 10 1.8 26Others 1.9 0.2 3

ForeignP.I.C. Kuwait 9.0 49 3.4 49

Total Paid-up Capital 20.0 100 7.0 100

--- SAEPA-(TD millions) (2)

Tunisia 25.2 60Tunisian Governmnt 15.7 38Central Bank 7.9 19Compagnie Phosphates Gafsa 1.1 2SIAPE 0.3 1

ForeignAbu D'Habi Fund 16.8 40

Total Paid-up Capital 42.0 100

Source: Groupe chimique

30 14L'ZS

-86 - ANNEX xxrPage 1 of 2

TUNISIAPUBIC ENTERPRISE REFORM LOAN

GROUPE CHThUQUE: PAST FINANCIAL PERFORMANCE

TABLE 1. CONSOLIDATED INCOME SrATEMENT

1980 1982 1984 1987- (in '000 TDA)-

Sales Revenues 152,323 195,412 287,542 298,714Less cost of goods sold 101,206 132,378 210.248 235.807

Gross margin 51,11? 43,034 77,294 62,907

Salaries 8,528 11,094 17,489 23,119Others operating expenditures 18.537 24.672 32.795 39.925

Cash generated from operations 24,052 7,268 27,010 (137)

Depreciation 10,712 11,006 19,472 27,828

Interest expenses- short teu 1,193 4,131 12,601 22,682- long & o diu3 term 5,436 5,786 10,931 17,638Sxchange ;_sse 161 (280) 7.671 30.410

Net Tacome 6,550 (13,375) (23,665) (98,694)

30 14 L3Y

- 87 -

PUBLIC ENTERIIISE REFORM LOAM

lrBE2 Re C0IMIOUI 10,7 - BASIC fINANCIAL DATA

SIAPt IC" ice SAEPA E. G. TOTAL

SaJlatRUnMUU (Million OT)Export 62.6 92.5 55.8 85.4 35.0 331.3Local _ 2. _ 9.S _ _Z1 .

TOTAL Ts-I W.4 35.0 2. 94.7 55.8

Number of Staff 1,844 l,SO S24 1,110 260 S.265

Not Incom (Million Ot) (18.8) (26.0) (8.7) (35.0) - (88.5)

Medium and long term (MLT)Debt outttanding as at 31/12l7 150.6 81.0 20.0 133.6 15.0 400.2

Debt/Debt + Equity Ratio A/ A/ 72/28 A/ 82118

Cash generated from operations (4.7) (1.0) 0.3 5.9 5.9 14.51 *

orations 7.7 4.0 - 10.9 1.7 24.3- Long & Medium Term Debt i9 _8

TOTAL H. 14.5 44. 1,.7 2.64.

Exchange Losses (1.0) (4.2) - (12.1) (1.7) (19.0)

Al Negative Equity.

3014LJ28

- 88- ANN=Ex XXIPage I of 4

TUNISIA

PUBLIC ENTERPRISE REFORM LOAN

RAILWAY SUBSECTOR (SNCFT)

Introduction

1. The Tunisian National Railway Company, SNCFT, plays a dominant rolein bulk transport (about 1.4 billion ton-km in 1988), although itsparticipation in passenger (main line and suburban) and freight traffic stillaccount for 162 and llS of the total traffic in the country, respectively.However, SNCFT suffers from institutional, operational and financialdeficiencies, at a time in which the relative importance of the railways inTunisia's transport syste!- is expected to continue declining. This annexdescribes briefly the above deficiencies in the framework of the PerformanceContract to be agreed between SNCFT and the Government. A more detailedbackground report on Tunisia's railway subsector is available in the ProjectFile.

