FOR OFFICIAL USE ONLY. Report No. 1734b-TUN Tunisia: Appraisal of an. November 29, Document of the World Bank. Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized Report No. 1734b-TUN Tunisia: Appraisal of an Industrial Finance Project consisting of a Loan to Banque de Developpement Economique de Tunisie and a Loan to the Government for Smail Scale Enterprises November 29, 1977 Industrial Development and Finance Division Europe, Middle East and North Africa Region FOR OFFICIAL USE ONLY 4I Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 Rate of Exchange of the Tuniian Dinat (D) $ 2.32 _D 1.00 DO.43 $1.00 ABBREVIATIONS AFI - Agence Fonciere Industrielle (Industrial Estates Agency) API - Agence de Promotion des Investissements (Investment Promotion Agency) BDET - Banque de Developpement Economique de Tunisie CNEI - Centre National des Etudes Industrielles COFIT - FOPRODI - Compagnie Financiare et Touristique Fonds de Promotion et de Decentralisation Industrielle (Industrial Promotion and Decentralization Fund) KIC - Kuwait Investment Company PMM, 4 - Peat. Marwick, Mitch,l1, ana Co. (auditors). UTICA - Union Tunisienne de l'industrie, du Commerce, a et de l'artisanat

3 FOR OFFICIAL USE ONLY APPRAISAL OF AN INDUSTRIAL F'INANCE PROJECT CONSISTING OF A LOAN TO BANQUE DE DEVELOE'PEMENT ECONOMIQUE DE TUNISIE AND A LOAN TO THE GOVERNMENT FOR SMALL SCALE ENTERPRISES TUNISIA TABLE OF CONTENTS BASIC DATA Page No. SUMMARY... i - iv I. INTRODUCTION... 1 II. THE ENVIRONMENT... I A. Manufacturing Sector... I B. Small Scale Enterprises (SSEs) C. Financial Sector... 6 III. BDET'S INSTITUTIONAL DEVELOPMENT A. Ownership, Board and Committees B. Management and Organization... 8 C. Statutes and Policies... 8 D. Procedures IV. BDET'S OPERATIONS A. Characteristics B. Economic Impact V. BDET'S FINANCIAL SITUATION A. Resource Position B. Auditors' Reports on BDET C. Quality of BDET's Portfolio D. Financial Performance and Position VI. BDET'S PROJECTED OPERATIONS AND FINANCIAL SITUATION.. 17 A. Projected Operations B. Resource Mobilization C. Financial Projections This report was prepared on the basis of the findings of an appraisal mission of June 1977 composed of Messrs. Franco Batzella, Fernan Ibanez and Bernard Snoy, and a preappraisal mission of March 1977, composed of the same team and accompanied by Mr. Bernard Decaux (Consultant). This document has a mtricted distribution and may be usd by recipients only in the performance of their omcial dutia. Its contents may not otherwise be disclosd without World Bank authorization.

4 TABLE OF CONTENTS (Continued) Page No. VII. STRUCTURE OF THE PROJECT; OBJECTIVES AND FEATURES OF THE PROPOSED LOAN A. Loan to BDET B. Small Scale Enterprises (SSE) Component VIII. RECOMMENDATIONS ANNEX 1 Table 1.1 Volume of Main Industrial Products, Table 1.2 Value of Main Industrial Products, Table 1.3 Industrial Production Index Table 1.4 Investment Projects in Manufacturing Industries Approved by the Agency for Promotion of Investments 1973-June Table 1.5 Medium-Term Lending Rates of Commercial Banks ANNEX 2 The Small Scale Industry Sector in Tunisia I. Characteristics II. Small Industry Constraints and Problems III. Administrative and Policy Framework Table 1 Distribution of Manufacturing Enterprises by Size, 1969 and 1973 Table 2 Distribution of Non-Agricultural Enterprises by Size, 1976 Table 3 Structure of Industrial Sector by Number of Firms (1973) Table 4 Mfanufacturing Activities. Number of Establishments by Size of Employment in 1973 Table 5 Regional Distribution of lndustrial Activities, 1973 Table 6 Industrial Sector - Total Employment Table 7 Investment and Employment in FOPRODI Projects ( ) ANNEX 3 BDET - Ownership Structure as of December 31, 1976 ANNEX 4 BDET - ANNEX 5 BDET - Board of Directors and Executive Committee Organization Chart ANNEX 6 BDET - Summary of Operations ANNEX 7 BDET - Analysis of Approved Operations ANNEX 8 BDET - Distribution of Approved New Project Operations by Size of Project ANNEX 9 BDET - Resource Position as of December 31, 1976 Page 1: Overall Situation Page 2: Status and Conditions of Long-Term Domestic Borrowings Page 3: Status and Conditions of Long-Term Foreign Borrowings

5 TABLE OF CONTENTS (Continued) AIINEX 10 BDET - Summary of Audit Results for 1974, 1975 and 1976 Accounts ANNEX 11 BDET - Outstanding Loan and Equity Investments as of December 31, 1976 ANNEX 12 BDET - Loan Portfolio Analysis: Arrears in Principal and Interests over Three Months ANNEX 13 BDET - Analysis of Loan Portfolio as of December 31, 1976 Loans for which the Auditors Have Recommended the Constitution of Provisions ANNEX 14 BDET - Audited Income Statements, ANNEX L5 BDET - Audited Sheets, ANNEX 16 BDET - Performance Indicators ANNEX 17 BDET - Assumptions Underlying Projected Operations ANNEX 18 BDET - Projected Operations, ]979 ANNEX 19 BDET - Projected Resource Needs, ANNEX 20 BDET - Projected Income Statements, A4NEX 21 BDET - Projected Cash Plow, ANNEX 22 BDET - Projected Balance Sheets, ANNEX 23 BDET - Industrial Sector Supporting Institutions 1. Thd Investment Promotion Agency (API) 2. Industrial Land Agency (AFI) 3. The Office of Vocational Training, Migration and Employment (OTTEEFP) 4. The National Center for Industrial Studies (CNEI) 5. Union Tunisienne de l'industrie, du Commerce et de l'artisanat (UTICA) ANNEX 24 Fonds de Promotion et de Decentralisation Industrielle (FOPRODI) ANNEX 25 Technical Assistance System for Small Scale Enterprises ANNEX 26 Schedule of Disbursements

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7 TUNISIA BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE (BDET) Basic Data Currency equivalents US Dollar = Dinar Dinar US $ US Dollar = Dinar Dinar US $ US Dollar = Dinar Dinar US $ Year of establishment: 1959 Year of reorganization: 1965 Number of professional Staff : 64 Ownership (as of December 31, 1976) Dinars Percent Tunisian public and semi-public institutions 1,770, Tunisian private banks 514, / Tunisian individuals 1,175, Total Tunisian 3,461, Foreign financial institutions 1,916,640 31,94 IFC 600, Foreign individuals 22, Total 6,000, / Including bearer shares.

8 Key financial indicators (at year end) Total assets (Dinar thousands) 45,587 56,970 74,381 Share capital (Dinar thousands) 4,500 6,000 6,000 Total equity (Dinar thousands) 6,709 8,411 8,204 1/ Total loan portfolio (Dinar thousands) 31,464 43,627 53,619 Total equity portfolio (Dinar thousands) 3,924 4,603 6,576 Debt/equity ratio (a) Original IBERD definition (b) New IBRD definition 2/ Administrative expenses (Dinar thousands) Net profit (Dinar thousands) Net profit/average equity (in %) Dividends (Dinar thousands) Operations (Dinar thousands) Approvals Commitments Foreign currency loans 24,673 17,026) 27,237 Dinar loans 9,343 3,614) Equity participations 2,675 1,724 2,981 Total 36,691 22,364 30,308 Foreign currency loans 10,733 13,414) 19,238 Dinar loans 5,000 3,919) Equity participations 1, ,384 Total 17,227 18,246 21,622 Disbursements Foreign currency loans 8,960 10,767) 14,203 Dinar loans 4,000 4,000) Equity participations 1, ,061 Total 14,145 15,712 16,264 1/ Includes profits net of prepaid taxes 2/ The new definition excludes the Government advances towards a capital subscription of Dinar 4 million. EMENA/IDF

9 Basic Data on Bank Group Loans and Investments A. Status of Bank Loans (US $ thousands) as of December 31, 1976 Date of Rate of Amorti- Amount of effectiveness interest zation Loan net of Commitments Disburse- Outstanding cancellation ments 449-TUN 7/11/ % ,722 4,722 4, TUN 4/6/68 6, % ,292 9,292 9,292 2, TUN 3/31/70 7% ,297 9,297 9,297 4, TUN 4/13/ % ,000 9, , TUN 5/24/ % ,000 13,958 13,240 10, TUN 6/7/ % ,000 11,047 2,116 2,116 B. Status of IFC Investments Equity (US $) No. 106 TUN Approved 5/10/66 632,305 No. 177 TUN Approved 6/2/70 575,926 Total commitments 1,208,231 Total disbursements 1,208,231 Held by IFC at December 21, ,208,231

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11 SUMMARY i. The project appraised in this report comprises (i) a $30 million dfc-type loan to Banque de Developpement Economique de Tunisie (BDET) including $2 million'reserved for financing expansions of existing Small Scale Enterprises (SSEs); and (ii) a $5 million line of -redit to the government for newly created SSEs. The SSE component is a pilot scheme -- therefore somewhat risky. It will be centered around BDET, but part of the funds will be channelled by the government to SSEs through the branch network of commercial banks. Technical assistance to SSEs will also be organized in the framework of the project. ii. Since the early 70's, the development of Tunisia's manufacturing industry is gradually changing its orientation from import substitution towards export-oriented activities. The Fifth Plan ( ) foresees, for the manufacturing sector, investments of D 950 million, with priority given to investment decentralization; an increase int value added at 11.7% p.a. in real terms; the doubling of manufacturing exports; and the creation of 90,000 jobs. Most employment creation would be in the private sector; this requires encouragements to new entrepreneurship, in medium and small scale industries (paras ). iii. There are an estimated 80,000 SSEs in Tunisia, of which 18,000 in the manufacturing sector, but information on SSEs is scanty. SSE deve opment has been at a disadvantage in the past, because the development strate v of Tunisia gave priority to large and medium enterprises. The government; s;titude has now changed, as SSEs are seen as potential contributors to solve '-- country's unemployment problems. In 1975 the government set up a budgetfinanced fund (FOPRODI) intended to provide financial assistance to the establishment of new SSEs. An extension service catering to SSEs will be organized by API (Agence de Promotion des Investissements) and will coordinate other forms of assistance available to SSEs (paras ). iv. The Tunisian financial system is tightly regulated by the authorities. BDET plays a key role in financing the industrial sector; commercial banks are also induced to finance industrial projects with medium term loans (up to 7 years). Interest rates were maintailned at a low level during the Fourth Plan, which hampered the development of medium and long term credit instruments. Following discussions with the Bank, IFC and the IMF, the Central Bank made a study of interest rates which led to their overall increase by up to 1-3/8 points. Medium-term rates for rediscountable loans to industry range now between 8 and 8-1/4%. The rate payable on new BDET long-term loans to resident industrial borrowers will also increase from 8% to 9% as of January 1, 1978 following the Government decision to abolish its 1% rebate on such loans. Further liberalization of credit, and measures to vitalize the capital market are subjects of the ongoing dialogue between the authorities and the Bank (paras ). v. BDET carried out a reorganization in 1976, which resulted in considerable improvement of the effectiveness of its management. BDET's house

12 - ii - has been put in order in the areas of financial management and quality of portfolio. Procedures are satisfactory, though improvements are needed as regards appraisals and, especially, supervision. Recognizing the progress made, the Bank agreed, in 1976, to a relaxation of some of the provisions in BDET's policy statement (Chapter III). vi. BDET's approvals declined in 1975, largely because of a resource squeeze, and of the increased competition of commercial banks since the authorities extended the limit of commercial bank's medium term credit from 5 to 7 years. Approvals picked up again in 1976 (D 30 million) with more new (versus expansion) projects, and with an increase in the average size and duration of loans. Tourism financing was reduced to 25% of total, as agreed with the Bank. Slightly less than one half of BDET's operations are in the Tunis metropolitan area (paras ). vii. BDET contributes about 30% of total term lending to the industrial and tourism sector. In the period BDET-financed projects generated on average about 9,000 new jobs per year, at an average investment cost per job of about D 9,000. Export projects were only 4% of BDET's 1976 approvals while projects of new entrepreneurs were 13%. The financial and economic returns of BDET's projects are generally satisfactory (better than 15%). BDET's activity in the capital market declined in importance in the past two years (paras ). viii. Total available term resources almost doubled between 1974 and 1976; the Bank's share in BDET's resources declined from 37% to 25%. BDET has been successful in mobilizing new resources, especially in the Arab world. In 1976 BDET borrowed for the first time in the free, international market. The bond issue, of 7 million Kuwaiti dinars, was subscribed by the Kuwaiti Investment Company (KIC). Due to the thinness of the Tunisian domestic bond market, BDET's principal source of domestic financial resources are the Government and the Central Bank (paras ). ix. BDET's auditors issued a clean opinion on the 1975 and 1976 accounts, with two minor reservations. Provisions have been brought to a satisfactory level, and the arrears situation has improved and is now brought under control. Reschedulings, however, have been high in 1976 (17% of loan portfolio) largely as a result of delays in the implementation of recently approved projects. Good progress has been made in validating mortgages of hotel borrowers, in line with the timetable agreed with the Bank. The yield of BDET's equity investments declined to less than 4% in 1976 (paras ). x. BDET's profitability remained adequate and permitted an increase in dividends from 6% to 7% in Capital structure is satisfactory. The Bank agreed, in 1976, to an increase of the debt/equity ratio limit from 5:1 to 7:1. but excluding subordinated loans from the equity base (paras ). xi. BDET's yearly approvals are expected to increase gradually to D 40 million ($100 million) by 1981, providing about 30% of total term financing for industrial projects. In line with the Plan's guidelines BDET will give

13 - iii - priority to (a) labor intensive projects; (b) export-oriented projects; (c) projects outside Tunis; (d) projects of new entrepreneurs; and (e) SSE projects. Bank funds will be reserved essentially for the financing of the above priority categories (paras ). xii. To finance its operation programs BDET will have to mobilize D 143 million during the Fifth Plan ( ), of which D 56 million ($130 million) in the two years Only D 21 million are already identified. The proposed Bank loan and local bond issues will only partly fill the resource gap. BDET will have to borrow up to D 20 million in the international markets before the end of 1979 (paras ). xiii. BDET profitability would decline in the next few years, due to the effects of the Government-imposed low interest rates policy of the recent past, coupled with the rising cost of resources. BDET's current nominal lending rate of 9% (which together with other financial charges and taking into account the collection of interest six months in advance corresponds to an effective lending rates of about 9.65%) will not be sufficient for BDET to maintain an adequate profitability. Yet, except in the case of tourism projects for which BDET has agreed to increase its lending rate to 9.5%, the rate cannot be further increased for fear of jeopardizing BDET's competitive position with respect to commercial banks which extend rediscountable medium-term loans to industry at an average rate of 8 to 8-1/4%. Agreement was reached during negotiations on a system of Government rebates on the cost of BDET's foreign exchange resources obtained at non-concessionary terms, calculated in such a way as to ensure, on an ex-ante basis, an adequate spread on BDET's operations. This will also permit BDET to aclequately remunerate its capital, which will increase from D 6 million to D 10 million between 1978 and The Government's share in BDET's capital might increase somewhat from the current 12% following the capital increase. The debt/equity ratio will be maintained within 8:1 excluding subordinated loans from equity (paras ). xiv. The main objectives of the proposed loan to BDET are: (a) helping BDET finance priority projects in accordance with the Plan's strategies; this includes the leading role BDET is expected to play in the proposed scheme of assistance to SSEs; and (b) helping BDET establish itself as a viable borrower in the international financial markets: Bank resources are expected to decline to 17% of BDET's indebtedness by The loan would be repayable in 13 years on a level principal payments basis (paras ). xv. The $7 million SSE component of the proposed loan will finance both newly established SSEs costing less than D 200,000 at 1976 prices and expansions of existing SSEs with fixed assets of less than D 100,000 at 1976 prices. $5 million will be lent to the Government for onlending to new SSEs through the existing FOPRODI scheme. BDET will participate in the scheme and will administer Bank selection and disbursement procedures. FOPRODI does not finance expansion projects, so $2 million of the SSE component will be lent

14 - iv - directly to BDET for onlending to eligible SSE expansion projects. SSE loans will have terms of 7-11 years, and carry on 8 to 8-1/4% interest rates. The banks administering FOPRODI will be encouraged to participate with their own resources in the financing of SSE projects, as Bank funds will not cover over 50% of total investment costs (paras ). xvi. In parallel with the Bank-financed scheme of financial assistance to SSEs, the Government agreed to set up a system of technical assistance for SSEs, based on the existing structure of API which is already in charge of determining, on behalf of the Government, projects' eligibility for FOPRODI assistance. The technical assistance scheme when completed will consist of about 20 specialists of whom 16 in API's regional branches. They will coordinate all forms of technical assistance which other agencies will be able to offer SSEs. API will be assisted, for the initial two years of this experience, by foreign experts, whose cost will be financed by a bilateral or multilateral aid agency (paras ). xvii. The project is suitable for Bank finance, in view of the conditions agreed with the Government and BDET, as regards, on the one hand, BDET's operations and its use of the Bank's funds, and, on the other hand, the setting up of a system of financial and technical assistance to SSEs (Chapter VIII).

15 I. INTRODUCTION 1.01 This report appraises a project consisting of (i) a dfc-type loan of $30 million to Banque de Developpement Economique de Tunisie (BDET) including $2 million to be earmarked for financing exp.sions of existing small scale enterprises (SSEs); and (ii) a line of credit of $5 million to the Government to provide financial and technical assistance to newly created SSEs in Tunisia BDET provides term loan financing as well as equity investments to industry and tourism; it has received so far six Bank loans for a total of $69 million. IFC holds 10% of BDET's share capital. The previous Bank loan was made in early 1976, and is now fully committed. The appraisal report (No TUN) for that loan, which this report updates, was distributed to the Executive Directors on December 19, BDET has made considerable progress since it was last appraised. A seventh loan to BDET would have three principal objectives: (i) to help finance the foreign exchan,ge component of high priority industrial projects; (ii) to help BDET establish itself as a viable borrower in international financial markets; and (iii) to serve as a vehicle for the Bank to start financing SSEs in Tunisia The SSE component of the proposed project is of an experimental nature and contains an element of risk because the Bank has never before financed SSEs in Tunisia and there are no estab'lished structures in the -ountry specifically geared to assisting SSEs. The proposed scheme will be cer.-ered around BDET; however, since BDET has no decentralized outlets, part of tu, funds destined to SSEs will be lent to the Government for channelling to SSEL through the regional branch network of four commercial banks. Financial assistance to SSEs will be complemented by the creation by the Tunisian government of a system of technical assistance services to SSEs. No such system exists now in Tunisia, and its creation will require the assistance of expatriate experts to be financed by multilateral or bilateral aid agencies. The objectives of the SSE component of the proposed project include: ti) an institution building goal, consisting of helping the Government devise the creation of necessary structures for fostering the development of SSEs; and (ii) preparation of a more comprehensive Bank-financed follow-up project. II. THE ENVIRONMENT 1/ A. Manufacturing Sector 2.01 During the early 1970's, while the bulk of manufacturing investment was still concentrated in industries catering to the local market, a strong effort was made to promote export-oriented manufacturing industries, and 1/ A report entitled "Economic Position and Prospects of Tunisia; Review of the Fifth Development Plan (1539-TU), was issued on May 2, 1977; it reviews the results of the Fourth Plan ( ) and assesses prospects for the Fifth Plan.

16 -2- to prevent the expansion of import-substitution activities beyond their limits of efficiency. Simultaneously, the public sector's role as entrepreneur was de-emphasized and a generous incentive system was created to promote private investment By 1976, at the end of the Fourth Plan ( ) the manufacturing sector accounted for 11.2% of GDP compared with 8% in A break-down by branches shows a predominance of food processing (33%), textiles and leather (25%) and, mechanical and electrical industries (13.6%). About 70% of all manufacturing production was generated in the North East, of which 59% in Tunis alone. Employment in the manufacturing sector, including the informal sector, amounted to 270,000 jobs, or 14.2% of Tunisia's labor force in Overall, industry has performed well during the Fourth Plan (Annex 1). The investment target was exceeded in real terms by 20%, with most of the increase taking place in the private sector. Employment creation also exceeded the target by creating 61,000 new jobs, or 50% more than expected. Value added in real terms increased at 6.5% p.a. Good overall results have been fostered by (i) the system of investment incentives (mainly tax exemptions) granted by the Investment Code modified in 1974 and by the 1972 export promotion law; and (ii) by the establishment of new institutions to assist industry such as API 1/, responsible for the administration of the investment laws, and AFI 2/ responsible for acquiring and developing industrial land (Annex 23) The Fifth Plan ( ) objectives for the manufacturing sector aim essentially at the continuation of the policies of the Fourth Plan, with the following emphasis: (i) a growth in value added in real terms at 11.7% p.a., with non-agricultural industries growing at 15.9% p.a.; (ii) total investment of D 950 million, at current prices, equivalent to 23% of total planned investment; (iii) increase of manufacturing exports from D 151 million in 1976 to D 327 million in 1981; and (iv) creation of 90,000 new jobs, or 43% of all non-agricultural employment to be created during the Plan period. The public sector will continue to play a leading role in implementing strategic projects of a capital-intensive, high-technology nature and will be reponsible for implementing over 50% of the proposed investment program. The financial 1/ One of the primary functions of API (Agence de Promotion des Investissements) is to assist prospective investors both at home and abroad by diffusing information and expediting procedures in determining eligibility of new investments for government incentives. Between 1973 and mid-1976, API approved 3,494 new projects with a total investment of D 657 million and an employment generation potential of 123,000 new jobs. 2/ AFI (Agence Fonciere Industrielle) was also created in The nature of its work has made AFI's take-off look less impressive than API. However, the initial efforts devoted to land acquisition, locational analysis, and initiation of civil works, will have an impact on industrial expansion during the Fifth Plan.