rnstitutional

2. The definition of SNCFT's status and obligations is currentlyunclear. On the one hand the railway has a clear economic role in freightmovement, bulk in particular, and there is no reason why SNCFT's financial'performance should be deficient. On the other hand SNCFT's competitive edgehas been dulled by Government interference in management, and by promotinginadequate cost recovery and low efficiency. SNCFT, as one of the biggestcompantes in the country, has been used by the Government as a tool for itssocial policy, by inadequate controls of its tariffs, staffing, investmentsand operations. Thus, the distinction between SNCFT as a comercialenterprise and as an agent of the Government's social policy has becomeblurred, greatly contributing to its present relatively poor financial andoperating performance. The relationship between its management and theGove-rment is ill-defined and lacks transparency, particularly with respect tosubsidies and investments. Moreover, SNCFT lacks adequate management tools -such as corporate planning, strategic objectives, i.e. a long-term view of therole of the railways in the total transport system, and financial discipline.The Government has now recognized these deficiencies within SNCFT and its ownrelationship with it and has decided to reform SNCFT into a financiallyautonomous and comnwrcially-oriented transport company operating in aprogressively deregulated transport market. Overall, SNCFT will follow atariff policy of long-term marginal cost-recovery, consistent with Governmentstrategy for competing transport modes. Those services which cannot I-,profitable but which the Goverruent wants SNCFT to perform have beenidentified and their costs will now be better quantified so that appropriateGovernment compensation mechanisms will be established.

Ogerational

3. In the past, maintenance of equipment and tracks has suffered due tolack of spare parts and other inputs needed for maintenance. Improvements in

- 89 - MNMEX XXItPage 2 of 4

workshop facilities and even routine maintenance to ensure a higheravailability of and more reliable rolling stock are overdue. Track repairsand rehabilitation, on several important sections, but more especially in thephosphate mining area around Gafsa and in the Tunis-Kalaa Khasba and BordjCedria-Sousse lines have assumed high priority. In addition, staffproductivity has to be improved through gradual decreases in their number byattrition (some 200 per annum), some redeployments, limited recruitment mostlyin the professional and highly skilled categories (some 50 per annum) and anexpanded training program. All the above points will be included in theperformance contract and performance will be monitored using a few easilyverifiable indicators, as summarixed below (1989-91).

INDICATORS 1989 1990 1991

Staff productivity(Traffic units (TU)/staff millions) 0.368 0.387 0.407Productivity of tractionequipment (TUI/loco., in millions) 18.80 19.40 20.04

Productivity of passenger cars(Passenger-Kilometer/seat, in millions):- main line 0.045 0.049 0.053- suburban line 0.016 0.015 0.016

Productivity of freight cars forgeneral cargo (Ton-Kilometer/ton capacity, in millions) 0.015 0.015 0.014

Turnaround of freight cars forgeneral cargo (days) 4.6 4.2 4.0

Turnaround of freight cars forphosphates (days) 1.8 1.8 1.7

Locomotive availability (2) 54 60 70

Investments.

4. SNCFT undertook heavy investments during the last 10 yearsprimarily to increase its capacity in order to retain its market share,unmindful of economic considerations. Some of these investments havecontributed to increases in the level of service, and combined withbelow-cost tariffs for passenger services, led to some gains in marketshares. However, these investments have not been capable of reversing theoverall declining trend. Rather, they have increased the debt serviceliability vithout corresponding benefits, thereby highlighting theiruneconomic nature, particularly for passenger services.

5. To improve SNCFT's financial situation, current and futureinvestments would have to fulfill appropriate economic criteria likeexplicit cost/benefit analyses and threshold levels for return oninvestments, besides being oriented to better maintenance and being modest

- 90- AINEX ItPage 3 of 4

in compadiso with the past. At the sam time, ongoing projects which are

in an advanced stage of implemntation should proceed wherever this iseconomicallY Justified. Simultaneously, the capacity of existing servicesand lines has to be protected through increased emphasis on intensivemaintenance, adequate supply of spare parts, etc., so that SNCFT can competeeffectively with other transport enterprises. SNCFT and the Government havenow agreed to limit investments for the Vltth Plan period to MD 163 million,which is 2a5 below the TD 214 million formerly planned for 1987-91. In

addition, the performance contract between SNCFT and the Government willspecify that SNCFT will submit future investments to economic analysis, andthat in no case would an investment yielding an economic rate of returnbelow 10 be considered.

Tariffs and Traffic

6. Current tariffs for freight traffic seem appropriate and areestimated to cover long-term marginal cost (including investment); tariffsfor main line passenger traffic do not cover long-term marginal cost but areestimated to cover direct operating costs (fixed and variable); tariffs forsuburban passenger traffic do not even cover variable operating costs.Under the performance contract, the Government and SNCFT would reachagreement on the periodic increases of tariffs so that: (M) freight trafficwill continue to cover long-term marginal cost; (ii) main line passengertraffic will gradually approach long-term marginal cost with the Governmentmaking up the difference in the interim period; it is estimated that by 1993the coverage rate would reach about 501; and (iii) suburban passengertraffic would gradually cover variable operating costs, with the Governmentmaking up for the difference between tariffs and long-term iarginal cost; itis estimated that by 1993 the variable operating cost coverage rate wouldreach about 100l. For exonerated traffic (e.g. students, service men, etc.)the Government would also compensate SNCFT on the basis of the long-termmarginal costs incurred with such traffic. The above is the result of theBank analysis of figures provided by SNCFT based on its existing accountingsystem which requires upgrading. SNCFT will improve its cost accountingsystem to enable more adequate cost computations and the resulting tarifflevels and Government subsidies. Moreover, to ensure fiscal neutralitybetween the railway and the competitive road transport mode, the Ministry ofTransport will carry out a study to update information on road user chargesand costs and msake recommndations on required adjustments to ensure thecoverage of long-tern marginal cost of road use, including externalities.

7. Assuming tariff increases of 61 p.a. in real term for main linepassenger traffic and 21 p.a. for suburban passenger traffic, a reduction inmain line passenger traffic of some 101 by 1993 and increases in the rest ofthe traffic of about 101 by 1993 can be expected (Annex XXIII). The trafficproject'ons reflect the foreseeable level of GDP growth and the evolution ofthe rel yive level of railway tariffs with respect to road tariffs, in aprogressively deregulated transport market. For main line passenger

-91 - ANNEX XXItPage 4 of 4

traffic, most of bhich takes place in the corridor Tunis-Sfax-Gabes, theGovernUSUt Vill carry out a study to analyze demand management issues takingaccount of tariff levels for both rail and road as well as the level ofservice and regulatory aspects relating to both modes.

Financial Situation and Outlook

8. SNCFT's financial situation has worsened over the last seven years:net losses increased from TD 13 million in 1981 to an estimated TD 44million in 1988. While operating cash flow has improved from a TD 2 milliondeficit in 1981 to break-even in 1988, SNCFT'S debt service requirementshave increased from TD 10 million in 1982 to TD 40 million in 1988 and,consequently, net internal cash generation worsened from a TD 16 milliondeficit in 1982 to a TD 47 million deficit in 1988. Government transferswere needed to cover these deficits and to finance investments not financedby borrowings which have hovered around TD 45 million per year. Theexpected tariff increases of para. 7 above, together with the increases inoperational efficiency and reduction of investments would result in reducedbudgetary allocations of around TD 55 million p.a. (compared to aboutTD 75 million p.a. without the above measures) and an improvement in SNCaT'sfinancial situation: its operating cash flow would improve from nil in 1988to about TD 16 million by 1993, and its net internal cash generation wouldimprove from a TD 47 million deficit in 1988 to a TD 22 million deficit by1993. Financial indicators are provided in Annex UXIV. Given its pastheavy investment progeam and associated debt service obligations, SNCFT's8fitnacial equilibrium will not be achieved until after 1993.

92 -

ANNE XX III

y Tratte . lOVf -a(in million unit-ks)

PasseQXrs Passengers* . ~flSLSuburb Utl8 1 r&t

1961 337 67n 62 1 92 * n.7281962 337 Su 521 lOU 2.5141983 301 SOS $94 1.217 2.618194 296 452 10 1.076 £,.43S198 2t0 464 711 99 2.44819" V7 47 781 1.098 2.6291987 270 s2 64 1.193 2.7641988 932 710 88n 1.256 3.1181969 342 708 512 1.323 3.243

1990 348 "81 902 1.M2 3.319991 3S3 670 934 1,382 32.48

1992 3 8 651 96? 1.282 3.359i992 363 433 1.002 1.382 3.360

Greowt Rate(1968-199) 3.651 .2.271 2.MCI 1.90 1.37

1961-1966: actual 1969-1993: pro2ected.