17 -3- performance of government-owned enterprises has been weak in the past, requiring frequent budgetary transfers, largely because of low initial capitalization and unrealistic pricing policies. This is now changing, as the Government has adopted the policy of granting public sector enterprises greater autonomy while requiring that they become self-supporting. Private investment is expected to be predominant in export-oriented manufactures, such as electrical and mechanical goods assembly, garments, leather products, and textile manufacture (Annex 1, Table 1.4). An important role is also assigned to small scale industries in providing employment and in improving income distribution Performance of Tunisian industry during the first half of the 70s supports the feasibility of Plan's targets. Their actual achievement will require however, that project identification, preparation and execution capabilities (eg. API) be further strengthened. At present, only about 70% of the expected manufacturing investment for is properly identified and over D 300 million are still unidentified. The bulk (67%) of identified manufacturing investment for the Fifth Plan is in relatively capital-intensive public sector projects (petrochemicals, basic chemicals, and cement) with an average cost per job of about $30,000. In order to reach the target of 90,000 new jobs in manufacturing, nearly 40,000 jobs will have to be created through currently unidentified projects at an average cost per job of less than $18,000; this would require intensified support of small and medium enterprises in the light manufacturing subsectors. B. Small-Scale Enterprises (SSEs) 1/ 2.06 Tunisians have a long tradition of craftsmanship and business capabilities and the number of small non-agricultural enterprises, defined as those employing less than 50 workers, is estimated to be close to 80,000 (18,000 of them in manufacture). Yet Tunisia's administrative, fiscal and financial system have not favored the development of SSEs in the past. Tunisia's industrial development strategy in the last two decades has given priority to large scale public enterprises and, more recently, to modern medium-size privately owned enterprises benefiting from generous incentives and institutional support. This process has not favored SSE development, because (a) investment incentives were linked to criteria into which SSEs do not fit, such as the absolute size of employment creation and value of exports 2/; (b) SSEs had limited access to the banks' financing; and (c) the authorities provided no assistance geared to the needs of SSEs SSEs have not been comprehensively studied in Tunisia. According to the 1973 industrial census (which excluded all firms employing less than 5 1/ See also Annex 2 for a more detailed description of the SSE sector. 2/ Although a change of the investment laws is not foreseen in the immediate future, ways to eliminate the implicite bias against SSEs are being studied by the government. This aspect will require further discussions during preparation of the proposed follow-up SSE project.

18 - 4 - people) small industrial firms employing between 5 and 50 workers accouinted for 21.4% of industrial employment, for 77% of industrial establishments, but for only 15% of the manufacturing sales (see Annex 2, Tables 1 and 5, for distribution of SSEs by size and region). In 1976, a complete inventory of all non-agricultural enterprises in major cities was started. The survey identified in Sousse, Sfax and Gabes alone 5,023 manufacturing firms with 1 to 10 employees. Such figures, compared with the census figure of 281 firms for the entire country, show the importance of SSE activities not covered by the census. 1/ 2.08 The SSE sector is mainly oriented toward the production of household goods for local markets. Three groups accounted, in 1973, for 63% of production: food and beverages (36%), metal products (15%) and textiles (12%). Small firms were also important in furniture and building materials. Information is not available regarding fixed assets in SSE manufacturing in Tunisia FOPRODI Scheme. A change in the Government's previous attitude of benign neglect was marked by the creation, in 1974, of the FOPRODI (Fonds de promotion et de decentralisation industrielle), a budget-financed fund intended to encourage the sponsors of small industrial projects, especially those outside Tunis. Under the FOPRODI scheme (Annex 24), eligible entrepreneurs 2/ obtain subsidized personal loans to supplement their venture capital and to help them acquire a majority ownership in the equity of the new enterprises; the smaller projects (total cost under D 30,000 3/) are also eligible for subsidized long-term credits to the SSE itself, as opposed to the entrepreneur. Eligibility for FOPRODI assistance is determined by API. FOPRODI itself is not an institution; it is administered through participating commercial banks,9 which are expected to contribute their own resources in term-loan financing, necessary to complete the financial plan for FOPRODI projects. Since it became operative (in December 1975) until May 1977, FOPRODI has financed 81 projects, with total investments of D 7,093,148 and creating of 2,553 new jobs (Annex 2) Other steps are being taken now towards an integrated program in support of SSEs. Of particular relevance are the creation of an SSE policy making unit in the Ministry of the Economy, and the decision to set up a countrywide system of technical assistance to SSE which will be built around the API network of regional branches and will combine efforts with AFI, CNEI (Centre National d'etudes Industrielles--Annex 23) and local governments. 1/ Preliminary data on employment for the Sousse province alone show 3,018 people employed in this sub-group in The census shows a total of 1,643 for the country as a whole in / Tunisian citizens with technical qualifications willing to devote themselves full-time to the new enterprise and sponsoring a project costing less than D 200,000 (this limit has been revised upwards to D 500,000 in October 1977). 3/ This limit has been revised upwards to D 75,000 in October 1977.

19 SSE Constraints and Problems. Excessive import protection and indiscriminate import substitution during the 60's favored the subsistence of traditional SSEs by conserving inefficient structures and reducing competition. The negative effects of such policies became more apparent when the gradual opening up of the economy, in the early 70's, caught SSEs out of step in the transition towards modern and efficient production units. Major problems adversely affecting their productivity and constraining their growth, are not different from those observed in other countries at similar stages of developments. They include: outdated machinery, deficient production planning and accounting-management, lack of quality control, poor plant layout and product design, poor working facilities. In marketing their products, SSEs cannot cope with market fluctuations due to acute shortages of raw materials (subject to import licensing) and to limited access to institutional finance. A characteristic of Tunisian SSEs is the regional concentration of some small industries, like weaving in Monastir, carpet making in Kairouan, metal fabricating in Sousse and Sfax. Such regional specialization favors integration with large, modern plants and upgrading of productivity through subcontracting Strategy for SSE Development. A strategy to develop SSEs should aim simultaneously at employment creation and at :improving productivity. Unemployment has been singled out by the government and the Bank as the most important problem facing the Tunisian economy. 1/ SSE development can make a substantive contribution to gainful employment generation if the productivity and competitiveness of the small shops now working on a stop-go basis is effectively increased. This is possible through upgrading operating techniques and replacing equipment. 2/ SSE viability and self sustained growth can be attained by focussing their potential on activities with insignificant economies of scale, catering to specialized or low-priced market niches, or complementary to production processes of large firms The transition from traditional small shops into small but efficient units requires some support by the Government, through various forms of technical and financial assistance aiming at putting SSEs on an equal footing with the larger firms. In the Tunisian environment, this may eventually require the establishment of a specialized agency, where all forms of public assistance to SSE development would be centralized. The Government is not yet prepared to take this step, and prefers, at this stage, to put the emphasis on reinforcing, and better coordinating among themselves, ongoing initiatives toward assisting SSEs. API, which is responsible for selection of projects eligible for FOPRODI assistance, and which already disposes of a decentralized network of regional branches, appears to be the most suitable agency to coordinate ongoing efforts of assistance to SSEs, and to establish, within its organization, an extension service catering to SSEs. 1/ In the non-agricultural sector, unemployment in 1976 amounted to 22% of the registered labor force (Tunisia-Special Economic Report, 1977). 2/ Modernization does not imply, in this context, over-mechanization and labor displacement. Appropriately chosen equipment and technologies can upgrade quality, improve competitiveness, expand operations and, eventually, generate (or maintain) permanent employment.

20 -6- C. Financial Sector 2.14 Tunisia's financial community is composed of 10 commercial banks, two development finance companies (BDET, which finances industry and tourism, and COFIT, which finances exclusively tourism), another small investment bank, two savings institutions and several insurance companies. Off-shore banks are being set up in Tunisia following a 1976 law which permits their establishment but limits their activity to foreign currency financing. The authorities use an array of monetary policy instruments, including the administrative determination of interest rates, reserve ratios related to banks' liabilities, and variable reserve requirements; however, the Central Bank has relied primarily on prior approval of large credits granted by commercial banks, and on rediscount ceilings, to implement its credit policies While the large industrial development projects in Tunisia, generally sponsored by public sector enterprises, are financed by the government or through direct foreign borrowings, the authorities rely on the banking system for the financing of the medium and small scale industrial development projects. BDET plays a central role in this respect (30% of total term credit extended to the industrial sector was held by BDET as of end 1976) 1/ and for this reason the authorities channel toward BDET concessionary foreign exchange loans as well as long-term local currency resources. Commercial banks are encouraged to participate in the development financing effort by the requirement that 18% of their deposits be placed in medium-term private loans, and by the availability of rediscounting facilities for refinancing further commercial bank lending to the private sector. Term credit represented 36% of total commercial banks' credit to the economy at end The overall level of interest rates has been kept low (Annex 1, Table 1.5) during the Fourth Plan period ( ) compared with the rate of inflation (4.1% in 1974, 9.6% in 1975 and 5.4% in 1976). Private savings (including those of public sector enterprises) averaged about 20% of GDP during the Fourth Plan, and financed about 60% of total investments. Low interest rates, however, have been partly responsible for insufficient mobilization of savings through medium and long-term financial instruments. The domestic capital market (especially the bond market) is extremely thin and remains a major weakness of Tunisia's financial system. Furthermore, on the the demand side, the ceilings on interest rates have deprived the banks of the incentive to take term risks, and resulted in a rationing and possible sub-optimal allocation of medium and long-term credit. Partly as a result of discussions with the Bank, IFC, and the IMF, the Government has become increasingly aware of these problems particularly in view of the resource mobilization effort needed to finance the investment targets of the Fifth Five-Year Plan ( ) In 1977, the Central Bank conducted a major study of the structure and level of interest rates of commercial banks. Following its conclusions, 1/ BDET also plays an important role in the financing of tourism investment. As of end-1976, BDET held 22% and COFIT 18% of total term credit extended to the tourism sector.

21 - 7 - the Central Bank raised its official rediscount rate from 5% to 5.75%, effective September 1, 1977, and deliberated that the commercial banks' deposit and lending rates be increased by up to 1-3/8 percentage points (Annex 1, Table 1.5). Medium-term lending rates for rediscountable loans to the industrial and tourism sectors (other than to resident export-oriented enterprises and to enterprises in the least developed regions) have been increased from a range of %, to a range of %.1/ The rate payable on new BDET long-term loans to resident industrial borrowers will also increase from 8% to 9%, as of January 1, 1978, following the Government decision to abolish its 1% rebate on such loans. These are steps in the right direction. The authorities intend to closely monitor the development of the domestic inflation rate (which is currently projected to be kept below 7% p.a. during the Fifth Plan period) as well as the level of lending rates in the international market, with a view to maintain domestic interest rates significantly positive in real terms, and to harmonize them with interest rates prevailing abroad In parallel with the Central Bank's study on interest rates, the Ministry of Finance has prepared a study on the domestic capital market; the study's conclusions recommend legislative measures to be taken in order to foster the development of the market. These include: the creation of new, more attractive types of securities (convertible bonds, investment fund shares, etc.); the revamping of laws and regulations affecting the bourse and the stock brokers (at present, only banks can operate as brokers in the Tunis bourse); encouragements to the banks to promote the placement of savings by the public in securities, and to be themselves more active in the market; a rationalization of tax and other incentives to both issuers and buyers of securities; and, finally, higher yields on bond issues. The implementation of these measures has not yet been decided. This, together with the still excessive rigidity of the Central Bank's control over credit and interest rates, and with the tightness of exchange controls (including the desirability of passing on the exchange risk to the ultimate borrowers of foreign exchange loans--see also para. 6.06) is the object of the ongoing dialogue between the Bank and the Tunisian authorities, on the reform of the financial system. III. BDET INSTITUTIONAL DEVELOPMENT A. Ownership Board and Committees 3.01 Since the last Bank loan appraisal, the ownership structure of BDET has remained substantially unchanged (Annex 3). The Tunisian public sector held at the end of % of BDET's capital and the Tunisian private sector 28.2%, the remainder being divided between IFC (10%) and other foreign 1/ The range of rates for rediscountable medium-term loans financing resident export-oriented enterprises and enterprises in the least developed regions was also narrowed from % to %.

22 - 8 - shareholders (32.3%). The decision to raise BDET's share capital from D 6 million to D 10 million (paragraph 6.11) might result in an increase of the share of the public sector as some of the other shareholders might decide not to exercise fully their subscription rights The composition of BDET's Board of Directors (Annex 4) reflects BDET's ownership structure. The Board delegates to the Executive Committee (composed of the Tunisian members of the Board) the authority to approve loans and investments of up to D 300,000. The Management Committee (BDET management and department heads), approves operations up to D 50,000. The Board meets quarterly, the Executive Committee once or twice a month, and the Management Committee as often as needed. B. Management and Organization 3.03 The Bank's concern in late 1974 that the departure of BDET's managing director might excessively weaken the institution's top management has not been confirmed by events. As agreed during negotiations for the sixth Bank loan, BDET has taken measures to improve management effectiveness. BDET's organization was radically restructured in 1976, in an effort to decentralize the decision-making function at the middle management level. Six new departments replace the three previously existing ones (Annex 5). Four departments are headed by young, capable and dynamic Tunisian professionals who have been promoted from the ranks. Experience with the new organization over the last fifteen months is definitely positive. Further improvements in procedures especially as regards bookkeeping, follow-up and internal audit are now being introduced on an experimental basis following the recommendations of a comprehensive organization study conducted for BDET by Peat, Marwick, Mitchell and Co. (PMM) and by Cabinet FINOR. The Bank is satisfied that PMM and FINOR's recommendations will allow BDET to cope more effectively with the increasing volume of business. C. Statutes and Policies 3.04 Except for the authorization to increase BDET's capital from D 6.0 million to D 10.0 milion, BDET's statutes are unchanged since the last Bank loan appraisal. BDET's Board adopted a few changes in BDET's Policy Statement including: (a) an increase, from 25% to 30% of BDET's total financing, of the limit to BDET's lending to public sector enterprises (which increasingly turn to BDET as a lender of last resort); (b) an increase in the limit to BDET's exposure to a single borrower, from 20% to 25% of BDET's equity; and (c) a new definition of BDET's debt/equity limit, which is now seven times BDET's equity (excluding subordinated government loans) compared to the previous limit of five times equity plus subordinated government loans considered as quasiequity. The Bank concurred with these changes in view of BDET's improved performance and strengthened financial situation (para 5.15).

23 In October 1975, BDET's Board approved a new amendment to BDET's Policies Statement specifying that BDET's activities in the tourism sector will remain of a secondary nature, and will not, in general, exceed one fourth of BDET's financing (see para 4.04); with the Bank's approval (para 5.15) BDET's management intends to submit shortly to its Board, for approval, another amendment increasing from 7:1 to 8:1 the ceiling for BDET's debt-equity ratio. BDET and the Government have also sought Bank agreement to increase to 40% of BDET's total lending the limit on BDET's exposure to the public sector. Prima facie, this request does not appear to be warranted (para 4.03). D. Procedures 3.06 Project Appraisal. BDET's appraisal work has further improved over the past two years and overall BDET's appraisal reports are generally comprehensive and sound. Further improvement can be achieved in (i) market studies, which should better assess competition; (ii) the assessment of a project's employment creation; and (iii) the evaluation of physical and financial contingencies. BDET has undertaken to strengthen its appraisal work in the above mentioned areas Project Supervision. Project supervision remains the weak link in BDET's organization, and progress in this area has fallen short of the expectations expressed in the last appraisal report. While about 100 of BDET's customers (currently numbering about 400) are deemed to be in need of close supervision, only 25 customers were visited by the supervision staff in 1975 and 40 in 1976 with only a few of them in their start up period. The work of the project supervision division is poorly coordinated with that of the operational units in charge of projects appraisal, promotion, equity participations and loan collection. BDET's management is aware of this problem and has agreed to submit to its Board and implement a comprehensive program of action for the supervision division. This program provides for (i) strengthening of the supervision division staff, which will be increased from 4 to 7 professionals, (ii) implementation of procedures and information flows which would improve the supervision division's integration within BDET following PMM and FINOR's recommendations (para 3.03); (iii) systematic planning of visits to customers in their start up period or having failed to submit satisfactory informations (para 5.05); (iv) strengthening of the quality of supervision reports and (v) submission to BDET's Board in the first half of 1979 of a synthetic report giving a feedback of supervision activities Promotion. Over the last two years, BDET's promotional efforts have shifted away from regional business solicitation, which was not deemed sufficiently profitable, towards the identification of large innovative industrial projects. BDET's promotional efforts have led to the implementation of three large projects in 1976, costing D 4.8 million in total, of which D 2.7 million financed by BDET: they are a velvet fabric manufacturing plant, a vegetable fat plant, and a conveyor belts plants. Several other industrial projects in different branches (including starch-glucose, chlorine, aluminum sections,

24 asbestos-cement pipes, luxury shoes for exports, car assembly, synthetic fibers etc.), are now being studied by BDET, which is also actively looking for potential Tunisian promoters and foreign technical or financial partners Procurement and Disbursement. BDET's procurement and disbursement procedures continue to be satisfactory. At the Bank's request, however, BDET has undertaken that projects appraisal reports would include in the future a more thorough coverage of procurement matters. IV. BDET'S OPERATIONS A. Characteristics 4.01 Annexes 6 and 7 contain a summary of BDET's operations over the last five years. The sharp increase in operations in 1974 reflect the boom in Tunisia's industrial sector, and contrast with a marked decline in applications and approvals in This decline resulted itself from the increased competition from commercial banks (due to a change in banking regulations extending from 5 to 7 years the maximum length of medium term credit) and BDET's resource constraints made particularly acute by the protracted negotiations of the sixth Bank loan, pending which other foreign lenders adopted a wait-and-see attitude. Operations picked up again substantially in 1976 with approvals amounting to D 30.3 million ($71.5 million equivalent) and commitments amounting to D 21.6 million ($50.9 million equivalent) The increase of BDET's approvals of new projects (75.5% in 1976 compared to 60.9% in 1975 and 39.3% in 1974) as opposed to expansion projects can be explained by the fact that commercial banks' cheaper credit at terms of up to 7 years is better suited to modernization and expansion projects than BDET's loans. This also explains why the proportion of foreign currency loans declined to 58.4% of total approvals in 1976 while that of dinar loans increased to 31.5% and that of equity investments to 10.1% (Annex 6), since new projects tend to involve higher local currency expenditures (mainly for construction) and higher needs for equity funds than expansion and modernization projects. Also it explains the longer maturity of BDET's loans: in 1976, over 50% of approved loans were for 10 years or more The proportion of BDET's new approvals in the public sector decreased from 25.1% in 1974 to 14.3% in 1975 and 11.7% in In terms of commitments however the share of the public sector was 21.0% in 1975 and 22.1% in In view of BDET's past record, and of an analysis of BDET's pipeline of projects under preparation, it appears unlikely that the present limit of 30% for BDET's public sector commitments will constitute a significant constraint The bulk of BDET's operations is now concentrated in the manufacturing sector. BDET's portfolio of industrial loans and equity investments is spread over a wide range of subsectors (Annex 7). It was agreed for the

25 sixth Bank loan that BDET would progressively reduce its excessive exposure in the tourism sector, which was about 41% of portfolio at the end of 1974, to 25% of total financing. This target was achieved by the end of For the future, BDET believes that it continues to have an important, though secondary, role to play in tourism, especially for co-financing projects which are too large for a single institution to assume the entire risk. BDET however foresees no need to exceed the agreed exposure limit of 25%. This view is reflected in an amendment to BDET's Policy Statement recently approved by BDET's Board Despite a substantial increase in the amounts approved, the number of approvals declined from 141 in 1975 to 124 in The resulting increase from D 158,600 to D 244,400 in the average size of BDET's operations reflects increases in project costs as well as a lesser emphasis on smaller projects especially those for expansion and modernization. In 1976, 84 projects involving BDET's financing of less than D 200,000 ac:counted for only 17.6% of the total amounts approved, as compared to 114 projects accounting for 34.7% of the total in Eight projects involved BDET's financing of D I million or more in 1976, and accounted for 42.1% of the total amounts approved, as compared to 3 projects accounting for 17.2% of the total in There has been a slight decrease in the proportion of approved operations for projects located in the Tunis area. In 1976 this area accounted for 48.1% of the amounts approved compared to 50.1% in Most of the rest however went to urban centers on the relatively developed coastal strip. BDET intends to launch a new promotion effort for its services outside of the Tunis area, with particular emphasis on the less developed regions of the interior (para. 6.02). B. Economic Impact 4.07 Contribution to Investment and Share in Term Lending. In the manufacturing sector, BDET's disbursements accounted for about 15% of total investment both in 1975 and BDET's share in total outstanding term lending to the industrial sector (including construction) remained also remarkably stable at about 30%. BDET has also maintained at approximately 22% its share in total term lending to the tourism sector. In percentage of the total investment cost of approved projects for all sectors, BDET's financial contribution reached a high point of 47% in 1975, due to the unusual concentration of industrial projects in that year, and went back to 37% in Employment Creation. Employment generation associated with BDET's financed projects decreased from the record level of about 12,000 in / to about 7,900 in 1975 and 6,500 in 1976 while the average investment cost per job after decreasing from about D 8,100 in 1974 to D 6,000 in 1975 went 1/ These numbers are based on BDET's appraisal reports.