Source: Mission ettites based on f *ues pofvdee byw O and SNCFMarch 1969

nu am te nuTq'uiwmln. anam

Total traffic. ailli". 1Us 2*617 2.762 3. I" 3.120 3.264 3.346 3.246 3.346 3.46Total reve_s I' J11 1 2 .240 62660 66. 109 73.373 12.351 91S19 9"797 101.OSOperating ltce" 421.2261 (1.1 (30.l012) (26.194) (26.02?) 422.62?) (2 0.3) 46.1591 (2.6971Profit after tax * 35.714 (331461 MA 476651 4 61 (43.06661 140.211 (36.623) 21.464) (11.0541ross inteal cash

_ terao as a (6.202) 46.7221 45.47)) 41.438) 1.762 4.131 7.027let cas swplUss-d6ficit 0 a 0 (1.9161 (15.62) (.901) (4.275) 25.240 17.112Oebt service coverge ratio 0.0 0.0 0.0 (6.21 (0.11 6.0 0.6 0.1 0.2CArwrot ratio 1.4 0.7 *.6 0.6 0.4 0.6 0.6 0.7 1.2LT deblaitv ratto 0.5 8.4 0.4 0.4 0.2 0.3 0.2 0.1 0.01.uity In Iof total ossots 41.31 40.61 35.6 37.3S 37.7 40.1 45.O1 *.9 66.6Usking ratio 111 11I% to"1 to0 9" 931 09 an an

* 195-39OW are actual figures; 19U: estimated; 1969-199: projected.*- oeore Gev6rammit contributots.

Source: nssion esttmtes based on foiures provided by SNCT.

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Page 1 of 6

TUNISIAPUBLIC ENTERPRISES LREORM LOANURBAN TRANSPORT ENTERPRISES

Sectoral Background

The last two decades have seen a transformation of Tunisia into anurban-dominated economy and society. The capital region of Tunis leads withabout 1,600,000 people, followed by Sfax at 300,000 and another dozen citiesbetween 100,000 and 300,000 people. Given a low level of auto ownership (only181 of households in Greater Tunis ara motorized), efficient functioning ofurban economies and the general standard of living therein are linked closelyto availability and performance of public transport services.

Scheduled public transport services in Greater Tunis are assuredby street buses operated by Soci4td Nationale don Transoorts (SNT), two urbanrail lines operated by Socidth de M6tro lAggr de TMns (SMLT), and suburbancomuter rail lines operated by Societd Nationale dqeCe n or Tunisiens(SNCFT). Outside Tunis, some 12 public bus companies serve Sfax, Sousse,Bizerte and other provincial centers, providing both urban and regionalpassenger services. Excluding the SNCFT, the sector employes about 15,000people Y Until now, the only private providers of transport services havebeen in the non-scheduled (hereafter called paratransit) category, where about10,600 taxis and voitures de louage (VDL) add another 15,000 to sectoremployment.W VDLs are authorized to operate fixed-route interurban services,but also provide regional transport in hinterlands of larger cities like Tunisand Sousse.

Throughout their existence, public enterprises working in urbanand regional Lransport (PTEs) have had difficulties in both service andfinancial dimensions of their operations. These difficulties culminated in themid-1980s and can be traced to two major factors, each of wbich prevails invarying degrees. throughout many Tunisian PEs, whether in the industrial,commercial or service sectors. In public transport however, the impact ofthese factors is particularly severe. The first factor has been the pursuit ofa policy that social objectives should override normal commercial objectivesand practices of PTEs, applied without a clear definition of the "social*services required or sufficient public resources to compensate for theconsequences on enterprise revenues and costs. This approach has mainlyaffected the service and revenue dimensions of PT% operations, notably throughthe adoption of discount fares for the young nd other social groups, themaintenance of regular fares at levels well below that needed to cover totaloperating costs, and the practice of developing route networks withoutrelation to commercial objectives. On the production (cost) side, social

1J/ The SNT has about 4,900 staff, the SMLT has 990, and provincial companieshave 9400 (1987 data).

2/ Of 10,600 taxis and VDLs, the latter account for less than 3,000 vehicles.

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Page 2 of 6

objectives have led to the use of PTEs to absorb otherwise unemployed labor.

The second factor contributing to financial difficulties of PTEs has been avery favorable salary agreement, negotiated in 1983 by an unusually strongworkers' union, first for the SIT and then extended to cover all PTEs. The two

factors have combined to create a financially troubled PTE sector, fraughtwith internal inefficiencies and unable to deliver public services for which

PTEs had been created. On the paratransit side, administrative constraints on

service authorizations and import licences, coupled with a punitive taxstructure, led to an illegal market for transport permits, a low profit marginfor actual operators and an inadequate supply of services.

At the end of 1987, the accumulated deficit of the SNT alonereached about TD 28 million and that of provincial PTEs about TD 71 million.The short term debt of the SNT was TD 36 million (86X of total debt); another

TD 96 million was owed by provincial FTEs. It being clear that the availablepublic resources would not suffice to pay all the subsidies and finance badlyneeded renewal and expansion of fleets and facilities, the Government ofTunisia commenced activities to reform the sector. The strategy has been four-fold:

(i) Breaking up provincial PTEs, and setting up their freightdivisions as separate companies, with intent to deregulatefreight transport, attract private sector involvement asrapidly as possible, and otherwise minimize governmentintervention in it.

(ii) Financial restructuring of PTEs, to "wipe the slate clean'and provide positive net worth and working capital. Therestructuring plans mad. so far have primarily involvedwriting off debts owed to the State and consolidation ofother debts, an essentially static or bookkeeping approach,which has not addressed the intrinsic inconsistencies in PTEobjectives or efficiency issues.

(iii) Reforming the relationship between PTs, which remained inthe passenger-carrying business, and their technicaltuto.le. Ministry of Transport (KTR). This activity is justbeginning and involves a "dynamic", sustainablerestructuring through the development and signature ofperformance contracts, which would separate commercial fromsocial objectives of PTE's and specify appropriatecompensation for the latter, subject to specific operationaland managerial performance commitments. This approach isintended to permit PTEs to provide setvices demanded by thecommunity, while maintaining financial viability andefficient operations, on a sustained basis.

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Page 3 of 6

(tv) Stimulating the entry of private operators into the roadtransport sector, with twin objectives of private resourcemobilization and greater efficiency in providing services.For urban passenger transport, private operators areexpected to play a role complementary to PTEs, whereas forintercity transport, particularly freight, a completeprivatization is envisaged. Deregulation is also underwayfor paratransit modes, taxis and VDLs, accogvanied by fiscaland credit moves to stimulate sector development.

Actions concerning (i) above have been completed, while items (ii)and (iii) are being introduced on a phased basis, as overall dynamicrestructuring programs are prepared. Financial restructuring of the SNT hasbeen approved; a draft contract program has been prepared and is now goingthrough the process of refineoent and negotiation (see below). As for otherPTEs, restructuring plans have been made and approved in principle, but thenecessary legal action on debt conversion and consolidation remains to beconcluded. Draft performance contracts for the SELT and provincial PTs areunder preparation; it is expected that the financial restructuring will befinalized within the framework of negotiating these contracts.