26 up again in 1976 to over D 12,500 ($29,500 equivalent). These figures are influenced by the relative proportions of new vs. expansion projects, (and of industrial vs. tourism projects). Investment cost per job for new projects increased from about D 5,500 in 1974 to about D 9,000 in 1976 reflecting increases in the cost of imported capital goods and a certain decrease in the relative importance of smaller projects (Annex 8). BDET's financing of small projects with total costs of less than D 150,000 declined from 11.8% of total in 1974 to 8.4% in 1975 and only 3.8% in Yet these projects consistently involved on the average an investment cost per job of less than D 4,000. BDET's financing of large projects with investment costs exceeding D 1 million increased from 58.9% of the total in 1974 to 67.5% in 1976 while the average cost per job of such projects increased in the same period from about D 6,900 to D 17,200. During the Fifth Plan period, BDET is committing itself through a strategy statement approved recently by its Board (para 6.02) to a stronger promotion of labor intensive projects, with particular emphasis being given to projects with an investment cost per job not exceeding D 4,600 (US$10,670 equivalent) at 1976 prices Export-oriented Projects. In 1976 exclusively export-oriented projects accounted for only 4% of BDET's industrial sector financing. This low percentage reflects both the difficulties encountered by Tunisian resident enterprises (as opposed to non-resident enterprises benefiting from the marketing experience of foreign parent companies) in penetrating foreign markets. BDET strategy statement for the Fifth Plan Period (para 6.02) includes exportoriented projects among its priorities for promotion and financing. Also, a closer cooperation is expected between BDET and the Export Promotion Center (CEPEX) Promotion of Entrepreneurship. While commercial banks are often reluctant to finance projects whose sponsors do not have a past record as enterpreneurs, 34 such projects (out a total of 124 approved by API) were financed by BDET in 1976, accounting for D 3.9 million, i.e. 13% of BDET's total approvals. Eleven more projects, accounting for D 623,000 were approved in 1976 for expansion of SSEs with assets of less than D 150, Financial and Economic Profitability. A sample of projects approved by BDET in 1976 and the early part of 1977 shows internal financial rate of returns (FRR) ranging from 15 to 35% and averaging about 20%. Larger projects submitted to BDET's Board and for which the internal economic rate of return (ERR) has also been computed showed in most cases an ERR generally higher than 20%, which is satisfactory, even after taking into account BDET's occasionally optimistic assumptions Contribution to the Development of Tunisia's Capital Market. In 1976 BDET subscribed about D 2.4 million in new equity participations, i.e. 11% of total 1976 commitments. BDET's portfolio management for individual and corporate clients increased from D 3.5 million at the end of 1974 to D 7.8 million at the end of On the other hand BDET is encountering difficulties in selling shares from its own portfolio. Sales of shares declined from D 318,400 in 1974 to D 250,000 in 1975 and D 152,000 in At the same time BDET's total interventions in the Tunisian stock exchange declined from

27 D 944,000 in 1974 to D 688,000 in 1975 and D 385,000 in Although part of this decline reflects a reduction in the overall activity of the Tunis stock exchange, BDET's share in total trading declined from 4.7% in 1974 to 3.7% in BDET's role in this area should be reviewed in light of the conclusions of'the recent report prepared by the Ad Hoc Committee on the Tunisian Financial Market (para 2.17). During negotiations, an informal understanding was reached that BDET would submit to its Board and to the Bank before the end of 1978 a plan of action to strengthen its contribution to the development of the Tunisia's Capital Market. V. BDET'S FINANCIAL SITUATION A. Resource Position 5.01 BDET's resource position as of December 31, 1976, is described in Annex 9 which also provides details on the status and conditions of domestic and foreign long-term borrowings. The evolution of the total resources available to BDET -- on a commitment basis -- over the last two years may be summarized as follows: December 31, 1974 December 31, 1976 Amounts in Amounts thousand dinars % thousand dinars % Equity 6, , Subscribed but unpaid capital 1,500 / Long term domestic borrowings 4, , Long term foreign borrowings 31, , of which IBRD (16,547) (37.4) (20,099) (24.9) 44, , A BDET's share capital increase of 1974 from D 3 million to D 6 million was paid-in in two equal tranches, the first in 1974 and the second in BDET has been quite successful in borrowing new domestic and foreign long-term resources, permitting a decline of the share of Bank funds. BDET's equity is due to increase over the period when share capital will be raised from D 6 million to D 10 million. BDET secured in 1977 a new DM 10 million loan from KfW (D 1.6 million equivalent), a KD 7 million line (D 10.3 million equivalent) from the Arab Fund for Economic and Social Development, and a sixth line of credit of D 2.5 million equivalent from the French Caisse Centrale de Cooperation Economique.

28 In accordance with understandings reached during the negotiations for the sixth Bank line of credit, BDET obtained from the Government a D 4 million subordinated loan, which is to be partly converted into equity to the extent BDET's existing shareholders do not exercise their subscription rights (para. 5.15). BDET may avail itself of the still unused D 2.5 million Central Bank rediscount facility. Other resources obtained by BDET on the Tunisian market include several 10-year bond loans issued from 1973 to 1975 and placed with the commercial banks (at 5.5%) and with the public (at 5.75%, or 7% in the case of subscribers not qualifying for tax exemption). More recently, however, the thinness of the Tunisian capital market, and the competition of Government securities have made it increasingly difficult for BDET to issue bonds aimed at the Tunisian public. A D 1.0 million issue of March 1977 met only very limited success and had to be closed at a level of D 100,000. BDET hopes to obtain more success with future domestic bond issues, once the proposed measures to revitalize the Tunisian capital market are implemented by the Government (para 2.17) and, especially, if the Ministry of Finance, following the general increase in commercial banks' interest rates decided by the Central Bank in September, 1977 (para 2.16) permits, as expected, that higher interest rates be offered also on bond issues In 1976 BDET issued a bond loan of 7 million Kuwaiti dinars (D 10.3 million) on the international financial market. The loan was guaranteed by the Tunisian Government and underwritten by Kuwait Investment Company (KIC). This operation is the first of its kind undertaken by a Tunisian financial institution and illustrates BDET's determination to gain access to the international capital market. Full repayment of the principal of this loan is expected in 1979 and 1980 but there is a distinct possibility to revolve the loan. Unfortunately the high cost of this issue (8.5%) would leave BDET with a narrow spread on its long-term loans and would have already caused losses of D 76,000 on short-term placement of that portion of the loan which could not be immediately onlent at long-term. On the basis of an ad-hoc agreement, the Government compensated BDET in 1976 for this loss, and informally agreed to ensure, with a special subsidy, that the servicing of this loan would not cost BDET more than 6% p.a. B. Auditors' Reports on BDET 5.04 The audit reports on BDET's 1975 and 1976 accounts were jointly prepared by the Tunisian firm Cabinet Finor, and Peat, Marwick, Mitchell and Company (PMM). The increasingly important role played by Finor illustrates the development of the local auditing profession 1/, an objective supported by the Government and the Bank. 1/ Large companies seeking rediscounted medium term loans, and major public sector enterprises are now frequently required by the Central Bank to be audited by an independent Tunisian firm. This has encouraged the establishment of numerous auditing firms in Tunisia which are rapidly gaining experience. Tunisian firms are no longer discouraged by the authorities from seeking an association with foreign auditing firms of international standing, as in the case of Finor and PMM.

29 The audit reports on BDET's 1975 and 1976 accounts were ready on schedule and were made available to Board members in accordance with understandings reached during the negotiations for the sixth Bank loan. The main results of the audit reports for 1974, 1975 and 1976 are summarized in Annex 10. The 1976 audit gave an unqualified opinion on BDET's accounts with only two reservations. The first reservation is basically related to inadequate reporting on 50 of BDET's clients, accounting for 3.2% of portfolio at end- 1976, a situation which should considerably improve once BDET's supervision activities are strengthened (para 3.08) The second reservation concerns a loan of D 877,500 to an hotel company which has been in deficit since BDET is taking steps to force the hotel owners to redress the situation by changing management arrangements. BDET confirmed during negotiations that all necessary measures will be taken to ensure full recovery of this loan. C. Quality of BDET's Portfolio 5.07 BDET's portfolio at the end of 1976 amounted to D 61.4 million ($144.8 million equivalent). Annex 11 divides BDET's portfolio at December 31, 1976, into medium-term loans (4.0%), long term loans (85.3%) and equity investments (10.7%) and provides a picture of the portfolio's sectoral breakdown. From the point of view of risk, BDET's portfolio is now well diversified Loans in Arrears. A detailed comparative analysis of BDET's loans in arrears of over three months is given in Annex 12. The arrears situation, particularly in the tourism sector, has dramatically improved since the time of the last appraisal, following a strong resurgence of tourism in 1975 and 1976, and assertive action on the part of BDET in collecting loans in arrears. At the end of 1976, the portion of the tourism sector loan portfolio affected by arrears of over three months had decreased to 17.1%, compared to 41.1% at the end of In the industrial sector, the corresponding portion has also gone down from 7.4% at the end of 1974 to 4.7% at the end of Total arrears of over three months in principal and interest represented 1.7% of total loan portfolio at end 1976 compared to 3.7% at end 1974 and 2.4% at end Loan Reschedulings. Loans reschedulings have increased from 1974 to 1976 as follows: Number of loans rescheduled Amounts involved - in thousand dinars 3,451 6,237 9,765 - in percentage of total loan portfolio at year end 11.0% 14.3% 17.8% Estimated potential arrears of over 3 months as % of loan portfolio, if no loans had been rescheduled 4.0% 3.3% 2.6%

30 Most reschedulings consist of shifting forward the loans' amortization schedules by one year or less. The increase in the percentage of the loan portfolio being rescheduled is largely due to delays in the completion of projects approved in the 1974 industrial investment boom. However, BDET should be more cautious in its projections of client's financial needs, and grant, when appropriate, longer grace periods. BDET's Supervision Division should follow up closely the performance of clients having obtained reschedulings. Agreement was reached during negotiations that, should reschedulings affect in any year more than 15% of BDET's loan portfolio, a special report on reschedulings would be submitted to BDET's Board Loan Security. BDET's loans to industrial customers are backed by chattel mortgages which are generally valid and sufficient to cover risks. Only seven industrial sector loans are to companies in difficulty against which BDET has collateral of an uncertain value (Annex 13). The taking of mortgage securities on many hotel loans, which was a major issue during negotiations for the sixth Bank loan, has been making substantial progress. Further energetic action will still be needed on the part of BDET. Agreement was reached during negotiations that, in the future, BDET's hotel loan contracts should include a timetable for the mortgage validation process Equity Portfolio. BDET's equity portfolio, estimated at acquisition cost, increased from D 3.9 million at the end of 1974 to D 6.6 million at end of 1976, while its book value went from D 4.5 million to D 7.4 million and its estimated market value from D 5.0 million to D 7.2 million. The snare of tourism investments has declined from 35.6% to 30.4% of total. Except for a hotel management company jointly owned by BDET and COFIT, BDET does not own more than 40% of the capital of any company, and half of its participations are in the range of 10% to 20% of total shares. Cash dividends on 1975 operations were declared in 1976 by 22 of the 78 companies in which BDET held shares and amounted to D 120,877 (compared to D 100,506 in 1975) producing an average yield to BDET of 2.5% on equity investments, (compared to 5.4% in 1973, 3.9% in 1974 and 2.6% in 1975). The decrease in the yield is largely due to the increasing proportion of new companies in which BDET holds shares Capital gains on BDET's equity portfolio have declined from D 154,700 in 1974 to D 73,600 in 1976, as a consequence of a decrease in the volume of sales (para 4.12). For 1977 BDET plans to sell about D 150,000 worth of shares, a substantial increase compared to 1976, but still only 2.3% of BDET's equity portfolio. A more aggressive policy of portfolio management would contribute to revitalizing the Tunisian capital market Provisions. At the time of the last appraisal provisions were still considered by the auditors and by the Bank as insufficient to cover BDET's risk of losses. Since then, BDET has built up its provisions to a fully satisfactory level, as recommended by the auditors (Annex 10).

31 D. Financial Performance and Position 5.14 Profitability. BDET's audited income statements and balance sheets for the years 1972 to 1976 are shown in Annexes 14 and 15, and the relevant performance indicators are presented in Annex 16. BDET's income almost doubled from 1974 to 1976, reflecting basically the growth of BDET's loan portfolio, which increased by 74%, as well as an increase in its average interest rate from 8.u% in 1974 to 8.6% in Dividends and capital gains declined from 7.8Z of average equity portfolio in 1974 to 3.4% in 1976 (see paragraphs above). Expenses have also doubled from 1974 to 1976, the main cause being interest expenses on term borrowings which increased by 140%. Administrative expenses (including depreciation) decreased from 1.8% of total assets in 1974 to 1.5% in 1976, which represents a good performance. Net profits increased by 78%, yielding in 1976 a return on average net worth of 9.7%, compared to 8.5% in 1974 and 8.3% in In 1977, BDET was able to raise its traditional 6% dividends distribution to 7%, which remains however well below what most commercial banks in Tunisia pay (i.e., between 10% and 12% of par value). Earnings per average share outstanding in 1976 were D Capital Structure. According to the Loan Agreement for the sixth Bank loan, BDET's debt/equity ratio was not to exceed 5:1. The Government subordinated loan of D 4 million, however, was to be included in the equity base on the assumption that most of it would be converted into shares in 1976 and 1977, to permit BDET's capital to increase from D 6 to D 10 million (para. 5.02). Given the lower-than-expected volume of business in 1975 BDET decided, with the Bank's concurrence, to delay the capital increase until About three-quarters of the capital increase appeared then likely to be subscribed by existing shareholders other than the Government. The rationale for including the Government subordinated loan in the equity base was thus no longer there, and the agreed debt/equity ratio limitation was redefined accordingly, and increased to 7:1. The ratio is expected to exceed 7:1 in 1977 and to stabilize thereafter slightly below 8:1 as BDET's capital increase takes place (para 6.11). BDET's improved financial situation, reflected in the auditors' opinion on the 1975 and 1976 accounts warrants an increase from 7:1 to 8:1 in BDET's debt/equity ratio limit. Given BDET's increased provisions against possible losses on loans and investments (para 5.13), the proposed 8:1 limit would adequately protect the risk of BDET's lenders, and would reflect fairly the company's debt servicing capacity. The Bank agreed, therefore, to the increase in the limit (para 3.05). VI. BDET's PROJECTED OPERATIONS AND FINANCIAL SITUATION A. Projected Operations 6.01 BDET's assumptions and projected operations are given in Annexes 17 and 18. BDET expects to continue to supply manufacturing with about 30%

32 of all the term credit--domestic and foreign--foreseen in the Plan (D 482 million, including D 164 million for private enterprises). Private sector industrial lending will continue to be the principal responsibility of BDET The sectoral orientation of BDET's projected industrial lending reflects that of the Fifth Plan ( ), with the main emphasis on electromechanical industries (especially light industry largely sponsored by private sector investors) followed by the construction, and construction materials industries (though this branch is likely to be largely developed by the public sector), and by the textiles, chemical, food processing, and wood and paper industries. The Plan assigns priority to labor intensive and to export oriented industries, the development of new entrepreneurships, and places great emphasis on the need to decentralize industry away from the coastal urban areas in general and from Tunis in particular. BDET's Board approved in October 1977 a strategy statement for the Fifth Plan Period declaring that BDET will make all efforts to finance and promote priority projects having the above described characteristics, specifically: -(a) labor intensive projects, defined as projects with an investment cost per job not exceeding D 4,600 at 1976 prices 1/; (b) export-oriented projects (defined as those expecting to export more than 20% of production) promoted by Tunisian sponsors; (c) decentralized projects, especially those in the interior; (d) project sponsored by new entrepreneurs (especially Tunisian workers returning from abroad) having the required technical qualifications, and the intention to personally attend to the management of the enterprise; and (e) small-scale industrial projects (see Chapter VII). On the basis of past experience, and of an analysis of BDET's project pipeline, BDET is aiming at meeting the following objectives during : at least 15% of BDET's new approvals should go to labor intensive projects; 15% to projects of new entrepreneurs; and 50% to projects outside Tunis. No quantitative target has been established for export-oriented projects given the uncertainties of the international climate for Tunisian exports. Understanding was reached during negotiations that the proceeds of the Bank's loan would be essentially reserved for the financing of the priority projects identified in the above mentioned strategy statement BDET's capacity to handle the projected volume of operations detailed in Annex 18 has been demonstrated in the period , when BDET's approvals averaged D 30 million per year, and BDET's management and staff had to devote much time and energies to strengthen BDET financial situation and internal organization. Further improvements in the effectiveness of BDET's staff are expected as the recently appointed middle level managers gain experience, and as the company's procedures are further streamlined (para 3.03). B. Resource Mobilization 6.04 In order to finance the program of operations detailed in Annex 18 BDET will have to raise, in the period , D 143 million of new financial resources (on a commitment basis). Of the resource requirements for 1/ This meets the Bank's Urban Poverty Program criteria, which set the threshold for Tunisia at an investment cost of $10,690 (D 4,608) for a 15-year job.

33 and 1979, estimated at D 56.2 million, only D 21.2 million have been identified (excluding the proposed Bank loan). These include, beside cash generation and the partial payment of the capital increase, one new French line of credit (partly at concessionary conditions), one new loan from Qatar, one new loan from the Arab Fund for Social and Economic Development, and a local bond issue. The resulting resource gap for , of D 35 million, could be covered in part by the proposed Bank loan (D 12.9 million) and in part by domestic bond issues. The latter should become less difficult to place (para 2.18 and 5.02) than in the recent past, but they can hardly be expected to yield more than D 2 million in the next 2 years. As a consequence, unless other unforeseen sources of concessionary financing become available (a possibility not to be excluded, but on which BDET does not count) BDET will have to borrow the equivalent of D 20 million ($46 million) in the international capital market before the end of BDET confirmed during negotiations that the Government has approved its resource mobilization plan for the period which calls for a D 10 million borrowing in the international capital in late 1977/early 1978 and a second borrowing for the same amount in late Preliminary contacts that BDET has had with lenders in the Euro-currency market indicate that this objective is realistic. To attain it, however, BDET may have to accept floating interest rates, a risk which BDET has been so far reluctant to bear. Initially, at least, the guarantee of the Government will be necessary to contain the cost of new foreign borrowings in the open market The Government is not yet prepared to permit BDET to pass on the foreign exchange risk to industrial borrowers, on grounds that the inconvertibility of the dinar prevents residents from covering their foreign exchange position, and that the tightening of credit conditions, begun with the recent increase of the overall level of interest rates, must be carried out gradually. As a consequence, the Government will continue to bear the foreign exchange risk on BDET's foreign borrowings. This is one of the matters being discussed in the framework of the on-going dialogue between the Tunisian authorities and the Bank on national financial policies. C. Financial Projections 6.07 BDET's Profitability and Interest Rates. BDET's financial projections are presented in Annexes 18 through 22. Under current circumstances, net profits as percent of average net worth would decline from a range of 8.3% to 9.7% in the period (Annex 16) to a mere 8% in 1977 and This is largely due to the Government having imposed on BDET artificially low lending rates of 8% in 1974 and 1975, and 9% (including a 1% Government subsidy on loans to resident industrial borrowers) in 1976 and 1977, in the face of the steadily increasing cost of BDET's borrowed resources, which rose from 5.4% in 1974 to 6% in 1976 and which is projected to reach 6.3% by During negotiations of the 6th Bank loan BDET and the Government had agreed to suspend the effectiveness of the arrangement by which any difference between the actually realized spread on BDET's operations and a minimum of 2.5% would

34 be debited to a Government account (interest equalization account). This was intended to eliminate a form of automatic subsidization of BDET by the Government. However, though the form of the negotiated agreements was adhered to, the Government had to intervene, at end 1976, to supplement BDET's income (para 5.03) BDET will have to seek similar Government interventions in the next few years given the restrictions that Government policies, and the competition with commercial banks, impose on its ability to raise lending rates to a level sufficient to ensure an adequate profitability. Agreement was reached with BDET and the Government during negotiations on the principle that the interest rate actually payable on long-term loans to BDET's clients should be higher by at least one percentage point than that payable on commercial banks' mediumterm loans to industry. BDET confirmed that, following the elemination of the 1% Government rebate (para 2.18), the interest cost to be borne by industrial borrowers on new BDET loans will increase from 8% to 9% as of January 1, Taking into account that, unlike most Tunisian commercial banks, BDET charges interest on its loans six months in advance (which amounts to a 0.4% increase in the effective lending rates) and that its various commissions and fees (other than commitment fees) are equivalent to an annual interest rate surcharge of about 0.25%, it appears that BDET's nominal rate of 9% on long-term loans corresponds to effective cost of resources to its industrial borrowers of about 9.65%, i.e. more than 1% above commercial banks medium-term rates for rediscountable loans to industry, which are in the range of 8% to 8-1/4% (para 2.18). As long as commercial banks rates remain in this range, BDET feels it cannot raise its nominal rate above 9% for industrial borrowers lest it jeopardizes its competitive position. For new tourism loans (for which generally BDET does not have to compete with the commercial banks given the longer maturities required), however, BDET confirmed during negotiations its intention to raise its nominal interest rate from 9 to 9.5%, which would correspond to an effective cost of funds of about 10.15%. This increase affecting only up to 25% of BDET new loans will, however, be insufficient to ensure BDET an adequate profitability, assuming that new resources will be borrowed domestically at a cost of no more than 7% p.a., and that the cost of foreign exchange resources borrowed from 1978 onward will average 8%, and assuming further that the Government will continue to contribute to the servicing of the Kuwaiti dinar KIC bond loan issued in 1976 at 8.5% (para 5.03) A form of Government intervention will thus continue to be necessary to ensure BDET's financial equilibrium, at least as long as commercial banks rates restrict BDET's ability to raise its lending rate to the level required to ensure an adequate profitability. The Government however concurs with the Bank that its contribution to BDET's profitability should be determined ex-ante, rather than ex-post, thus encouraging BDET to aim at maximizing its operating spread rather than relying on a Government-guaranteed spread. Understanding was reached during negotiations that the Government would selectively subsidize the cost of BDET's foreign exchange borrowings obtained at non-concessionary terms in such a way as to ensure a gross spread of 2.5-3% on these resources.