With regards to item (iv) of the above strategy, theliberalization of the road transport market, some practical developments areaccompanying or even preceding the adoption of the necessary legal andregulatory instruments. Negotiations are underway to authorize two privatecompanies to comence passenger transport services in Greater Tunis, as acomplement to the SNT operations. This will involve some SO mid-size buses,operating on 12 lines in a first class (seat only) mod. Other recentlyannounced actions concern the paratransit mode: import and other taxes forVDLs and taxis will be substantially reduced, decreasing vehileo purchaseprices by about 45X; fleet renewal will be stimulated through easier access tocredit; a new, nine-seat, shared taxi service will be introduced in urbanareas; and the current six-seat limit for VDLs will be increased to nine.Also, market entry rules for passengr transport vill be simplified, aiming atexpansion of the supply and elimination of the secondary market in paratransitservice permits. The regulatory innovations will appear in dcrtsdn1aulican of the 1985 transport law, which have been in the making since

the law wv adopted, but are now in the final stage of development.

Soeidtd T rts (SNT)

The SNT's 4925 staff operate a fleet of 713 buses on a 2250-kenetwork of 154 urban and suburban lines in Greater Tunis, producing about 34.8million bus-km (2,690 million place-ki) per year. It is by far the mostimportant public transport operator in the region, carrying about 220 milliontrips a year (79Z of all trips made by conventional public transport and aboutSO of all motorized trips). One third of these trips are made by school

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Page 4 of 6

children and university students using lnexpensive monthly passes (TD 20 for a9-month period, translating into a 902 discount relative co average farepaid). Regular fares are controlled by the Government as a matter of socialpolicy concerning the purchasing power of the population. They changeinfrequently (twice since 1983) and without relation to trends in costs ofinputs; at present the average fare paid (excluding school passes) is about TD0.170 per boarding.

The SNT's patronage has been falling since 1981. when it carried236 million trips, largely because the fleet investments made during the VIthand VIIth plan period wvre insufficient even to renew the fleet at its 198:level of 730 buses. This is due to the SNT being financially dependent on theGovernment, which in the 1980s has not been willing to make substantialinvestments in this enterprise, while at the same time spending an estimatedTD 170 million on a competing, light-rail system, WHtro LAghr de Tunis. Since1980, the Government has contributed TD 27 million for school passcompensation and TD 35 million 'equilibri'wm subsidy to the SNT. The companycovers only 70S of its TD 38.7 million operating costs through ticket revenue,while the Governmsnt contributions account for another 21S. The remaining gapof 92 has been financed through a build-up of unpaid contributions to social tsecurity, arrears and short term debt to suppliers and banks. The failure toidentify and fully compensate for operating losses due to the social functionsof the SNT, combined with a lack of managerial freedom in personnel.purchasing and service planning matters, led to overstaffing and internalinefficiencies. Of its 713 buses in 1987, about 530 operated in peak periods.giving a peak to total utilization factor of 742; in preceding years, thisfactor fell as low as 671. Judged by an upper-limit standard of 8 staff perbus in peak circulation, at the present levels of fleet utilization, thecompany has 600-1,000 extra staff, while at the same time suffering from ashortage of skilled drivers and higher-level professionals. Soe extra staffare in the maintenance department, but most are in the administrativedepartment. The resulting higher costs of operation further aggravated thedeficit, which by the end of 1987 had accumulated to about TD 28 million(compared to total assets of TD 32.7 million); short-term debt of TD 35.8million represents 85.62 of total debt.

It is now proposed to restructure the SNT in two steps. The firstis a financial restructuring, the objectives of which are to recreate positivenet worth of the ST and provide sufficient working capital without recourseto short term lons. The Government has approved a restructuring planincluding a conversion of unpaid public debt of TD 23.3 million into equity,debt consolidation of TD 2.3 million, and a medium term loan of TD 9.6 millionto be financed through a public bond issue. The second step involves a packageof measures, to be undertaken by the Government and the SNT, which woulddiminish or remove structural causes of the latter's financial and technLcalproblems. A draft performance contract, which records a development scenariofor the SNT and specific commitments of both parties from 1989 to 1991, hasbeen prepared by the enterprise and is being considered by the hM.

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ANNEX XXVPage 5 of 6

Actig. agreed under the PMR

As a condition for loan effectiveness, a draft performancecontract, agreed between the SNT and the ZTR, will be submitted to the Bankfor review, prior to its approval by CAREPP. Its signature by the SNT and theKTR, after approval by CAREPP, and satisfactory progress on its implementationis a condition of second tranche release.