35 On the basis of the assumptions made above, BDET's net profit as percent of average net worth is expected to decline slightly (to 9.2%) in 1977 then rise again to 9.7% in 1978, 11.2% in 1979, and over 12% thereafter. The expected improvement in BDET's profitability will be partly due to the increasing efficiency of BDET's staff, as reflected in the relative decline of administrative expenses from 1.5% of average total assets in 1976, to about 1% by Profits so projected should permit the company to remunerate outstanding shares at 8% p.a. in 1977 through (compared to the traditional 6% dividends paid by BDET until 1975). Dividends should be increased to 10% beginning in 1980, thus bringing the yield of BDET's share more in line with that of other banks in Tunisia. At the same time BDET would be able to continue to carry out the very prudent provisions policy it adopted in 1974, while moderately building up its free reserves Share capital increase. In order to maintain the debt equity ratio below 8:1 (para 5.15) new shares would have to be subscribed early in 1978 and paid in in three tranches within M4ost foreign shareholders, have already announced their intention to exercise their preemptive rights. IFC is also considering exercising its rights. The Government will maintain its share in BDET's ownership by converting into shares part of the D 4 million advance made in 1975 and As agreed, a greater portion of the Government advance may have to be converted into capital, with the Government acting as a subscriber of last resort, in case preemptive rights not exercised by existing shareholders (which may be the case with some of private Tunisian shareholders to whom the short-term yield of BDET's share is not sufficiently attractive) are not taken by other shareholders or by other new private sector subscribers. Direct Government ownership of BDET's shares could thus double, in relative terms, from 12% to 24%, bringing the total of BDET's shares held by public sector institutions (including the Central Bank and various Government-owned companies) to slightly more than 40% of capital. BDET would in any event remain a majority privately owned institution. VII. STRUCTURE OF THE PROJECT, OBJECTIVES AND FEATURES OF THE PROPOSED LOAN A. Loan to BDET 7.01 The proposed loan to BDET will provide needed support for BDET's operational strategy as explained in para Firstly, the loan will help BDET meet its foreign exchange resource requirements for the financing of industrial projects especially in the private sector, in the framework of the priorities set by the Fifth Five-Year Plan ( ). The earmarking of the loan for priority projects is intended to encourage BDET to concentrate its promotional activities towards areas where special efforts are necessary at this stage of the country's economic development. It is expected that about 60% of the loan will finance projects located outside the Tunis area, thus contributing to the industrial decentralization policy of the Government.

36 Probably 25% of the subprojects financed with the proposed Bank loan, will be sponsored by new entrepreneurs. Assuming a favorable international climate for Tunisian exports abroad, export-oriented projects sponsored by Tunisian entrepreneurs are expected to represent at least 10% of projects financed under the Loan. This will require special promotional efforts, because this type of activity has been so far the almost exclusive monopoly of large public-sector enterprises and of foreign investors. About one-third of the proposed loan is expected to finance projects meeting the labor intensity criterion of D 4,600 (at 1976 prices) invested per job created, which falls well within the Bank's Urban Poverty Guidelines for Tunisia. Labor-intensive projects alone would thus generate about 2000 new jobs, compared to the jobs expected to be created by other projects financed with the proceeds of the loan. The proposed loan to BDET will also include a $2 million tranche to be earmarked for the financing of expansions of existing SSEs; furthermore, BDET is expected to take a leading role in implementing the SSE component of the proposed Project (Section B of this Chapter) The second objective of the proposed loan, is to help BDET establish itself as a viable borrower in the international financial markets, thus becoming less and less dependent on concessionary financial resources, and on World Bank loans in particular. Continued Bank support will help consolidate BDET standing on the international financial community. The Bank's share in BDET's total borrowed resources is declining. On a balance sheet basis, at end-1976 it was 23% of total term borrowing of BDET, compared to 48% at end-1974; it is projected to decline to 18% of borrowed resources by the end of 1979 and to 15% by As mentioned (para 6.05) BDET will submit to the Bank a resource mobilization plan as part of agreements to be negotiated BDET will maintain its debt/equity ratio at or below 8:1. In its financing operations, BDET will continue to observe the following limitations which are specified in BDET's Policy Statement: exposure to a single customer should not exceed 25% of BDET's equity; financing of public sector enterprises should remain less than 30% of total financing; tourism sector financing should continue not to exceed 25% of total financing. The free limit for subprojects not subject to prior Bank approval will remain D 300,000 ($705,000) The proceeds of the loan, other than the $2 million portion to be earmarked in the Loan Agreement for SSE expansion projects, will be used for financing (a) the full cost of directly imported equipment or services needed for the implementation of eligible subprojects; and (b) 70% of the cost of equipment previously imported in Tunisia, and purchased locally for the implementation of eligible subprojects. Taking into account that the loan will be committed over a 2-year period, and given that the average term of BDET's longterm loans is about 12 years, with a 2-year grace period, the loan should be repaid in a period of 13 years, including a 4-year grace period, on a level principal payments basis. The estimated schedule of disbursements is shown in Annex 26.

37 B. Small Scale Enterprise (SSE) Component 7.05 The main objective of the SSE component of the project is to coordinate and strengthen on-going initiatives in the field of SSE development, by providing financial resources through the commercial banks' branch networks, with BDET participating in the effort, and administering Bank procedures for subproject selection and disbursement of funds; and by fostering the creation, in parallel, of a system of technical assistance for SSEs, centered around API. It is expected that the experience of this pilot project will lead to the identification of the most suitable channels for a possible future project of the Bank fully devoted to SSE financing. The SSE component of the proposed loan will consist of two sub-components: (i) $5 million to be lent to the government for the financing of newly created SSEs through the existing FOPRODI mechanism (paragraph 2.09 above and Annex 24); and (ii) $2 million to be lent to BDET to finance expansion projects of SSEs, which are not presently eligible for FOPRODI assistance (FOPRODI being basically intended to encourage new ventures). Both SSE sub-components will benefit from the technical assistance scheme for SSEs to be set up by API (para 7.10) The $5 million sub-component to be borrowed by the Government will be channelled through a special account with the Central Bank of Tunisia and drawn upon by the four commercial banks (Societe Tunisienne de Banque, Banque Nationale de Tunisie, Union Internationale de Banques, and Banque du Sud, which together cover the whole country through a wide network of branches) currently administering POPRODI as well as by BDET which would become the fifth bank participating in the scheme. The establishment of the special account referred to above is a condition of effectiveness of the proposed loan. Bank funds will be used to finance a new FOPRODI credit facility that will complement in the form of medium- and long-term loans the financing plan of newly created SSEs which qualify for concessionary FOPRODI loans for the constitution of their equity capital (see Annex 24). The eligibility criteria for the Bank funds will be, however, slightly more restrictive than those currently established for FOPRODI, in that: (i) total project cost including working capital should not exceed D 200,000 ($460,000 equivalent) at 1976 prices, which is in line with the Bank's working definition of SSEs; (ii) normally the investment cost per job created or maintained should not exceed D 4,600 ($10,700 equivalent) at 1976 prices, which is in line with the Bank's Urban Poverty Program criteria; and (iii) the promoter should be willing to make use of the available technical assistance deemed necessary by API The operational arrangements for the $5 million SSE sub-component will be the following: (i) Promotion, identification, initial'screening and appraisal of eligible SSE projects will be the responsibility of the banks (four commercial banks and BDET) administering FOPRODI. A summary appraisal report will be prepared for each SSE project by the sponsoring bank under a simplified procedure,

38 and with the possible assistance of API. The report will spell out the project's total investment cost, including the needs for working capital, and will propose a financing plan detailing the respective contributions of (a) promoters in the form of equity (at least 30%, part of which can be financed out of the existing FOPRODI concessionary loan facility), (b) the subloan to be made out of the Bank funds, which should not exceed on the average 50% of total project cost; and (c) the sponsoring bank in the form of a term loan out of its own resources (which in consequence should be about 20% of total project cost). The report will also specify the number of jobs to be created and the forms of technical assistance required by the SSE. (ii) Once the SSE project and its financing plan have been approved by the supporting bank and API, the SSE appraisal report will be sent to BDET which will (a) verify that the project complies with the Bank eligibility criteria (paragraph 7.06); (b) submit to the Bank on behalf of the Government approval and disbursement applications; and (c) maintain the necessary documentation, particularly as regards disbursement, available for inspection by Bank supervision missions. (iii) The SSE's repayment obligation for the Bank funds will be toward FOPRODI (i.e. the Government) but the responsibility of loan collection will remain with the banks sponsoring the project, which will share evenly with the Government the risk of loss on both FOPRODI loans financed out of the Bank funds and term loans made out of their own resources. For their services, the participating banks will receive from the Government commissions patterned after those they currently receive for the administration of the existing credit facilities (flat percentage commission on disbursements of FOPRODI funds and commission based on the amount of principal and interest recovered on behalf of FOPRODI with an increasing percentage depending on the recovery ratio; see Annex 24). These arrangements will be reflected in the FOPRODI agreements between the Government and the participating banks. The same agreements will also specify the banks' commitment to participate with their own resources -- generally with 20% of the projects' costs -- in the financing of FOPRODI assisted projects. The amendment of the FOPRODI agreements to these effects, as well as the signing of a similar agreement between the Government and BDET, are a condition of effectiveness of the proposed loan The second SSE sub-component, amounting to $2 million will be part of the loan to BDET but will be earmarked to finance the expansion of existing SSEs with net fixed assets valued (before expansion and excluding land) at less than D 100,000 ($235,000 equivalent) at 1976 prices. The conditions

39 of subloans and the eligibility criteria for such expansion projects will be similar to those applying to subloans for newly created SSE projects, but the repayment obligation of borrowing SSEs will be toward BDET with no risksharing mechanism between BDET and the Government. In order to ensure that SSE expansion projects will receive appropriate attention BDET will set up a special unit staffed by two SSE specialists. The unit will be responsible for the processing of these projects as well as for administering Bank funds of thie $5 million SSE sub-component to be channelled through the FOPRODI scheme. The establishment of this unit is a condition of effectiveness of the proposed loan The terms of Bank-financed FOPRODI subloans for SSEs are expected to be between 7 and 11 years, with grace periods between 2 and 3 years. Correspondingly, the SSE component will be repayable to the Bank, by the Government and BDET respectively, over a period of 13 years, including 4 years of grace, on a level principal payment basis. Such a term is expected not to create restrictions on the appropriate duration of subloans, while keeping the possible roll-over of funds to no more than about 25% of the SSE compouent. The cost of funds to SSE borrowers will be the same as the cost charged by commercial banks on medium-term loans to larger industrial enterprises, currently in the range of 8 to 8-1/4% except f'or subloans financing investments in the less developed regions of the interior and industrial investments of export-oriented enterprises, for which the rates will be between 6.75 and 7%. The foreign exchange risk on the Bank funds will be assumed by the government. Although Bank funds will be usable to finance one half of the full investment cost of SSE projects, without distinguishing between foreign and local currency expenditures, it is expected that on average this will imply little, if any, local currency financing with Bank funds, as the foreign exchange costs of SSE investments in Tunisia are estimated to vary between one-third and two-thirds of total costs, averaging about 40% of total. The estimated schedule of disbursements is shown in Annex Techncial Assistance. The establishment of a system to deliver technical assistance to SSEs is one of the major objectives of the projezt. The Government intends to entrust to API the responsibility of setting up such a system, making use of API's existing network of 4 regional branches (which is expected to expand to 8 branches in the near future). There will be a central core of four SSE experts at API's headquarters, in Tunis, and a small unit of two experts in each regional office. API's technical assistance staff will receive the support of CNEI and of AFI, whose activities in the field of SSE development will be coordinated by API. The scheme, which would be initially staffed by 20 specialists, is conceived in view of the needs of Tunisian SSEs in general. Initially, API's technical assistance staff would concentrate on identifying SSE projects and assisting sponsors in preparing their project, obtaining the financing, and properly implementing the projects. Later, the API-centered extension service will provide follow-up assistance, especially in the areas of financial management, marketing and improvement of productivity. API is expected to need initially specialized expertise, estimated at 69 man-months, to establish the central core of four SSE experts and train the experts in the regional offices. At least two and

40 at most four expatriates (depending on the availability of Tunisian experts with the appropriate profile and SSE experience to fill two of the four positions envisaged) will be recruited by the Government. Financing of the foreign exchange cost of the expatriates is expected to come from bilateral and/or multilateral aid agencies. However, it was agreed with the Government during negotiations that, if firm commitment from these sources is not obtained by July 1, 1978, a portion of the loan to the Government, amounting to $300,000, would be earmarked to finance the foreign exchange cost of these experts. Agreement was also reached on a timetable for the establishment of the technical assistance system and on the principle of periodic consultations between the Bank and the Government to review the functioning of the system (Annex 25) Benefits and Risks of the SSE Component. It is expected that the SSE component of the Project will finance between 50 and 60 new sub-projects and between 20 and 30 expansions. About 2,300 new employments will be created, at an average cost/job of $7,000, and half of the sub-projects are likely to be located outside of the Tunis metropolitan area. In addition, the Project will have an important institution building effect. Beside supporting API in its efforts to set up a country-wide network of assistance to SSEs, it will reinforce the FOPRODI scheme which could eventually be institutionalized and 4ecome a suitable counterpart for the Bank in future larger operations specifically oriented towards SSEs. Moreover, the efforts to be undertaken by BDET in developing a specialization for SSEs will leave open an alternative channel for further Bank assistance to SSEs in Tunisa. The relative lack of experience, both in the Bank and in Tunisia, in assisting Tunisian SSEs entails a moderate risk that the Project's targets will not be fully achieved. The risk, however, is well worth taking, also because the proposed mechanism will ensure that the Project's funds will be used for worthwhile projects, even if no success were to be obtained by the Project in its institution building objectives. VIII. AGREEMENTS REACHED AND RECOMM4ENDATIONS 8.01 During negotiations, agreement was reached on the following principal issues affecting the loan to BDET: (a) distinction between the traditional dfc portion of the loan ($28 million), reserved for financing industrial projects in the framework of the priorities established by the Fifth Five-Year Plan ( ) (paras and 7.01), from the $2 million portion of the loan to be earmarked for expansion of existing SSEs (para. 7.08); (b) strengthening of BDET's appraisal work (paras. 3.06; and 3.09); (c) strengthening of BDET's supervision work (para. 3.07);

41 (d) BDET's plan of action to strengthen its contribution to the development of Tunisia's Capital Mlarket (para. 4.12); (e) measures taken by BDET to ensure full recovery of a loan to an hotel company (para. 5.06); (f) BDET's submission to its Board of a special report on loan reschedulings, should these affect in any fiscal year more than 15% of its loan portfolio (para. 5.09); (g) inclusion in BDET's hotel loan contracts of a timetable for the mortgage validation process (para. 5.10); (h) BDET's maximum debt/equity ratio of 8:1 (paras and 5.15); (i) BDET's resource mobilization plan (para. 6.05); (j) BDET's long-term lending rates for industrial and tourism projects (para. 6.08); and (k) Government's contribution to BDET's profitability in the form of subsidies towards the cost of selected BDET's foreign exchange borrowings obtained at non-concessionary terms (para. 6.09) Agreement was also reached on the following principal issues affecting the SSE component: (a) SSE eligibility criteria (para. 7.06); (b) operational arrangements, including BDET's role of intermediary between the Bank, the Government and the commercial banks participating in the FOPRODI scheme, risk-sharing between the commercial banks and the Government, and the remuneration of commercial banks (para. 7.07); (c) onlending rates for the SSE component (para. 7.09); and (d) design, staffing, financing and timetable of establishment of the system of technical assistance to SSEs (para. 7.10) Subject to the conditions of effectiveness described in paras 7.06, 7.07 and 7.08, which apply to both loans, the project is suitable for a Bank loan of US$30 million to BDET on the terms outlined in paragraph 7.04 and for a Bank loan of US$5 million to the Government for onlending to SSEs through the FOPRODI's scheme on the terms outlined in paragraph 7.09.

42

43 ANNE I Table 1.1 Table/Tablaao 1.1 VOLUME OF MAIN INDUSTRIAL PRODUCTS, (in thousands of tons unless indicated otherwise) PRINCIPAUX PRODUITS INDUSTRIEIS EN QUANTITE, (en ailliers de tonm.s ou aotre unite specifice) SECTORS/PRODUCCSS AcCals/Raal9 isations Est. /Et secteurs/produits Mining Mines Crude Oil Petrole brht Phosphate rock Phosphate Iron Ore Mineral de fer Lead concentrate Concentre de plomb Zinc Concentrat Concentre de ziin Natural Gas (10 3) Cez naturel (10 m3) Salt (sea) Sel marin Chemical fluor-spar Spath-fluor chimique Barite and others Baryt et divers Food Processing Industries Alimntaires Cereal Products n.a. n.c. n.e D4rives cerealiers Olive oil Huile d'olive Sugar Sucre Wine (1000 hi) Vins (1000 hl) Beer (1000 hl) Biere (1000 hl) Canned fruit and vegetable Conserves fruits et legumes Biscuits, chocolates Biscuits, chocolat Tobacco na. n.a. n.a. n.a. n.s. n.a. n.a. na. Tabac Textiles Clothing Leather Textilej; H.abillementCuir Yarn]f5ons) Fili (oneres) FabricJ (1000 m3) Tissus./(l00 m3) Shoes (1000 pairs) Chaussures (1000 paires) Carpets (ton) Tapia (tonnes) Construction Materials Materisu. de Construction Cement Ciment red Ceramics C;ramique ro-ge Lime., Chaux 2 Tile (1000 m2) Carrea.o do faience (1000 m Chemicals Chimie Myperphosphate hyperphosphates Single Superphosphate Super simple Triple S.perphosphate Super triple Phosphoric acid Acide phosphorique Fertiltzer Engrais Composes Paper and others Papier et divers Pulp eate a papier Nevsprint Papier d'impression Packaging Emballage en papier 1/ Series since 1970 do not correspond with previous series/ Lea series depuis 1970 no correspondent pas aux series *nterieures Source: Ministere du Plan

44 I'-' CC 2.2 '-0 'CC o CD CD '0 'OC CO 0 0-C < ,-" 0 - CD CDCDO CC CD0. DC 00, C.' 2000'0D220'1 O20DCO'CC'0.' C'COoOCD "- 0'CCCO ,-CD 000QCCCC CC 'C 2002 CC ,"0..-o 0 0 COOCO COO.>0020 C' "-' o CC o'' ' 0- -D 0 CD 0 0..' -.' 00.-'0'0 CC 00 '0 '20 COCCO 0 20CJO00NC-'"'C "0'-'0 - -C'- DO -. CC'C'C2.' '."- 0- COO 3020 CC CC 20000CC. 0 0 '"'20 -" ' CC CC 00'0'0 00" CCC20'000 0 CCC '-CC o C 0CD ,'- 0-"-.'CCCC CC 0 CD 0 20 CC. CD CC. CC CC. CC 0 00 CCC 0 CC o o 0'OOCC Oo '0 I'D 0 CC , CC 0 CC CC CC 0 0 CD CCC 20CC CD.'-0.' CDo.CC-CD CC 020 Co 0200 CCI- '00.C.-CC * DC CO CC. 2 " CD-" CCI 200CC DC 20 0 DC 0 D' 20 0 CC CC CD '-' 20 CC ' CC CD 2000CCCCO0 ' '-O2.-' '-200' OCOO.oCO " > CC OOCO20 DC ,-C2002." '0.-'0000.2C C ' ' " > OC ' CC CCVC C ' ' - 00 CO20C.0 20C.C'-' '-op 3-2 CC ' ' ' ' CC. '0 20 K 20 CD CD CC '-2 CCOC CC CO C' CC > ' CC CD 00 ' CC CC C CC o0 ' 00 0' ' o o > '..'' ' CC CD' CC > ' CDOCOOO'' 20 CD CD 20 CC 000-0,, CC ,20 O CDCD CC CC DD 'CC 'D ''.' ' -CCC ' CC 20 CC0000 no :20CC CCC '-" CD.I C '0 2000"C "' CC CCX C ->.'C.-.C ' CC CO ' , '200 "-20.' 0 0 'CCC O CC '" ,00 0CC CD' CC o-o 'COO 0' CC, CD '-20' CC CC " 0-' CC CC " CC 020 C CC "C 20 0 DCC 'CO ' C > '0 0'-'CCO CD 0 00 C '-' CC 20 " CCjD 200 '--0 0 o '-' ,

45 T.ble/TAbla0: 1.3 INDUSTRIAL PRODUCTION INDEX, INDICE DE LA PRODUCTION INDUSTRIELLE, ( : ) ( : 1970 = 100) (October) Ma.ufacturlng Industries sufertorieree Food processing T.stiles Alisentttion Leather and shoss Textiles MNceelcb4il sd Icdcetrleo dlectricel Chuo.s.res 107 ei cuirs C-str-ction emter-lal and gloss t Industries tenaniqece electriqoen Chemical oduetrtes Mlteris de constroction 121 et veers Petroleum refgning Industries chiiques Pape Dsri-s 117 du petrele PApier at carton i Idostri-o extractives of which: crude oil doot: petrole phosphaten phosphstes OlectrLcity Ion so EIectrieite et ROC GENERAL INDEX INDICE GENERAL 1/ loden revined io 1970/1' inden o ste revise en 1970 Source. Institut Natienel de 1a Stotistiqun

46 ANNEX I Table 1.4 Table: 1.4 TUNISIA: Investment Projects in Manufacturing Industries Approved by the Agency for Promotion of Investments (1973-June 1976) (Jan.-June) Total ( ) Invest. Invest, Invest. Invest. Invest. No. (1000 D) Jobs No. (1000 D) Jobs No. (1000 D) Jobs No. (1000 D) Jobs No. (1000 D) Jobs Sector Food Pro ,232 4, ,000 6, ,342 5, ,001 2, ,485 cessing ( 1,500) ( 660) ( 3) ( 4,854) ( 673) ( 2) ( 330) ( l22) ( 1) ( 3,500) ( 103) Mech. & Elec ,452 2, ,398 4, ,725 5, ,928 4, , ) ( 270) 17 (29,091) ( 2,300) ( 12) ( 4,675) ( 881) ( 8) ( 1,193) ( 495) Cons truc - tion Mat ,834 2, ,378 4, ,448 7, ,253 4, ,407 erals 220) ( 60) (- ) ( - ) ( - ) ( - ) ( - ) ( - ) (- ) ( - ) ( - ) Chemicals 23 14, , , , ,365 9,056) ( 264) ( 5) ( 7,283) ( 211) ( 1) ( 216) ( - ) ( 2) ( 0,274) ( 25) Taxtile & Leather ,206 17, ,715 10, ,208 13, ,558 8, ,326 (37,746) (12,128) ( 52) ( 6,237) ( 5,630) ( 74) ( 8,945) ( 8,562) ( 41) (13,725) ( 5,246) Others 2/ ,094 4, ,149 3, ,435 4, ,233 3, ,646 60) ( 1,477) ( 1,249) ( 12) ( 1,268) ( 528) ( 8) ( 866) ( 367) 19 ( 1,705) ( 900) _ TOTAL ,375 31, ,195 31,182 1, ,777 37, ,927 23,489 3, ,175 94) (50,366) (14,631) ( 89) (48,735) ( 9,342) ( 97) (15,032) ( 9,932) ( 71) (20,398) ( 6,769) 1/ Figures in parentheses correspond to export-oriented projects _/ Including wood, paper, printing, plastic. Source: Agence de Promotion des Investissements (A.P.T.)

47 ANNEX I Table 1.5 TUNISIA: Structure of Commercial Banks' Interest Rates DEPOSIT RATES March August 1977 Since September 1, 1977 Sight Deposits Term Deposits 3-6 months months months months over 24 months Savings Accounts up to 12 months months months over 24 months LENDING RATES Short Term Loans Domestic Transactions - Rediscountable Non rediscountable Foreign Transactions - Rediscountable Non rediscountable Warrants and other Collateralized Loans - Rediscountable Non rediscountable Crop Loans - Rediscountable Non rediscountable Other Loans - Rediscountable Non rediscountable Medium Term Loans Housing Loans Loans to agriculture, resident exporting enterprises, and investments in least developed regions Loans to Industry and Tourism - Rediscountable Non rediscountable Overdrafts EMENA/IDF November 1977.

48 ANNEX 2 Page 1 THE SMALL SCALE ENTERPRISES (SSE) SECTOR IN TUNISIA I. CHARACTERISTICS Size Distribution 1.01 There is no official definition of SSE in Tunisia. For administrative conveniences demarcations have been adopted by the Institut National de la Statistique (INS), which publishes annual industrial censuses excluding all enterprises with less than 5 employees or activities considered handicrafts; and by the Ministry of the Economy (handicrafts- less than 10 employees; small enterprises - between 10 and 50 employees; medium enterprises between 50 and 300 employees; large enterprises - over 300 employees). For the purpose of this project, SSEs are defined as those employing less than 50 employees and having fixed investments of less than D 150,000 (US$350,000). Statistical information, as noted above, refers only to the "5 and over" size of firms and imposes a restriction on the detailed characterization of the sector. According to the 1973 industrial census, SSE in Tunisia accounted for 21.4% of formal industrial employments, for 77% of industrial establishments and for only 15% of the manufacturing sales. In 1976, INS started a complete inventory of all non-agricultural enterprises in the major cities. The survey identified in Sousse, Sfax and Gabes alone 5,023 manufacturing firms with 1 to 10 employees (see Table 1). Such figure must be compared with the census figure of 281 firms for the entire country (see Table 2) to show the extent of the under coverage of SSE activities. Moreover data on employment for the Sousse province alone show 3,018 people employed in the sub-group in 1976, while the census shows a total of 2,492 for the country as a whole. Based on the above preliminary surveys, on data provided by entrepreneurial associations (UTICA), and on preliminary countings by the Office of the Employment, the mission estimated the number of non-agricultural enterprises of all sizes to be close to 80,000 of which 18,000 are in manufacturing or manufacturing-related activities (mechanical repairs, food preparing, etc.). Sectoral Distribution 1.02 The sectoral characteristics of manufacturing firms are shown in Table 3 and the sectoral distribution by size of enterprises in Table 4. Small scale firms are predominantly oriented towards production of household goods for local (as opposed to national) markets. Three groups accounted in 1973 for more than 63% of production: food and beverages (36%), metal products (15%) and textiles (12%). Small firms were also important in furniture and building materials, i.e., subsectors in which SSEs have a comparative advantage of labor costs and location for the requirements of local (as opposed to national) markets. Information is not available regarding the total amount of fixed investment in SSE. However, data for yearly investment in existing firms, between , show a decline in the share of SSE investment over total investment in manufacturing.

49 ANNEX 2 Page 2 Regional Distribution 1.03 Regional distribution of industry, in 1973, is shown in Table 5. The Province of Tunis alone has more than 50% of the establishments and 53% of the employment. The next area of concentration, Sfax, has only 14% of firms and a meager 8% of the employment. The concentration is even greater in some branches of industry like metal manufacturing, glass, garments, printing and some food products. In these branches nearly 80% of the firms are located in Tunis. A few regional concentrations can be found in Sfax (mechanical products, chemicals), in Monastir (textiles), Kairouan (carpet making) and Nabeul (ceramics and food processing), which could be the base of a regional specialization and might favor regional vertical integration with larger industries. Employment 1.04 The evolution of the employment structure in the formal sector between 1969 and 1973 is shown in Table 1. According to the census about 15,000 persons or 20% of total manufacturing employment work in firms with less than 50 employees. More recent estimates of employment including the "informal" sector are shown in Table 6. It is estimated that about 120,000 persons work in the "informal" manufacturing sector, of which over 80,000 in handicrafts. The Office of Handicrafts (Office National de l'artisanat - ONA) estimates at 35,000 the number of independent carpet weavers, while another 8,000 are employed in the medium size carpet production centers of ONA. Other artisans working in leather, wood products, furniture and miscellaneous artistic and utilitary handicrafts add up to 37,000 people. The information about productivity, on small firms of the formal sector, for , shows that while the number of employees in firms with less than 50 people remained at about 20% of total manufacturing employment, turnover (as an approximation for industrial output) declined from 19 to 15%. This data suggests a relative decline of productivity in smaller firms during the period of accelerated industrialization. II. SMALL INDUSTRY CONSTRAINTS AND PROBLEMS 2.01 In the absence of a structured base of information about SSEs, the comments that follow are based on limited surveys carried out by official institutions, and on the observations of the pre-appraisal and appraisal missions to a number of small scale firms. Ownership 2.02 The predominant form of ownership in small firms is the single proprietorship. The typical owner is a self made man who started as an apprentice or as a merchant in the souks and learned the trade on the job. Few small-scale businessmen have any formal education beyond the primary level, although many have gone through specialized training courses in their

50 AliNEX 2 Page 3 trade. They might be termed craftsman-entrepreneurs rather than industrialists. The mission was favorably impressed with the quality of entrepreneurship in many SSEs. Owners appeared resourceful and hardworking. They often display considerable ingenuity in the development of machines or in reconditioning old equipment. In other respects (relations with employees, accounting practices) they are reluctant to accept innovations and change. A special group among SSE owners are those who have picked up new skills abroad as migrant workers. These are among the most ambitious and open-minded small entrepreneurs. Production and Layout 2.03 Workshops of SSEs in Tunisia display the universal traits of the informal sector: poor lay-out, lighting and ventilation of the shop; lack of organization in the production process; young apprentices and adult workers alike working unusually long hours, often in unsafe conditions. At the other extreme, some of the small firms with dynamic growth potential which have moved into the new industrial zones show a tendency to overbuild their plants. Designs have been carried out with limited help of industrial specialists and the results, in many cases, are relatively expensive buildings with serious problems of layout. Investment 2.04 Data on fixed assets of industry are not available. Even the recent surveys in Sousse and Sfax neglect information about capital stock. Industrial censuses contain only yearly investment by existing establishments. An indication of the trends in modern small industries can be obtained from the 81 projects, with total cost of D 200,000 or under, financed by FOPRODI for the period December May Investment and Employment in Selected SSE's Total Investment/ Investment/ Number of Size of Employment Investment Employment job project projects (number of employees) (dinars) (persons) (dinars) (dinars) 10 or less 232, ,463 23, to , ,744 29, to 49 4,445,568 1,221 3,641 96, above 50 2,058,000 1,060 1, , TOTAL 7,093,148 2,553 2,778 87, Source: FOPRODI.

51 ANNEX 2 Page 4 Investment and employment intensity fluctuates according to the type of small industries (see Table 7). It appears, however, that in the type of industry qualifying for FOPRODI, cost/job is below D 5,000 and is often around D 3,000. It is interesting to note that for the type of projects in the sample cost/job tended to decrease when the size of the project increased. Technology 2.05 In Tunisian SSEs technology varies greatly even within the same industry. In the textiles sector SSEs in Tunis, all looms are powered, whereas many of the SEE looms in relatively remote areas are manually operated. Technology may be very modern, such as adjustable wrenches, cutters and presses brought back by Tunisian workers abroad for their metal workshops. Relatively high machine power among small production units may reflect several factors. First, SSEs often acquire old, inefficient machines as opposed to modern machines utilized in large industries. 1/ Secondly, the small industrialist, basically a skilled worker and a self-taught man, may choose machines from various accessible sources without sophisticated selection procedures. 2/ He may also develop a taste for owning more and more machines, some of which may not be of immediate use. In the end, he finds himself with equipment clearly excessive to his needs. This situation was observed in several metal working units Many small industry owners, on the other hand, are capable of "copying" and sometimes adapting an original design of equipment. In Tunis, an improved version of a standard lathe (for wood cutting purposes) was found to be built by largely self-taught local technicians. This is only one example of Tunisian engineering skills in SSEs. It could be useful to undertake a survey of existing technologies and skilled labor in Tunisian SSEs, so that the resulting picture of appropriate technologies for SSEs can be referred to by the extension service to be created by API. In the meanwhile it is the mission's impression that for most SSEs improvement of existing machines, more rational workshop layout and appropriate selection of equipment would probably make a greater contribution to the increase of productivity than the introduction of new technologies. Procurement 2.07 The most commonly mentioned constraint for growth was the difficulty in getting supplies (materials rather than equipment). Most of the raw materials utilized by SSEs are purchased through intermediaries with easier 1/ In this context, it is interesting to note that SSEs use relatively few directly imported machines. Many imported machines are bought through dealers, including second hand machinery. Only the largest SSEs obtain technical advice from foreign suppliers of machinery. 2/ This often creates maintenance problems. Maintenance and repair of very diversified machinery is difficult to arrange satisfactorily.

52 ANNEX 2 Page 5 access to import licenses and sometimes on the parallel market when the items are scarce. At present, such items include cement, linings and some imported fabrics, stainless and special steel, etc. Although small firms are allocated annual quotas of imported materials corresponding to their "normal" requirements, delays occur at various stages (time to obtain import licenses, delays at ports, losses in transit, difficulty in finding exact specifications for required items). This results in time losses, under-utilization of capacity overpricing of raw materials. A satisfactory solution to this problem might follow from the measures being taken by the Government to gradually liberalize trade for major materials. Marketing 2.08 SSE's in Tunisia seem to have more problems in access to production factors (see above), than in market access. Most marketing is done through wholesalers and other "middlemen" (particularly in textiles). Construction materials producers often sell directly to builders. Very few workshop owners met by the mission had their own marketing outlet, like a store in town for themselves. 1/ Subcontracting relationships are of limited scope. Thus, in the SSE engineering subsector, "ancillary" production for large industries is only a supplementary activity. Outside the metal products and engineering industries, subcontracting frequently takes the form of commission work. In view of the relative importance of Tunisian public sector participation in production and services it is surprising that there are no structured channels for government purchases from small producers. In addition, very few small manufacturers have succeeded in securing import orders. The Government could have an important role to play in three areas of marketing: promotion of subcontracting, organizing Government purchases, and setting-up or promoting the creation of trading companies. Management 2.09 A world-wide characteristic of small scale enterprises is the concentration of managerial, production and marketing functions in one or two persons. The typical small entrepreneur, however, has a restricted notion of plant layout and is generally unfamiliar with basic accounting methods, inventory planning and other management techniques. It is only natural, for him, to concentrate on the production side and pay scant attention to the rest. Of 2217 firms of all types surveyed in Sousse by INS less than 20% keep any sort of accounting. The percentage raises to 26% if only manufacturing firms are considered and 31% in the case of mechanical shops. Two-thirds of the mechanical shops which keep accounts rely on outside accountants to do the job. The critical point in the development of an industrial establishment is reached when it becomes essential to delegate managerial functions; many entrepreneurs are incapable to take this step and are condemned to stagnation. 1/ One exception was a hydraulic pumps producer in Tunis with a store in the center of Tunis of his own.

53 ANNEX 2 Page 6 Others move slowly but consistently towards specialization and growth. Management is probably the area in which a technical assistance service is most urgently needed. Finance 2.10 Lack of access to institutional finance, particularly from SSEs occupying the lower end of the size range, is an important constraint to SSE development. It is hard to ascertain the true dimensions of the problem, in view of the reluctance of many SSEs to disclose their detailed financial position and of the limited experience of commercial banks in dealing with small entrepreneurs. Expansions of plants are usually financed by borrowing from relatives or by plough-back of profits. 1/ Those firms which reported financial constraint, emphasized inadequate financing of working capital. The combination of uncertain raw materials supplies (para 2.07) and lack of working capital puts small entrepreneurs at the mercy of seasonal market fluctuations (very important in handicrafts, food processing and garments). Interviewed entrepreneurs considered the ready availability of funds more important than the rate of interest at which those funds were made available. Owners of small workshops run into even more problems when they grow and become industrialists. Their larger requirements in terms of amount and duration of credits are not likely to find adequate support from the commercial banks which are not geared to accommodate small industrial customers without suitable collateral. This is one reason why FOPRODI has been set up and, despite initial shortcomings due to procedural delays, is becoming rapidly known among small industrialists as an interesting source of project financing. Potential for Development of SSEs 2.11 The overall low productivity of SSEs does not mean that most of them are lacking in economic viability or development potential. A large number of small firms is successful in satisfying local needs for reasons of transport economies (e.g. bricks, tiles, etc.) or for speed, convenience, and service (auto and agricultural equipment repairs, printing establishments, etc.). The main asset of SSEs is clearly the great natural skill, determination, and specialized experience of the people working in the small shop. Many small scale industries are regionally concentrated like weaving in Ksar Hellal, carpet making in Kairouan, metal fabricating and engineering in Tunis, Sousse and Sfax, providing a good opportunity for vertical integration with large, modern industry. Though this will often necessitate a leap forward in technology and markets, the example of several industrialized countries shows that the transition can be made with appropriate support from the government through various forms of assistance. 1/ Several industrialists mentioned a 20% net profit on fixed assets as the normal rate of return envisaged for undertaking a new venture. An indication of good profitability may also be the fact, confirmed by banks, that those small industrialists who get loans repay always on time.

54 ANNEX 2 Page 7 III. ADMINISTRATIVE AND POLICY FRAMEWORK 3.01 Dispersed institutional responsibilily toward SSIs and a system of incentives oriented towards large scale modern enterprises were until very recently the characteristics of the framework of development for SSEs in Tunisia. The Fifth Plan dedicates increasing attention and support to the sector, and the structuring of an integrated program of assistance to SSEs appears to be in the making. The situation described below is that prevailing until Incentives 3.02 Government policies and incentives have favored large scale public enterprises and, more recently, modern medium-size privately owned enterprises. Capital intensive subsectors, where small industry is less competitive, have been encouraged and far less support has been lent to labor-intensive exports, e.g. metal manufacturing and engineering products, plastic products, and footwear. 1/ In these industries, the bias in favor of import prot~c:tion (over export support) helps SSEs by conserving traditional structures and reducing competition in price, quality, marketing and new technology. It also postpones the inevitable and desirable transition towards modern, lynamic enterprise - integrated with the export sector or with new competitive h -e market industries as suppliers, subcontractors and ancillary industries. 3SE access to incentives is constrained by criteria of eligibility for investment benefits. Incentives to industrial investments have been established by the Investment Code which was first issued in 1969 and revised in Such incentives include a 5-years reduction in income tax; duty free import of equipment; and the right guaranteed to non-resident investors to re-export both their capital and profits. Incentives are linked to criteria such as employment size, value of exports and location The Tunisian authorities recognize that SSEs do not fit into the standard incentive scheme. One preliminary condition to benefit from incentives is to set up a firm creating at least 10 new permanent jobs, which eliminates the bulk of small workshops. Another condition is that 30% of investment must be financed from the investor's own resources, which is not always easy for a small scale industrialist. In addition income tax exemption increases with employment and irrespective of investment as shown below: 1/ One important exception is knitwear and clothing where exports have developed rapidly.

55 ANNEX 2 Page 8 Income Tax Exemption Category Number of New Permanent Jobs Rate of Exemption A B C D E 151 and above 90 The concept is thus to give consideration to employment creation but the smallest firms are excluded and firms employing 10 to 50 people receive less concessions than larger firms. In other words, tax exemption is not related to investment per added working place and the choice of technology is not to be influenced Location of plants outside Tunis is encouraged through one extra year of tax exemption, grants for infrastructure work and subsidies on the interest rate for specific risk capital loans, to complement the owner's equity. Encouragements toward decentralization apply, in theory, to small and medium firms 1/, but the smallest firms with up to 9 working places are again excluded. The law of April 1972 provides special incentives for export oriented enterprises such as total or partial tax exemption for up to twenty years; exemption from customs duties for imported equipment and intermediate goods; exemption from turnover taxes on purchases from domestic sources; and the right granted to non-resident investors to dispose of the proceeds of their exports. These concessions promote foreign enterprises without however encouraging local subcontracting. Local linkages which could promote small enterprises are excluded In the procurement of supplies by government agencies, a 20% higher price is allowed for local supply. However, each concerned agency is free to make use of this opportunity or not. There are no indications of specific efforts by purchasing agencies to support the establishment of small local suppliers. The same applies to the 80 or so public enterprises, the 15 offices (cereals, coffee, tourism, transport, commerce, etc., of which several have some industrial or commercial functions in addition to their regulatory duties) and the statutory public or private monopolies. Nothing seems to have been done to promote supplies from small firms While it can be argued that small workshops can generally evade tax payments more easily than large firms, such evasion is partially due to their inability to maintain a good accounting system and is often an encouragement 1/ These benefits are mentioned both in Law of 1974 applying to all industries and in Law of 1973 creating FOPRODI. In practice they have not been implemented yet.

56 ANNEX 2 Page 9 against implementing such a system. The only real tax incentive for SSEs in Tunisia is the exemption of registration tax (taxe a l'enregistrement), and some thought is now being given by Government authorities to the possibility of reducing income tax rates for SSEs. In addition, SSEs may in the future receive support through industrial estates facilities. Institutional Support 3.07 Responsibility for implementation of various administrative regulations and policies affecting SSEs lies within several different government agencies (e.g. Directorate of Industries, Ministry of the Economy; A.P.I.; Office de l'emploi, Ministry of Social Affairs; Ministry of Finance; etc.). Lack of communication and unified criteria among them has hampered the development of consistent regulations and integrated programs in support of SSEs, in spite of their common needs and problems. At present there are no specific technical advisory services for small manufacturers 1/. A few institutions providing some free or subsidized services are catering to large and medium undertakings in areas of project identification and preparation (A.P.I., C.N.E.I.) and training (Office de l'emploi). The inadequacy of the existing information concerning SSEs aggravate the communication gap and the lack of coordination among agencies As part of a new Government approach towards SSEs, and partly as a result of discussion with Bank missions during the preparation of this project, some remedial proposals have been advanced by the Government that could have great impact in the SSE sector. Of particular relevance are the creation of a SSE policy making Unit in the Ministry of Economy, and the decision to set up a country-wide system of technical assistance to Small- Scale Industries. The latter will use A.P.I. and its network of branches and will combine efforts with A.F.I. and C.N.E.I. In addition, the Employment Office has recently established a SSE Unit to coordinate its assistance and vocational training in view of the specific needs of small entrepreneurs. The present activities of A.P.I., the Employment Office, A.F.I. and C.N.E.I. in relation to the industrial sector are described in Annex 23. 1/ Wiith the exception of artistic handicraft, which are being assisted through O.N.A.