The main elements of the performance contract, to be satisfied bythe SNT, would be as follows:

(i) Develggment straeg. The SNT will prepare for aredefinition of its transport role in Greater Tunis, vis-a-viS HItro -JAgr de Tunis, the SNCFS and private operators,following the completion of an on-going modal coordinationstudy (expected in the fall 1989).

(ii) Fleet Investments. The SNT will limit its fleet investmentsto a level of 800 buses, as authorized under the VIlth Plan.

(iii) Reduction of services. The SNT will identify corridors andlines which should be offered to private operators.

(iv) Staffi.g For 1991, SNT will adopt a staffing target of 8.0per bus in peak operation, of which no more than 2.0 in non-opoerational departments. This norm would be revised downwardin subsequent performance contracts. With a fleet of 800buses, of which 640 in peak operation (assuming that fleetavailability and utilization targets cited below would bemet), the above target would require a net staff increase ofabout 200 from the current staff of 4925, over the threeyear period. In addition, this will require majorrestructuring of the work force, inclusive of retraining andretiring substantial segments of the existing staff. The SNTwill prepare a personnel action plan and the Government willpledge financial and other support with indemnity paymentsand retraining costs.

(v) ProductiviZE. The SNT will make a comitment to increase itsfleet availability and staff productivity, with 1991 targetsof 80X for the ratio of peak to total buses and 9,000revenue bus-km per staff per year, in addition to othereconomies identified in the draft performance contract.

(vi) Cost accountina. The SNT will upgrade its cost accountingsystem to permit the estimation of costs and revenues on aroute-by-route basis.

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Page 6 of 6

(vii) Travel at reduce fares. The SNT will develop a method toestimate the amount of travel by beneficiaries of reducedfaros, school children, students, civil servants and others.

The major elements of the performance contract, to be satisfied bythe Government, are as follows:

(i) Unit commensation. The Ministry of Transport will agree withthe SNT on average compensation for travel at reduced faresand compensation for other services which the Government maydemand of the company.

(ii) Comgensation pavmenta. The Government will make a commitmenton an appropriate schedule for paying componsation referredto above.

(iii) Cost recovery througb fares. In deciding on the SNT'snominal fares (as opposed to various *social* fares),economic pricing principles will remain subjugated to socialand political considerations, but the current proportion oftotal operating costs recovered through fares will not beallowed to deteriorate in real terms. Costs of major inputs#(fuel, vehicles, spare parts, labor) will be monitored andthe Government and the SNT will hold annual fare reviews,following which the fares will be adjusted.

(iv) Subsidis. To compensate for the constraint on the SNT'snominal fares, the Government will make a commitment tocover the difference between operating costs and revenues ofthe SNT through capital and/or operating subsidies, subjectto the success of the enterprise in fulfilling service andproductivity commLtments recorded in the performancecontract.

- 100 -ANNEX XXf

PUBLIC ENTERPRISE REFORM LOANSuWo1ementarv Prohe2t Data Sheet

Section I: Timetable of Key Events

(a) Time taken to prepere project: about 18 mouths

(b) Respons bility for project preparation: Government/Bank

(c) Project first identified by Bank: February 1988

(d) Bank appraisal mission: February 1989

(e) Negotiations: May 1989

(f) Planned date of effectiveness: January 1990

Section II: Special Bank Implementation Actions

None

Section III: Special Conditions

(a) Conditions of Effectiveness (US$ 70 million)

(see paragraph 891

(b) Conditions of Second Tranche Release (USS 60 million)

(see paragraph 891

- 101 - Al.EX XXVII

TUNISLIPUBLIC ENTERPRISE REFORM LOAN.

Disbursement Schedule

BankFiscal Year Quarter Cumulative

…--(US$ million)-------

FY90

_0.0 20.020.0 40.0

FY91 15.0 55.015.0 70.030.0 100.030.0 130.0

Signing : September 30, 1989Effectiveness (latest) : January 31, 1990

Completion : June 30, 1991Closing Date : December 31, 1991