57 Table: I ANNEX 2 Table 1 & 2 TUNISIA: Distribution of Manufacturing Enterprises By Size No. of firms Employment No. of firms Employment Size of Firms No. % No. % No. No. : Less than 10 employees , , employees , , employees ,972 1L , employees ,572 1L , Over 100 employees , , TOTAL , , , Average Employment SOURCE: Institut National de la Statistique. Recensement des Activites Industrielles, 1969 et Table: 2 TUNISIA: Distribution of Non-Agricultural Enterprises, By Size, 1976 (including informal sector) Size of firms Number of firms Sousse Sfax Gabes Total (Province) (City) (City) Manufacturing 1 to 10 employees 1,011 1/ 3, ,023 Over 10 employees Subtotal Manufacturing 1,121 3, ,386 All firms 1 to 10 employees 4,352 8,455 1,607 14,414 Over 10 employees All firms 2/ 4,571 8,859 1,681 15,111 1/ Of which 889 in firms with 1 to 5 employees. 2/ Including manufacturing, public works, transportation, tourism, commerce, banking, services, etc. SOURCE: Institute National de la Statistique - Preliminary Survey, 1976

58 ANNEX 2 Table 3 Table: 3 TUNISIA: Structure of Industrial Sector by number of firms (1973) 1/ (financial data in thousands if Dinars) 2/ Branches No. of Firms Sales Purchases Investments No. of Employees 1. Petroleum and Fuel 6 82,233 23,623 10, Metal Works ,243 57,665 4,867 13, Shipbuilding 8 1, , Construction material ,848 20,746 3,685 8,190 ceramics & glass 5. Chemical Industries ,957 38,176 6,453 5, Rubber, plastics 12 7,093 4, Tobacco 1 30,675 28, , Food Processing ,311 92,383 3,326 9, Textile, clothing ,837 30,867 3,382 5S, Leather, shoes 36 9,672 6, ,6iu 11. Wood and Furniture 116 8,305 5, , Paper 71 17,928 12,876 1,582 3, Cork 2 1, Miscellaneous Indus. 21 3,343 2, TOTAL 1, , ,807 25,637 67,627 1/ I.N.S. does not include in manufacturing those firms with 5 employees or less or those considered as handicraft (artisanat). 2/ Only yearly investments during Source: Institut National de la Statistique Recensement des Activites Industrielles, Resultats 1973.

59 Table: 4 ANNEX 2 Table 4 TUNISIA: Manufacturing Activities Number of Establishments by size of employment, in and group share Sector above Total in Total (%) Public Utilities Power, gas Water Subtotal Mining Salt Iron Ore Other Minerals Phosphates Subtotal Petroleum Metal Products Metallurgy Foundry, tanks, electricals Mechanicals industries Other metal products Subtotal Shipbuilding Building materials, ceramics Glass Subtotal Chemicals Fertilizers, liquid gas explosives Cleansing materials Pharmaceuticals Paints; glue Perfumes, cosmetics Refined oil, soap Subtotal Rubber and plastics Tobacco Food products and beverages Cheese, milk, margerine 1 2 Flour milling, pasta making Bakeries Biscuits Sugar, yeast

60 Table:4 ANN~EX 2- Table 4 (contd.) Number of Establishments by size of employment in 1973 (contd.) and group share above Total in Total (%) Beverages Canning Confectionery, chocolate Coffee processing Others Subtotal Textiles and clothing Textiles Clothing Subtotal Leather and shoes Wood Products Sawmilling, furniture Bed manufacturing Subtotal Paper Products Paper, Board Newspapers, printing Other Subtotal Cork Other manufacturing industries Buildings, Public Works Transportation Road Rail Sea Air Pipeline Subtotal TOTAL Public utilities Mining Petroleum Manufacturing , Public Works Transportation TOTAL , Source: Institut National de la Statistique Industrial Census, 1973

61 ANNEX 2 Table 5 Table 5 TUNISIA: Regional Distribution of Industrial Activities, 1973 No. of Province No. of firms % employees x TUNIS , TUNIS SUD , BIZEFTE , BEJA , JENCOUBA , LE KEF , SILIANA KASSERINE , S. BOUZID GAFSA , MEDENINE GABES , SFAX , KAIROUAN MAHDIA MONASTIR , SOUSSE , NABEUL , TOTAL 1, , Source: Institut National de la Statistique.

62 ANNEX 2 Table 6 Table: 6 TUNISIA: INDUSTRIAL SECTOR - TOTAL EMPLOYMENT Food Processing 35,600 36,620 Textile, clothing, leather 79,000 99,097 Wood, cork, furniture 9,200 9,930 Paper, printing, miscellaneous 7,700 9,198 Chemicals and rubber 7,600 8,08, Building materials, glass 15,900 21,981. Mechanical, electrical industries 16,000 15,393 Subtotal Manufacturing 171, ,300 (formal and informal sectors) Building and public works 59,000 68,945 Mining 19,000 17,878 Public utilities 6,300 6,683 Transportation 42,900 45,866 Total 298, ,672 1/ of which 46,800 female employees, including 41,000 in textile and clothing, 4,100 in food processing, 500 in chemicals, 600 in mechanical/electrical industries, 400 in paper and printing and 100 in wood, cork and furniture industries. Sources: a) 1972 estimates from UNDP/ILO survey b) 1974 estimates by the Office of Employment.

63 Table: 7 ANNEX 2 Table 7 TUNISIA: Investment and Employment in FOPRODI Projects ( ) Sub Sector Investment Employment Investment/ Investment/ Number of (Dinars) job project projects (Dinars) (Dinars) Food processing less than 20 employees 84, ,060 28, to 49 employees 782, , ,430 6 above 50 employees 400, , ,000 2 Textiles, garments less than 20 employees 222, ,319 44, to 49 employees 577, ,400 96,300 6 above 50 employees 400, , ,000 2 Construction materials employees 1,183, , , above 50 employees 373, , ,500 2 Wood products less than 20 employees 43, ,279 21, to 49 employees 414, , ,500 4 above 50 employees 333, , ,500 2 Metal products mechanical industries less than 20 employees 302, ,462 27, to 40 employees 718, ,646 89,778 8 over 50 employees 150, , , / Chemicals and plastics less than 20 employees 26, ,188 13, to 49 employees 113, ,794 56,500 2 Paper products, printing less than 20 employees 30, ,727 30, to 49 employees 303, ,032 60,632 5 Building and public works 20 to 40 employees 413, , ,990 3 Above 50 employees 200, , ,000 1 Optical glass 20 to 49 employees 51, ,889 51,000 1 Shoes and leather Above 50 employees 385, , , / Electrical industry. Source: FOPRODI

64 ANNEX BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Ownership Structure (as of December 31, 1976) Number of Shares Par Value of Shares % of Capital (in Dinars) Tunisian Government 145,410 1,087, Central Bank 72, , Government-Controlled Institutions Banque Nationale de Tunisie 43, , Societe Tunisienne de Banque 36, , Societe Tunisienne d'assurances et de Reassurance 16,592 82, Societe Tunisienne du Sucre 11,975 59, Soci6t6 Financiere et de Gestion 9,514 47, Societe Nationale du Liege 8,101 40, Soclit6 Tunisienne d'electricite et de Gaz 2,000 10, Soci_te El Bouniane 2,000 10, Raffinerie Tunisienne du Soufre 1,820 9, Lloyd Tunisien 1,600 8, Societe de Transport du Sahel 1,200 6, SIAPE 1, Subtotals: Public Sector 354,124 1,770, Tunisian Private Shareholders Union Bancaire pour le Commerce et l'industrie 45, , Banque de Tunisie 41, , Union Internationale de Banques 10,998 54, CFCT 1,872 9, Banque du Sud 3,180 15, Other Private Tunisians, including Bearer's Shares 235,180 1,175, Subtotals: Tunisian Private Shareholders 338,140 1,690, Foreign Shareholders othe than IFC Banca Commerciale Italiana Holding 12,000 60, Skandinaviska Enskilda Banken 6,000 30, Bank fuir Gemeinwirtschaft 6,000 30, Worms & Compagnie 2,336 11, Caisse Centrale de Cooperation Economique 72, , FRAB Bank International 18,000 90,00') 1.50 Banque Nationale de Paris 11,992 59, Banque Arabe et Internationale d'investissement 15,000 75, Caisse de Dep8ts et Consigantions 12,000 60, Kuwait Investment Company 72, , Lybian Arab Foreign Bank 84, , Deutsche Gesellschat fur Wirtschaftliche Zusammenarbeit 72, , Other Foreign Shareholders 4,408 22, Subtotals: Foreign Shareholders other than IFC 387,736 1,938, International Finance Corporation 120, , Totals 1,200,000 6,000, EMENA/IDF May 1977

65 ANNEX 4 BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE BOARD OF DIRECTORS AND EXECUTIVE COMMITTEE (as of December 31, 1976 Habib Bourguiba, Jr. x Moktar Fakhfakh x Taoufik El Karoui, President General Manager of BDET General Manager of BDET Ministryr of Finance Fawzi Habib International Finance Corporation Abdelaziz Ktari x Central Bank Fouad El Bahr Kuwait I]nvestment Company Abdallah Ammar Essaoudi Yves Roland Billecart Christ of Rotberg Abdesselem Ben Ayed x Moncef Belkhodja x Lybian Arab Foreign Bank Caisse Centrale de Cooperation Economique Deutsche Gesellschaft fiur Wirtschaftliche Zusammenarbeit President General Manager of Union Bancaire pour le Commerce et l'industrie President General Manager of Banque Nationa:Le de Tunisie Habib Ghenim x President General Manager of Socifte Tunisienne de Banque Rachid Ben Yedder x Banque Ggnerale d'investissement Ali M'Heni x Shareho.lder Ezzedine Ben Achour x Shareholder x Also a member of BDET's Executive Committee. EMENA/IDF May 1977

66 BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE ORGANIZATION CHART (MARCH 1, 1977) G-nera M-naer PjcGSeneel Dept.y: Wr Mokhtar Fakhf.kh Mn E Farhrt ~ ~ ~ rooto an netet n M = 3 S ard Projects Appraisal Dept. Genera S-ri-e D,,pt Financie S.vi-0 De,pt. Sperv sion, -Det Secu -t-e et~.dl S.Perisin De,pt. Reorc Securities Dape, auditn et Mr Brigui Mr. Joulak Mr. T-ni Mr. Crif Mr. elkhodja Mr Riohe P 12S 5 P=2 S=2 P=2S=1_ P=1 S=1 P2 S=1 P=25= Personnel and R Ml Procarererrt _ Cammiements _ P omot _ Represneltatio-i Board Secretariat Mr. Tangour Mr. Meegh-nni Promotin- Mr. B1n M'R,d Mrs Ben Ha3iia P 2 S=43 P=1 S=2 P=2 S=1 P 4 S4=2 P= 5=1 Legal Ditunrn t S prvsio 1 Secnrr en Finencia Pinjec- Me. Abd,,l Alir Mr. Chraker I Mr. abbes rjrouioaait suc. Mrs CherM P ~~~ 4 S 6 P 3 S ~~~~~P - 7 = S =1 P - 3 S P p_45=p6 _3 S 5 _ P=25= 1 P35= 1 L _P-2 Accounting Repaymen1ts r j Decumeritasion Flinancigi, erinerna Mr. Mr Majorl Ou Mrs. l - A,,. AlijriBen Ay,io, ps 1 S=11 P 4 S=10 P=2 S=1 Pi P=2 S 2 Cashier M.,rperenrt IMi 3 tnionals ipi 60 P 1 S 4.S 3 pponrt Staft Si t114 TOTAL 1377 Ar 1 Park EMENAtlDF JoiY 1977

67 HANQUE DE DEVELOPPB}iENT ECONOMIQUE DE TUNISIE Summarj of Operations (Amounts in thousand dinars) B j9 Amoun 176 Number Amount _ Number /AmountAmounAmer Amo % on Num9b er A1 m Applications Foreign currency loans noao noao n.a , , , , n.a, n a: noa , , , , Dinarv loartnsioation n,a. n,a. n,a. 30 2, , , EauitN participations Totals n.a, n.a , OQ , W ,362, , Approvals Foreign currency loans n.a. 5, , , , R3 17, Dinar loans n.a. 4, , , , , E4uitvy articipations n.a , , , , Totals 0 1, , , ,092=P 3 =T 100.)O T171 22, O 0 0. Comritments Foreign currency loans n.a' 4, , , , a Dinar loans n..36, , 1, , , , Fouitv nartieninstaona n.a, , , Disbursements Totals n.a. 5, ,015 ;.00 O , , Foreign currency loans 3, , , , , Dinar loans 1, , , , , Mruitv participations , , Totals 4, , ,145 loo1. 15, V/ Many operations involve at the same time a loan and an equity participation, Also very often the same operation involves a dinar loan and a foreign currency loan, E3IENA/IDF June 1977

68 BANQU-' DE DEVELOPPPEMNT ECONOMIQUE DE 7UNISIE Analy ei of A provea perations amounts in thousand dinars) Number Amount % Number Amount % Number Amount % Number Amount 7 NEW PROJECTS VERSUS EKTENSION OR MODERNIZATION o5 8, , '71 13, , E;tension or modernization projects 75.i %2.6o ,6 f r Totals 12 9 l 2, l. ; 1c PIMVATE VERSUS PUBLIC SECTOR Private sector , , , , Prublic sector Totals t363: r 30, SECTOR OF ACTIVITY Industry MNchanical, electrical and metalworking , , , Construction materials, ceramics and glassware 17 1, , , , Chemicals and rubber 5 1, , , , ,2 Food processing and beverages , , , Textiles, clothing and leather 16 2, , ,560.o , Wood, cork and furniture 12 1, o.6 Plastics , Miscellaneous industries 20 2, , , , Subtotals: Industry 1i 13, ; i 23, , X 7-2T 73-4 Tourism 17 2, , , , Transport 6 2, , Totals 1 11, t , :0 SIZE OF OPERATIONS U 15,000 to 49, , , , D 5O,000 to 199, , , , , D 200,000 to 499; , , , , D500,000 to 999, , , , , D 1,000,000 and over Totals 129 lot,o , t! 22,t LOCATION Tunis 71 10, , , , , Bizerte o , Beja - - _ Cap-Bon (Nabeul) , , ,255.o 7.2 Jendouba , o Le Tef Sidi Bouzid _ - - Kairouan o 0.3 Sousse 18 2, , , ,388, Monastir , , Mahdia Kasserine Gafsa o , o 0.2 Sfax 18 2, , , ,0 13 1, Gabes 3 1,368.o , , Medenine ' Totals , , o , r , DURATION (LOANS ONLY) Five to less than seven years 31 4, , , ,6 Seven to less than ten years 74 10, , , , Ten years and above 11 2, , , , Totals , , , il 27, pgna/ijjy gunelr7

69 BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Distribution of Approved New Project Operations by Size of ProJect (amounts in thousand dinars) BDET financing Size of project Number of Total pro- Equity Dinar Foreign currency Investment projects jects costs part. loan loan Total amount % JobScreated cost/job A to to , ,7 50 to , ,8 100 to , , to , to to , to , ,739 2, ,000 to 1, , ,242 2,750 4,390 31, ,000 and over 3 27, ,340 1,830 3,843 27,5 4,391 6,2 TOTALS 74 48,063 1,431 3,507 9,049 13, ,0 8,681 5,5 B to to ,9 50 to , , ,7 100 to , to , ,6 200 to to , to , , ,000 to 1, , ,928 4,932 37,7 2, ,000 and over 2 5, ,450 1, TOTALS 67 29, ,151 10,993 13, , C to _ 44 0,2-30 to to to , to , to to , ,506 1, , to , ,515 3, , ,000 to 1, , ,A29 2, ,000 and over 8 28,250 1,795 3,270 6,400 11, EMENA/IDF May 1977 TOTALS 63 48,363 2,189 5,328 13,727 21, ,

70 BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE ANNEX -9 Page 1 of 3 Resource Position as of December 31, 1976 I. Overall Situation Amounts in % of total resources in thousand dinars A. Resources Equity 8, Domestic term borrowings - Government 4, National Social Security Fund Bond loans (commercial banks) 5, Bond loans (public) 3, Central Bank loan Central Bank rediscount (unused) 2, Subtotals 1W=13 T95- Foreign term borrowings - IBRD 20, SIDA (Swedish aid) 5, KfW (German aid) 1, CCCE (French aid) 10, Qatar Government 4, Kuwait Fund 3, Kuwait Investment Company (bond loan) 10, Abu Dhabi Government African Development Bank 1.9 Subtotals 58, Total Resources 83, B. Portfolio Loans outstanding 54, Equity investments 6, minus - provisions for doubtful loans - 1, reserve for exonerated reinvestments 1/ Net portfolio 59, C. Resources available for disbursement (A - B) 23, D. Undisbursed commitments Undisbursed commitments - on equity participations on dinar loans 7, on foreign currency loans 11, Total undisbursed commitments 20,061 E. Resources available for commitments (C-D) 3, / The reserve for exonerated reinvestments is considered by the auditors as a special provision for possible losses on BDET's equity portfolio. EMENA/IDF July 22, 1977

71 II. Status and Conditions of Long Term Domestic Borrowings Year Repayment Original amount Outstanding amount Interest Rate Contracted Period Domestic Borrowings National Social Security Fund (CNSS) % Government - subordinated loan subordinated loan ,000 4, % / Central Bank % Commercial banks - bond loan ,000 2, % bond loan ,000 2, % Bond loan , % , % ,500 2, % and % 15,800 13,651 1/ The Government subordinated loan of D 4 million is convertible into equity to the extent of the portion of the forthcoming capital increase from D 6 million to D 10 million that will not be subscribed by other shareholders. The balance of the loan will be converted into 20 year loan from the date of the full payment of the capital increase and will bear interest at the rate of 6%. X Xrn EMENA/IDF 0 July 1977

72 III. Status and Uonditions of Long Term Foreign Borrowings Original Amoant Committed Available Disbursed Undisburmed Outetan- nterest Year Repayment!net of Cancellation net of Can. for ComI Commitments ding rate Contracted Period win thousand (in thounsand cellation nitmenti Foreign Borrowings foreign Cur- Diar)nars) rency Unite) (in thousand dinars) IBRD. 449 TOD US S 4,722 2,447 2,447 _ 2, TUN US 3 9,292 4,836 4,836 _ 4,836 _ to TUN US 3 9,297 4,567 4,567-4, ,0% TUN US S10,000 4,250 4, , ,25% TUN US 314,000 5,800 5, , ,25% TUS US :20,000 8,500 4,733 3, , ,5% Sub Totals : IBED US 367,311 30,400 26,572 3,828 22,370 4,202 12,669 Swedish International Development Agency (SIDA) Firts loan SIr 15,000 1,496 1,496-1,496-1,196 5% Second loan SKr 30,000 2,898 2,898 _ 2,898-2,747 3% Third loan SKr 15,000 1,493 1,493 _ 1, ,431 3% Sub totals SIDL 60,000 5,887 5,887-5, ,375 XreditanBtalt Fazr Winderanfban ( X H ) First loan DM 10,000 1, , ,167 5% to Caisse Centrale de Coopdration Economique(CCCE) First loan - French Goverment FF 3, % French Commercial banks FF 6, ,5% Second loan- French Goverment FF 12,640 1,160 1, % French Commercial banks FF 18,296 1,723 1,723-1,723-1,550 6,5% Third loan - French Goverment FF 9, % Fraach Commercial banks FF 12,872 1,158 1, ,5% Fourth loan- French Goverment FF 10,000 0,900 g 2, % French Commercial banks FF 16,000 1,400 ) ) ,5% Fifth loan - French Soverment FF 10,000 0, % French Commercial banks FF 16,000 1,400 _ 1,400 _ - _ 7,5% FF 116,407 10,504 8,047 2,457 4,816 3,231 4,410 African Development Bank UA 3,000 1,600-1, ,5% Qatar Goverment US$ 10,000 4,233 4,233-4,233-4,226 3% Kuwait Fund KD 2,500 3,667 3,667-2,411 1,256 2,411 4% Kuwait Investment Company (XIC) bond loan KD 7,000 10,299 8,871 1,428 6,734 2,137 10, Abu - Dhabi Gcverment US$ 1, , Total Long Term Fbreign Borrowings 68,789 59,476 9,313 47,926 11,650 40,895 3ine 1977,I

73 ANNEX 10 BANQUE DE DEVELOPPEMENT ECONOMIQJE DE TUNISIE Summary of Audit Results for 1974, 1975 and 1976 Accounts (amounts in thousand dinars) A. Loan Portfolio Total loan portfolio 31,464 43,627 54, Portion of loan portfolio on which auditors lacked data to form an opinion (a) enterprises in start-up period with no technical or financial difficulties -- number of enterprises loans outstanding 6,606 7,708 9, percentage of total loan portfolio 21.0% 17.7% 17.9% (b) enterprises in start-up period with technical or financial difficulties -- number of enterprises 1/ loans outstanding - 2, percentage of total loan portfolio - 4.2% (c) enterprises having failed to submit satisfactory information -- number of enterprises loans outstanding , percentage of total loan portfolio 0.9% 0.6% 3.2% 3. BDET's provisions for doubtful loans , Minimum provisions recommended by auditors for doubtful loans 1, ,066 B. Equity Portfolio 1. Total equity portfolio 3,925 4,603 6, Portion of equity portfolio on which auditors lacked data to form an opinion (a) enterprises in start-up period with no technical or financial difficulties -- number of enterprises equity participations 734 1,296 1, percentage of total equity portfolio 18.7% 28.2% 26.9% (b) enterprises in start-up period with technical or financial difficulties -- number of enterprises 1/ equity participations percentage of total equity portfolio 0.9% 2.9% (c) enterprises having failed to submit satisfactory information -- number of enterprises equity participatiouie percentage of total equity portfolio 2.7% 0.6% 0.3% 3. BDET's reserve for exonerated reinvestments2/ Provisions recommended by auditors for losses on the equity portfolio / The 1976 audit did not make a distinction within enterprises in their start-up period between those encountering technical or financial difficulties and those encountering no such difficulty. For 1976, all enterprises in their start-up period are, therefore, grouped in category (a). 2/ The reserve for exonerated reinvestments is considered by BDET and the auditors as a provision against losses on the equity portfolio.

74 BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Outstanding Loans and Equity Investments as of December 31, 1976 (Amounts in thousand dinars) Medium term loans Long term loans Equity investments Totals Number Amount Number Amount Number Amount Number Amount % Industry Food processing and beverages 12 11A , , Textiles, clothing and leather , , Wood and cork and furniture , , Chemicals , , , Tiles, ceramics and glassware , , Mechanical and metalworking industries , , Electrical equipment Transport equipment Rubber and plastics Mining and careers , Paper and printing , , Construction , , Miscellaneous industries , , Subtotals 86 1, , , , Tourism , , , Transport , , Banking and insurance Totals 117 2, , , , EMENA/IDF July 1977

75 BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Loan Portfolio Analysis: Arrears in Principal and Interests over three Months (amounts in thousand dinars) December Industrial Sector Loans Number of loans affected by arrears Interest in arrears Principal in arrears Total in arrears - in absolute value in percentage of total industrial sector loans Principal outstanding of loans affected by arrears - in absolute value 1,362.0 n.a. 1, in percentage of total industrial sector loans 7.4 n.a. 4.7 Tourism Sector Loans Number of loans affected by arrears Interest in arrears Principal in arrears Total in arrears - in absolute value in percentage of total tourism sector loans Principal outstanding of loans affected by arrears = in absolute value 5,373.0 n.a. 2, in percentage of total tourism sector loans 41.1 n.a Total Loan Portfolio Number of loans affected by arrears Interest in arrears Principal in arrears Total in arrears - in absolute value 1, , in percentage of total loan portfolio 3,7Z Principal outstanding of loans affected by arrears - in absolute value 6,735.0 n.a. 4, in percentage of total loan portfolio 21.4 n.a. 7.9 EMENA/IDF June 1977

76 BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Analysis of Loan Portfolio as of December 31, 1976 Loans for which the Auditors have recommended the Constitution of Provisions (amounts in thousand dinars) Borrowers Principal Principal Interest in Total Minimum Securities not in arrears in arrears arrears Provision available Tourism Sector Hotel Ben Tanfous Baie des Singes (SOPHOHOT) Hotel Skanes Rivage Transtours (bus transportation) Hotel Setid Medina Hotel Sahara Beach (RYM) 1, , Societe PUPPUT (Recreation Center) s lab 1.3 Sub-total 2, , Industrial Sector Societe Mongi Ghariani (cannery) Said Ghorbel (carpets) SICOAC (asbestos - cement) Huilerie Bayar (oil mill) Huilerie Tabka (oil mill) Huilerie Harrabi (oil mill) Entreprise Salah N.'Sir (construction) Sub-total , TOTAL ,930 1,066 Code for Securities Available: 1. Chattel mortgage of doubtful value 2. Valid mortgage 3. Mortgage of doubtful value until validated 4. Guarantee by third parties of doubtful value 5. Legal proceedings underway EMENA/IDF June 1977

77 BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Audited Incomiie Statements, (in thousand of Dinars) INCOME Interest on loans and advances 1, , , , ,228,0 Interest on deposits Dividend income Capital gains Other income Total income 1, , , , ,149.7 EXPENSES Interest on deposits Interest on borrowings , , ,803.6 Administrative expenses Depreciation , Total 1, , , , ,816,5 Operational income , ,333.2 Less: allocation to provisions for doubtful loans (60.0) (120.0) (200.0) (300.0) (300.0) Profit before tax ,033.2 Current taxes ,6 Other tax adjustments 1/ (39.0) (63.4) (139.5) (139.5) NET PROFIT ,1 ALLOCATION OF NET PROFIT (made during following year) Dividends ,0 Employees' social fund Net increase of reserve for exonerated reinvestments Supplementary allocation to provisions for n.a. doubtful loans n.a. Reserves and surplus n.a. 1/ According to Tunisian fiscal laws, allocations to provisions are not deductible from taxable income until the losses have actually been incurred. The auditors consider that taxes paid on the allocation to provisions are pre-paid taxes to be reimbursed when the losses will be actually incurred. Such taxes have therefore been included in net profits and in accounts receivable. EMENA/IDF June 1977

78 BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Audited Balance Sheets, (in thousand of Dinars) December ASSETS Cash and bank deposits 3,215 1,994 5,571 5,553 5,955 Accounts receivable ,121 3,239 5,244 Accrued income from loans , ,516 Short-term investments Current Assets 4,419 3,193 8,002 9,521 12,907 Medium-and long-term loans 14,398 19,794 31,464 43,627 54,803 Equity Investments 2,013 2,908 3,925 4,603 6,576 Total Portfolio 16,411 22,702 35,389 48,230 61,379 Less: Provisions for doubtful loans (100) (220) (519) (934) (1,339) Net Portfolio 16,311 22,482 34,870 47,296 60,040 Government Securities Fixed assets (net of depreciation) Other assets (net of depreciation) TOTAL ASSETS 20,878 25,838 43,086 57,037 73,448 LIABILITIES Deposits 2,700 4,150 5,969 4,389 3,313 Accuunts payable 891 1,370 1,899 3,961 5,687 Current liabilities 3,592 5,520 7,868 8,350 9,000 Long-term borrowings ,839 39,360 54,548 of which: tibrd (9,170) (0,271) (13,375) (13,488) (12,669) Government subordinated (615) (615) (615) (2,615) (4,615) Employees' Social Fund Reserve for exonerated reinvestments 1/ Share capital 3,000 3,000 4,500 6,000 6,000 Premium on capital subscription Government grant Reserves and surplus ,161 1,438 Equity 4,425 4,43 6,7 8,411 8,688 TOTAL LIABILITIES 20,878 25,838 43,086 57,037 73,448 1/ The reserve for exonerated reinvestments is considered by BDET and the auditors as a provision against losses on the equity portfolio and is therefore exe uded from BDET's equity. EMENA/IDF June 1977

79 BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Performance Indicators, Profitability Indicators Net profit as % of average net worth 4/ Profit before tax as Z of average net worth 4/ Dividends as % of net profit 4/ Dividends as % of par value share Book value share as Z of par value share Earnings per average share outstanding (in dinars) Year of operation 13th 14th 15th 16th 17th Operational Zndicators - assets Gross iucome as % ot average total assets Administrativ expenses as % of average total Financial expenses as % of average total assets 4, ,5 4,8 Administrativ expenses/average number of professional staff (in thousand dinars) Dividends and realized capital gains as % of average equity portfolio 1/ Income from loans as % of average loan portfolio Volume of approvals/average number of professional staff (in thousand dinars) Cost of term debt as % of average term debt Year end professional staff Financial Structure Indicators Total debt/year-end networth Long term debt/year-end networth Provision for doubtful debts as % of loan portfolio 2/ 0.7 3/ 1.1 3/ 1.6 3/ Interest coverage ratio Year end total assets (in thousand dinars) 20,878 25,838 43,086 57,037 74,448 Year net net worth (in thousand dinars) 4,425 4,430 6,710 8,411 8,688 1 A small portion of dividends and capital gains are derived from short-term dealings in the stock market and from trading of Government securities; they are included in the calculation of yield on the equity-portfolio. 2/ The risks of losses on the equity portfolio are deemed by the auditors to be covered adequately by the reserve for exonerated reinvestments. 3/ Provisions in 1972, 1973 and 1975 were considered insufficient by the auditors. They have since then reached an M adequate level. X 4/ For the purpose of these indicators, profit before tax and net profit are taken after deduction of the supplementary 0 allocations to provisions that BDET had to make in (see Annex 14), in line with the auditors' recommendations. EMENA/IDF - June 1977

80 ANNEX 17 Page 1 TUNISIE BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Assumptions underlying Projected Operations Overall approvals will increase moderately, at a rate of about 6.5% p.a. The proportion of tourism financing to total approvals is expected to decrease from about 20% in 1976 to 12% in % of approved loans are expected to be committed, as follows: 30% in the same year as they are approved; 50% in the following year; and 5% in the third year after the approval. 3. Commitments of a given year are expected to be disbursed as follows: 55% in the same year that the loan contract is signed; 35% the year after; and 10% in the third year following contract signature. 4. Provisions on doubtful loans are conservatively expected to remain at a level of about 2.5% of portfolio. As regards equity participations, the same proportion of outstanding portfolio (about 13%) as in 1976 will continue to be provisioned. This latter requirement is covered by the existence of a "reserve for tax-exonorated investments" on BDET's books, which the auditors accept as a provision. In the projected balance sheets, however, that portion of this reserve which will have to be earmarked as a provision against losses on the equity portfolio, has been identified as such, and deducted from BDET's equity. 5. It has been assumed that long term loans signed in 1978 and 1979 would be made at an effective rate of 10.15% p.a. for tourism projects and 9.65% p.a. for industrial projects; those made in 1980 and later would be made at 10.65% respectively. 6. Medium-term loans signed in 1978 and 1979 are expected to carry an interest rate of 8% on average; those made in 1980 and later, an interest rate of 8.5%. The proportion of medium-term loans signed under these conditions is expected to grow from less than 1% of outstanding portfolio in 1978, to about 3% in Cost of new resources obtained after 1977, has been assumed to be, on average, 7% p.a. for local currency borrowings, and 7.5% for borrowings in foreign exchange taking into account future Government subsidies towards the cost of selected foreign exchange borrowings obtained at non-concessionary terms. These assumptions would bring the average cost of outstanding borrowing to 5.5% in 1977, 6.0% in 1979, and 6.3% in The KD 7 million bond loan subscribed by KIC in 1976, although it carries an interest rate of 8.5%, has been assumed to continue to cost BDET 6% p.a. thanks to a Government rebate. Average interest spread on BDET's lending operations is thus expected to vary between 2.7% and 3%.

81 ANNEX 17 Page 2 8. Equity investments are expected to be paid in, after approvals, as follows: 50% in the year of approval, 40% in the following year, and 10% in the third year after approval. The yield of outstanding portfolio of equity investments is assumed to average 3.6% p.a. 9. Administrative expenses are expected to increase by D 100,000 per year, i.e., on average, at about 9% p.a., which is a higher growth rate than that of approvals, but much slower than the growth rate of BDET's portfolio. As BDET's efficiency improves, partly thanks to economies of scale, the ratio of administrative expenses to average fixed assets will decline from 1.5% in 1976 to 1.0% in BDET's capital increase from D 6 million to D 10 million is assumed to be paid-in as follows: D 1 million in 1978; D 1 million in 1979; and D 2 million in A subscription premium of 20% of par value will be collected by BDET in BDET's dividends are assumed to increase to 8% p.a. on Daid-in shares for 1977 through 1979, and to further increase to 10% p.a. from 1980 onwards, when such an increase is made possible by the increased profits resulting from the higher interest rates to become effective in 1978.

82 ANNEX 18 TUNISIA BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Projected Operations, (D '000) APPROVALS (actual) Loans Industry 21,881 24,900 26,400 28,500 30,000 33,000 Tourism 5_?,357 4,000 4,000 4,000 4,000 4,000 Sub-total 27,238 28,900 30,400 32,500 34,000 37,000 Investments Industry 1,906 1,600 1,600 1,700 1,700 2,000 Tourism 1, Sub-total 3,070 1,800 2,000 2,100 2, Overall Financing Industry 23,787 26,500 28,000 30,200 31,700 35,000 Tourism 6,521 4,200 4,400 4,400 4,500 4,500 TOTAL 30,308 30,700 32,400 34,600 36,200 39,500 COMMITMENTS On all operations Loans 19,278 23,650 25,000 27,250 28,200 28,600 Investments 2,384 1,800 1,900 2,000 2,200 2,400 Overall financing 21,662 25,450 26,900 29,250 30,400 31,000 On all operations DISBURSEMENT Loans 16,069 22,078 26,506 28,475 29,776 28,067 Investments 2,061 1,800 1,705 2,045 2,155 2,305 Overall financing 18,130 23,878 28,211 30,520 31,931 30,372 EMENA/IDF August 1977

83 ANNEX 19 TUNISIA BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Projected Resource Needs, A. Balance of uncommitted resources as of Dec. 31, , B. Commitments during ,400 C. Resources being mobilized in KFW 1,800 - Arab Fund for Social and Economic Development 10,000 - Revolving on previous loans 2,000 - Cancellations on earlier IBRD subprojects French credit 2,500 - Bond Loan Self generated 300 D. Resource RaD A+B-C (3,900) 1978 E. Commitments during ,900 F. Projected resources - Capital increase Subscription premium 12JOR - Proposed World Bank loan - Self generated 450 G. Resource gap (F- D -E) 1979 H. Total commitments during ,250 I. Ptojected resources - French credit 2,500 - Qatar loan 4,000 - Arab Fund for Social and Economic Development 10,000 - Capital increase Bond Loan 1,000 - Self generated ,080 15,030 (15,770) L. Resource gap (I - H - G) (25,9401 IM^NAI luk November 1977

84 ANNEX 20 TUNISIA: BANQUE de DEVELOPPEMENT ECONOMIQUE de TUNISIE Projected Income Statements, (D '000) INCOME (Actual) Interest on loans and advances 4,228 5,222 6,753 8,569 10, Interest on deposits Dividend income Capital gains Other Income EXPENSES Total 5,150 5,966 7,577 9,479 11,390 11,n56 Interest on deposits Interest on borrowings 2,804 3,495 4,660 5,934 7,022 8,471 Administrative expenses ,040 1,140 1,240 1,340 Depreciation Other Total 3,817 4,588 5,854 7,229 8,418 9,968 Net Operational Income 1,333 1,378 1,723 2,250 2, Less Provisions Profit before tax ,101 1,647 2,345 2,614 Tax 87 (14) NET PROFIT ,362 1,770 1,973 Allocation of Profits Dividends ,000 Reserves and surplus Other RATIOS Net Profit as % of avg. net worth Interest Coverage 1/ Admin. Expenses as % avg. total assets Average spread on lending operations % Debt service coverage 2/ ,1 X 1/ Defined as ratio of earnings before interest on LT debt and taxes over interest on LT debt. 2/ Defined as ratio of gross income minus administrative and other expenses, minus taxes, plus loan collection, over debt service. 3/ The debt service coverage ratio declines in 1981 due to the balloon repayment D 7.5 million on the D 10 million loan from KIC, which is expected to be rolled over. EMNA/IDF November 1977

85 ANNEX 21 SOURCES TUNISIA Banque de Developpement Economique de Tunisie Projected Cash Flow, (D '000) Net profit before taxes and provisions 1,378 1,723 2,250 2,972 3,088 Depreciation Cash generated 1,455 1,798 2,325 3,047 3,163 Share Capital increase, paid-in - 1,000 1,000 2,000 - Subscription premium Term Borrowings 20,200 22,200 23,800 22,500 26,400 Loan collection 7,345 8,462 11,151 12,491 16,407 Sales from equity portfolio Total 29,200 34,660 38,876 40,688 46,870 APPLICATIONS Loan Disbursements 22,078 26,506 28,475 29,776 28,067 Purchase of Equity 1,800 1,705 2,045 2,155 2,305 Repayment of Borrowings 1/ 4,917 5,318 7,151 7,004 14,771 2/ Dividends Paid ,000 Income tax (or tax credit) (14) Increase in fixed assets Increase (decrease) in Cash Flow (99) Total 29,200 34,660 38,876 40,688 46,870 1/ Including conversion into capital of part of the Government loan, equivalent to 12% of paid-in capital increase. 2/ Including D 7.5 million balloon payment D 10.0 million loan from KIC. EMENA/IDF August 1977

86 ANNEX 22 TUNISIA Banque de Developpement Economique de Tunisie Projected Balance Sheets, (D '000) ASSETS (actual) Current Assets 12, ,848 12,960 12,990 13,038 Medium-and long-term loans 54,803 69,536 87, , , ,849 Equity Investments 6,576 8,176 9,481 1o.p76 12,411 -_JU6 Total Portfolio 61,379 77,712 97, , , ,685 Less: Provisions for losses - on loans (1,339) (1,738) (2,190) (k,623 ) (3,055) (3,346) - on equity portfolio 1/ ( 890) (1,062) (1,232) (1,402) (1,597) (1,780) Net Portfolio 59,150 74,,12 93, , , ,559 Fixed Assets (net) ,104 1,106 Other Assets (net) _ Total Assets 72,558 88,4 107, , , ,793 LIABILITIES Current Liabilities 9,000 9,000 9,000 9,000 9,000 9,000 Long Term debt 54,548 69,831 86, , , ,487 (of which: - IBRD (12,669) (13,777) (15,527) (18,022) (20,084) (19,033) - Government (4,615) (4,615) (4,495) (4,375) (4,094) (4,053) Social Fund Share capital 6,000 6,000 7,000 8,000 10,000 10,000 Subscription premium ,550 1,550 1,,.50 1,550 Government grant Reserves and surplus 2/ 1,5.13 "gjj 2Q, C' 4 Equity 8,763 9'062 11, }5, Total Liabilities 72, , ,93 RATIOS Term debt/equity Reserves and Provisions as % of average 7.7 7, portfolio , Current assets/current liabilities Outstanding Bank loans as % of total outstanding term loans 23.2% 19.7% 17.9% 17.4% 16.9% 14.6% 1/ provision for losses on equity portfolio has been taken from the Reserve on exonerated investments, as estimated by BDET. 2/ Including that portion of the reserve for exonerated investments which exceeds the required provision on possible losses on equity investments. The full amount of the reserve for the years Is estimated as follows (D'000): 1306; 1616; 1872; 2140; EMENA/IDF August, 1977

87 ANNEX 23 Page 1 INDUSTRIAL SECTOR SUPPORTING INSTITUTIONS 1. THE INVESTMENT PROMIOTION AGENCY (API) 1/ A January, 1973 Decree established the Agency as an autonomous public institution operating under the aegies of the Ministry of National Economy. The Agency's objectives are the following: a. Assist industrial investors in preparing and filing licensing applications within the framework of existing legislation (i.e. both the Investment Code and the Export Industries Law). To claim the benefits of incentives, industrialists should first apply to the API. Depending oni their size and scope, all projects are reviewed by the Board of Directors of the API which meets once a month or by the Internal Committee of the Agency which meets once a week. In the case of smaller projects (below D 250,000), a review is conducted by the Internal Committee of the Agency which, upon approval, delivers a letter of consent 2/. For such projects the letter of consent is obtained normally within 30 days from the presentation of the project. 3/ Such time schedules does not pertain, however, to projects presented under the Fund for Industrial Promotion and Decentralization (FOPRODI) which are forwarded to the API through one of the banks that have signed with the Ministry of Finance the June 1975 Agreement establishing the management procedures of the Fund. Industrialists are granted a one-year delay from the date of receipt of the Approval Certificate or letter of consent to commence operation on their projects, failing which such approval may be withheld. The API has created a follow up department for the purpose of overseeing the scheduled implementation of all relevant industrial projects. b. initiate research and studies on its own or in collaboration with the National Center for Industrial Studies (CNEI) or any other agency, public or private, domestic or foreign, with a view towards promoting investments in Tunisia, and c. disseminate information, both inside and outside Tunisia, regarding investment opportunities, and help to establish relationships beween investors, particularly in the field of export oriented industries. 1/ Agency de Promotion des Investissements. 2/ The Board grants an Approval Certificate for larger projects. 3/ The maximum length of time is in principle 8 weeks for projects involving expected investments of over D 250,000.

88 ANNEX 23 Page 2 Under the direction of its Chairman and Managing Director (President- Directeur General) and of its Deputy Managing Director, the Agency is organized into three major departments, a Licensing Department, a Promotion Department and a Study and Follow-up Department. The Promotion Department includes overseas promotion offices (in Germany, Belgium, France, the USA, and Canada) as well as various services in charge of initiating research and studies, bringing investors together and carrying out public relations activities likely to foster investments. The Licensing Department assists investors in preparing their applications, and reviews investment proposals. It is subdivided into sectoral branches specialized in various industries. The department prepares reports and recommendations to API management for approving or rejecting investment applications. The Follow-up and Studies Department, as mentioned above, oversees the scheduled implementation of all relevant industrial projects. It also includes the FOPRODI Divison, a research and study branch, one administrative and financial division, one statistical division, missions abroad and 4 regional offices in Tunisia. 1/ These regional offices are in charge of following up on approved projects to make sure that these projects are carried out in due time. They provide information to investors (including potential FOPRODI applicants) 2/ on licensing procedures, they assist industrialists in solving various administrative problems (such as clearing goods with customs) and they organize visits by foreigners or for Tunisian businessmen abroad. Coordination between regional offices and API headquarters is very close. Most licensing applications are forwarded to regional offices rather than to Tunis. The application is screened locally in a preliminary way, mainly in order to eliminate obviously unsound requests. Once a file has been forwarded by the regional office, the final decision is taken by API in Tunis. Regional Managers remain closely supervised by Management in Tunis and are frequently summoned to report to the head office. Lack of staff and budgetary limitations put a severe strain on regional office efficiency. Under such circumstances, assistance to SSEs can only be extremely limited and fragmentary, provided as it is on a purely ad hoc basis. API has succeeded in promoting foreign investment and, more importantly for SSEs, in speeding up bureaucratic processing of licensing agreements. However, as indicated above, an integrated program of assistance to SSEs would imply a combination of financial and technical assistance to be provided through close contacts with small industrialists. The API regional branches already work in close cooperation with local branches of banks (in particular STB) in gathering information on potential and existing industries. However, much more must be done to strengthen API's regional branches and the creation of other branches is also envisaged in the near future, in order to set up a viable system of outreach to promote and assist SSEs in Tunisia. 1/ Tunis, Northern Tunis, Sousse, Sfax. 2/ This appears to take a substantial share of local API representatives' time.

89 ANNEX 23 Page 3 2. INDUSTRIAL LAND AGENCY (AFI) 1/ AFI was set up in 1973 for the following purposes: (i) to carry out any study or review related to provision of industrial land in Tunisia; (ii) to purchase land - expropriation; either through direct negotiation or (iii) to carry out any activity concerned with development of industrial land (improvements, building of roads, provision of public utilities and possibly the construction of factories); and (iv) to sell or rent these lands and/or buildings. Practically, the agency sells or rents land and buildings to promoters for development and renovation. Promoters thereafter sell (or rent) these properties to enterprises. The agency, although a non-profit organization, is expected to be financially viable by itself. 2/ In practice AFI has been in operation only since 1975 and has been able to start acquiring and improving land in a number of areas. Industrial zones are considered to be a city planning device rather than a concept for developing small scale industries. However, the 1974 Investment Law provided that the government would subsidize infrastructure costs for small and medium industries moving to industrial zones. This was also mentioned in the 1973 Law establishing FOPRODI. No decision has been officially taken defining those industrial zones in which small industrialists would benefit from subsidies. According to AFI's management, only firms in industrial zones in non-metropolitan areas (Group B in the table below) are eligible to receive subsidies. The difference between the cost of nonimproved land (Dinar 0.5/square meter) and the cost of improved land sold to industrialists (Dinars 3/sq. meter) would be provided to eligible projects as a subsidy. This would probably be too little to induce small industrialists to move to an industrial zone, remote from the SSE traditional markets, since additional transport cost would be incurred to carry the goods from the zone to main urban centers. However, in the case of medium-size industries it might be economic to settle in industrial zones. AFI management is extremely skeptical as to the likelihood of attracting SSEs to Group B industrial zones. Should it be eventually decided to provide cheap industrial land to SSEs, a specially low selling price per hectare might be set for SSEs. The problem of giving easier and cheaper access to industrial land to SSEs should be considered as a matter of urgency since it is becoming increasingly difficult for 1/ Agence Fonciere Industrielle. 2/ It has been however losing money since it was set up.

90 ANNEX 23 Page 4 SSEs to find land or rent premises at reasonable rates; this has become an issue for a number of small units needing better quarters in order to raise productivity. It seems also that a combination of extension services with AFI's new industrial zones has not been given consideration until now, but that idea should be given further attention. It has been demonstrated in other countries, that when there is enough concentration of small industries (as in the Tunis area), the latter may be willing to move to industrial estates where they may benefit from banking, management and technical assistance. 3. THE OFFICE OF VOCATIONAL TRAINING, MIGRATION AND EMPLOYMENT (OTTEEFP) I/ This office is the main body in charge of manpower in Tunisia. Established in 1967 and operating under the wing of the Ministry of Social Affairs, it administers employment exchanges, conducts a wide variety of training programs, and supervises external migration. It employs 2,400 persons, including 5% professionals. A Placement Office within the organization maintains offices in every province. However, workers and employers alike do not seem to be eager to use the exchange and do not have to. There are about 100 local vocational training centers mostly for drop-outs from elementary schools, and 13 regional and 7 national centers for drop-outs from secondary schools, as well as for some of the graduates from the local centers. The total number of students in vocational training is around 100,000. There are also about 10,000 on-the-job trainees. For a few hundred, more advanced, there is a national vocational training institution. No specific training activities for small manufacturing entrepreneurs exist, until now. As a comparison, vocational training for farming covers over 4,000 persons and for handicrafts about 3,000. An experimental training center for small industries may be started in 1978 at El Djem. The Center would include several workshops: wood working, metal working and leather processing. At this center, technical training, as well as training and management, accounting and administrative procedures will be provided freely. The idea of setting such training center in a rather remote area is to make it possible to analyze more clearly the direct impact of the experiment on the local small industry sector. Should the experiment be successful, a network of 20 training centers could be installed throughout the country. At this stage, the intention is to provide training and courses within the Center rather than to give on-the-spot advice through extension services. 1/ Office des Travailleurs Tunisiens a l'etranger, de l'emploi et de la Formation Professionnelle.

91 Table 8: INDUSTRLAL LAND DEVELOPED BY AFI ANNEX 23 Page 5 (hectares) I) Large urban centers Total (estimated) Tunis Bizerta Sousse Nabeul Mahdia Sfax Gabes II) Metropolitan areas / (Group A) Subtotal Zaghouan / Tunis S?jth Nabeul Sousse area Monastir Mahdia area Menzel Bourguiba Mateur III) Other areas (Group B) Subtotal Beja Rairouan Jendouba 5 _ 5 Le Kef Kasserine Siliana Sidi Bou Zid Gaf'sa Medenine Subtotal Grand Total: /1 In vicinity of urban centers: e.g. Zaghouan near Tunis, Enfida near Sousse, Menzel Bourguiba, near Bizerta, etc. /2 Djedaida, Ylattab, Mornaguia. /3 Kelibia, Beni Khiar, Gromnalia. /4 M"Saken, Sidi Bou Ali, Bouficha, Enfida. /5 Chebba, El Djem, Ksour Essaf.

92 ANNEX 23 Page 6 Other scattered activities related to SSEs have been (a) a Dutch supported program to identify new small enterprises which could provide work for returning migrant workers 1/, (b) a Swedish/ILO program to evaluate small rural development projects in the North West. It was found that many small units needed technical assistance to be revived or to survive and that on-thespot advice should be given through plant visits. 2/ Partly as a result of these experiments, the office hopes to set up a Small Enterprises Unit which could identify and evaluate SSE projects and would provide technical and managerial assistance with on-the-spot advice and plant visits. The fact that the Office Management is taking initiatives in developing such a program for SSE testifies to the growing interest shown in Tunisia for the development of the small scale sector. This is obviously part of the priority given to employment by the new Development Plan. However, the program summarized above, has not yet been officially approved and if it is implemented it will probably be complementary to the API scheme. 4. THE NATIONAL CENTER FOR INDUSTRIAL CENTERS (CNEI) 3/ are to: The CNEI was established in 1968 as an autonomous agency. Its tasks (i) make recommendations on means to foster industrial development and follow up on the progress of the plan in the field of industrialization; (ii) initiate detailed economic and technical studies for specific industrial projects, including those whose implementation is called for by the Plan; (iii) furnish advice on the possibilities of creating new industries and on how to finance and establish them; (iv) provide assistance both on technical and managerial issues to state-owned and private enterprises; and (v) disseminate information and data obtained either in the course of its own activities or from foreign publications. 1/ In one year, 30 projects were identified, but they have yet to be implemented. 2/ Such visits would be made by mobile teams (equipes mobiles). 3/ Centre National d'etudes Industrielles.

93 ANNEX 23 Page 7 Since its inception, CNEI has made numerous market studies, sector studies and project feasibility appraisals. It has been put to use by the government for the preparation of Development Plans and is called upon by API for advice concerning investment proposals. -[t is instrumental in suggesting new investment opportunities to investors and helping companies with tender offers, and bids evaluation. The main thrust of its activity, however, has been on behalf of the ministries, public institutions and state owned enterprises. Private investors and enterprises appear to prefer dealing with the local bank from which they expect financing rather than asking CNEI for a market analysis or a profit appraisal. Also since 1972, CNEI is charging a fee for its assistance 1/ and suffers from the increasing competition of private consulting firms. CNEI has carried out only a limited number of studies on small industry projects. 2/ Out of 26 studies made in seven years, 16 have been for food processing industries (olive oil, pasta, fruit and vegetable canning, etc.). The management of the CNEI did not feel the need to work on small scale manufacturing until recently, because priority was given to large and medium scale industries. Studies made on SSEs have been part of technical consulting services to potential investors. Since January 1977, a one-man office has been set up in CNEI to provide information to small industrialists on possible projects. The concept is to centralize requests from these industrialists and to give them preliminary reaction to their ideas and thinking. CNEI management seems to welcome more general background studies of SSEs. The motivation towards small scale industrial development seems to be strong among some of CNEI's staff. CNEI will be assigned a role in the API scheme for assistance to SSEs (see below). For the time being, CNEI is represented on the Board of API to which FOPRODI's small projects are submitted. As a result, CNEI representatives analyze, and comment on, FOPRODI's proposals before they are considered by the Board of API. CNEI's program includes further work on industrial decentralization which will directly benefit SSEs. For each province, a report will be prepared providing all available information on existing industries, licensing agreements, investment, etc. Reports will also include (1) information on proposed local industrial zones; 3/ (2) potential regional markets for new 1/ For instance, CNEI charged a small investor D 100 for the study of an olive oil processing plant. Such fee does not seem to be excessive but private consulting firms are apparently much more aggressive than CNEI in looking for clients. 2/ 1 in 1970, 3 in 1971, 7 in 1972, 6 in 1973, 5 in 1974 but only 2 in 1975 and 2 in The total number of studies is thus 26 only in seven years. See Annex Table 18 for a 'List of CNEI studies. 3/ This part of the reports will be prepared in consultation with AFI.

94 ANNEX 23 Page 8 industries; and (3) a list of projects which could be envisaged on the basis of an analysis of local resources and markets; such project list would give rough indications on capacity, investment cost, employment, etc. CNEI management hopes to identify a number of SSEs which will be included in the project list. Detailed industry studies paying special attention to the position of SSEs are necessary to investigate the economic efficiency of SSEs, problems of minimum economic size and also the new areas where SSEs could be set up. Such studies could be made by CNEI which has gained experience in preparing industrial studies. They could be worked out as part of the cooperation with operationally oriented institutions such as API and also banks engaged in lending to small scale industrialists. 5. UNION TUNISIENNE DE L'INDUSTRIE, DU COMMERCE ET DE L'ARTISANAT (UTICA) UTICA was established in It acts as the federation of employers in Tunisia, as well as the major organization promoting the interests of private business. UTICA in practice focuses an important part of its efforts on medium and small scale Tunisian businesses. It argues strongly for further efforts to assist SSEs. Through its continuing contact at the regional level 1/ with firms, UTICA is in a position to know their needs?nd promote their interests. However, given the specific needs of Tunisian entrepreneurs for financial, managerial and technical assistance, UTICA does not seem to have the resources to handle technical and other extension services for small scale manufacturers, as is indicated in its statutes. A new advisory unit (SEPIC) 2/ has been set up in 1976, following a recommendation of UTICA. The objectives of SEPIC are: (1) to provide training to small businessmen mainly through seminars and teaching of nontechnical subjects (such as management and accounting); (2) to set up a "projects bank". (Projects could be sold to interested promoters and SEPIC maintains a library of industrial projects prepared in various countries); (3) to study projects or sectors (for a fee) as a private consulting firm, selling services. SEPIC is a limited liability company with a D 200,000 share capital and UTICA is only a minority shareholder; other shareholders are Tunisian businessmen and industrialists. A minimum 5% statutory dividend is paid normally to shareholders. SEPIC Is willing to take some equity participation in some of the projects it studies. SEPIC is only starting operations with limited financial and human resources. 3/ SEPIC has not 1/ UTICA has 17 regional offices. 2/ Societe d'etudes et de Promotion Industrielle et Commerciale. 3/ Present staff includes 2 engineers (agricultural, chemical), 1 statistician, 2 economists and one technician.

95 ANNEX 23 Page 9 been able so far to receive any governmental subsidy, in particular to meet its training objectives. It is investigating the possibility to assist small industrialists in preparing projects to be subsequently submitted to FOPRODI. In a few cases, commercial banks (which act as a channel between applicants and FOPRODI) have requested investors to submit a detailed proposal and these investors have come to SEPIC for help. However, SEPIC experience is that it is often difficult for small industrialists to understand the need for studies and even more to pay for them. It is too early to pass a judgment on SEPIC's ability to assist SSEs but it seems so far to have experienced difficulties in obtaining financial resources from public sources, has only a few clients and anticipates possible competition from API and/or CNEI, in case the latter would decide to increase its program of assistance to small scale enterprises.

96 ANNEX 24 FONDS DE PROMOTION ET DE DECENTRALISATION INDUSTRIELLE (FOPRODI) General Purposes and Functioning 1. The Fonds de Promotion et de Decentralisation Industrielle (FOPRODI) was established by Tunisian Law No of December 31, Its organization and functioning were defined in Decree No of August 16, 1974, and amended by Decree No of October 20, Its general purposes are promotion of entrepreneurship, support to the creation and development of SSEs and implementation of incentives for decentralization of industrial investments. 2. FOPRODI is not an institution but a fund financed with budgetary allocations, proceeds from the amortization of loans made out of the fund, interests charged on these loans, and any other sourcesof funds that could be allocated to it by law or decree. 3. The administration of FOPRODI is entrusted to banking institutions (the Participating Banks) under the term Qf an agreement concluded between each of them and the Ministry of Finance, and specifying procedures for the appraisal of eligible projects, their submission for FOPRODI financing, funds disbursement, loan collection, remuneration of the participating Bank and risk-sharing between it and the Government. So far, four commercial banks have concluded such an agreement with the Ministry of Finance. They are Societe Tunisienne de Banque (STB), Banque Nationale de Tunisie (BNT), Union Internationale des Banques (UIB) and Banque du Sud (BS). 4. The decision to extend FOPRODI financing to a particular project is taken by the Minister of the National Economy, on the basis of a recommendation made by API (see Annex 23). 5. FOPRODI financing is available only for projects in the industrial sector, with equity accounting for at least 30% of the financing of total investment cost. FOPRODI Credit Facility for the Promotion of Entrepreneurship 6. The FOPRODI credit facility for the promotion of entrepreneurship is extended to the sponsor of the project in the form of a personal loan towards the constitution of equity capital. Until October 1977, this credit facility was intended only for new projects with an investment cost (including working capital) not exceeding D 200,000 ($464,000 equivalent). This ceiling was raised to D 500,000 ($1,160,000 equivalent) by Decree No of October 20, 1977.

97 -2-7. To be eligible for the above credilt facility, the sponsor (s) must be Tunisian nationa14 with adequate qualifications but limited means, and willing to assume personally and full-time the management of the project. 8. Until October 1977, the personal 'Loan to the sponsor extended under this FOPRODI credit facility amounted to up to 41% of equity capital and was intended to enable him to acquire a 51% majority ownership by investing 10% of equity. Decree No has estab:lished a more complex scheme: (a) (b) For projects costing less than D 250,000 (including working capital), the personal loan will be of up to 70% of equity, the sponsor having to contribute himself a minimum of 10% of equity; For projects costing between D 250,000 and D 500,000 (including working capital), the personal lo;an will be of up to 45% of equity, the sponsor having to contribute himself a minimum of 20% of equity. 9. The above percentages to determine the maximum personal loan that can be obtained under this FOPRODI credit facility apply to an equity basis amounting to no more than 30% of total investment cost. These personal loans have terms of 12 years, including 5 years of grace and bear interest at 3%. FOPRODI Credit Facility for SSE Creation and Development 10. The FOPRODI credit facility for SSE creation and development is extended to the SSE itself (as opposed to the project sponsor) in the form of a medium- or long-term loan. This loan may be combined with the personal loan described in paragraphs 6 to Until October 1977, this FOPRODI credit facility was reserved for new projects costing less than D 30,000 ($69,600 equivalent), including working capital, or SSE expansion projects costing less than D 15,000 ($34,800 equivalent), excluding working capital. Decree No has raised these two ceilings to D 75,000 ($174,000 equivalent) and D 45,000 ($104,400 equivalent) respectively. 12. The amount of the loans under this FOPRODI credit facility cannot exceed 70% of total project cost. 13. Loans under this FOPRODI credit facility bear interest rate at 4% and have maximum terms of 10 years, including 3 years of grace, for new projects, and 7 years with no grace period for expansion projects.

98 -3- FOPRODI Assistance for Industrial Decentralization 14. FOPRODI assistance for industrial decentralization has not yet been organized. However it is envisaged in the law that FOPRODI will finance incentives to be given by the Government for investments in the less developed regions of Tunisia. Such incentives may include interest subsidies, investment grants and the financing of selected infrastructure works. Operational Arrangements 15. Identification, initial screening and appraisal of eligible projects under the existing FOPRODI facilities is the responsability of the Participating Banks. The appraisal reports prepared by the Participating Banks are sent to API for its review. On this basis API submits recommendations to the Minister of the National Economy who takes the decision to finance the project under one (or several) FOPRODI credit facility (ies). The Minister's approval enables the participating bank concerned to withdraw funds from the FOPRODI account, established at the Central Bank of Tunisia, in line with its own disbursements of the corresponding amounts to the project sponsor or to the SSE. 16. The participating Banks are also responsible for drafting and conclusion of contracts, taking of adequate securities, control of the uilization of the funds, collection of interest and principal, and enforcement Oi the securities and other legal proceedings in the case of non-payment by the s rnsor or the SSE. An interest penalty of 7% p.a. applies on overdue payments. Iuterest and principal collected by participating banks have to be transferred by thel. to the FOPRODI account established at the Central Bank of Tunisia. Risk-Sharing 17. Losses on a loan extended under a FOPRODI credit facility are shared between the Participating Bank having extended the loan and FOPRODI in the proportions of 25% for the bank and 75% for FOIODI. The risk sharing mechanism applies only after exhaustion of all legal means to recover the loan. Remuneration of Participating Banks 18. The Participating Banks are remunerated for their services in administering the FOPRODI by the following commissions: (a) a fixed commission of 1% based on the principal amount of loans disbursed under the FOPRODI credit facilities; and (b) a variable commission based on the amounts recovered in principal and interest every year and fixed at 5%, 4%, 3%, 2%, 1% and 0.5% when the rate of recovery of the amounts to be recovered in principal and in interest: in that year has attained respectively 100%, 90%, 80%, 70%, 60% and 50%.

99 These commissions are paid annually to the participating banks out of the FOPRODI account established at the Central Bank of Tunisia. Experience with the FOPRODI 20. Since it became operative in December 1975 until May 1977, FOPRODI has financed 81 projects, accounting for total investment of D 7,093,148 and creating 2,553 new jobs (Annex 2, para. 2.04). The main problem encountered so far has been the reluctance of the Participating Banks to contribute their own resources to complement in the form of term loans the financial plan of projects eligible for the FOPRODI credit facility for the promotion of entrepreneurship but not eligible for the FOPRODI credit facility for the creation and development of SSEs. Before the increase of ceilings in October 1977, these were essentially the new projects with investment cost (including working capital) between D 30,000 and D 200,000. Now that the ceilings have been raised, the same problem is expected to arise for projects costing between D 75,000 and D 500,000. The reason for this reluctance is that in view of the chronically tight liquidity position of Tunisian' commercial banks, the Participating Banks prefer to use their own resources to lend to established customers rather than to SSEs offering less attractive securities and with no previous debt repayment records. Purpose and Modalities of the New FOPRODI Credit Facility to be financed out of the Proposed Bank Loan to the Government 21. The main purpose of the new FOPRODI credit facility to be financed out of the proposed $5 million Bank loan to the Government is to fill this gap in making available to the Participating Banks (which will be joined by BDET) special resources to complement in the form of term loans the financing plan of new SSE projects already qualifying for the FOPRODI credit facility for the promotion of entrepreneurship. However, to keep the focus of Bank's assistance on employment generation and SSEs rather than medium-sized enterprises, the eligibility criteria for the new FOPRODI credit: facility will be more restrictive than those established under the FOPRODI c:redit facility for the promotion of entrepreneurship (paragraph 6 above), in that: (a) total project cost, including working capital, should not exceed D 200,000 at 1976 prices; and (b) normally the investment cost per job created or maintained should not exceed D 4,600 at 1976 prices, which is in line with the Bank's Urban Poverty Program criteria for Tunisia. A new condition of eligibility has also been added in that the project promoter should be willing to make use of the available technical assistance deemed necessary by API. 22. The new FOPRODI credit facility will finance up to 50% of the SSE project investment cost, including working capital. Combined with a minimum 30% financing with equity capital, this will leave about 20% of the cost to be financed by the Participating Banks out of their own resources (instead of 70%).