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Report No. 274a-TUN REPORTS DESK The Economic Development ONE WEEK of Tunisia Public Disclosure Authorized Volume 11: Annex-Industry December 27, 1974 EMENA Region Country Programs Department II Not for Public Use Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the International Bank for Reconstruction and Development International Development Association

This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS

Currency Unit = Dinar = 1000 millimies

With effect from 1955

US $1.00 = 0.42 Dinar Dinar 1.00 = US $2.381

With effect from September 28, 1964

US $1.00 - 0.52 Dinar Dinar 1.00 = US $1.90

With effect from December 20, 1971

US $1.00 = 0.48 Dinar Dinar 1.00 = US $2.08

With effect from February 1973

US $1.00 = 0.44 Dinar Dinar 1.00 = US $2.27

UNITS AND WEIGHTS AND MEASURES: METRIC

British/U. S. Equivalents

1 m = 3.28 ft. 1 m ton = 0.981 g. ton 1.1 US sh. ton 1 m2 = 10.76 sq.ft. 1 kg = 2.2 lb. 1 km = 0.62 mi. 1 litre = 0.22 gal. 1 km2 = 0.386 sq.mi. = 0.26 US liq. gallon 1 hectare = 2.5 acres 1 m3 = 1.31 cubic yards

FISCAL YEAR January 1 - December 31 THE ECONOMIC DEVELOPMENT OF TUNISIA

TABLE OF CONTENTS

ANNEX II

INDUSTRY

Page No.

13. INDUSTRIAL DEVELOPMENT TRENDS

A. Review of 1961-1971 ...... 1 B. The Structure of Tunisian Industry ...... 5 C. Economics and Operation of State Enterprises 6 D. The Fourth Plan - A New Deal ...... 10 E. The Private Manufacturing Sector ...... 11

14. POSITION AND PROSPECTS IN KEY SECTORS

A. Oil, Natural Gas and Petroleum Refining ...... 12 B. Phosphate Mining and Fertilizer Production ...... 16 C. Mining, other than Phosphates ...... 18 D. Sugar ...... 20 E. Textiles, Clothing, Leather and Shoes ...... 22 F. Pulp and Paper ...... 26 G. Construction Materials (Particularly Cement) ...... 28 H. Steel ...... 28 I. Metal Manufacturing, Mechanical and Electrical Industries ...... 31 J. Motor Vehicle Assembly ...... 33 K. Electric Power ...... 36

15. AN INDUSTRIAL DEVELOPMENT STRATEGY

A. Introduction ...... 41 B. The Proposals of the Fourth Plan ...... 41 C. Some Elements of a Production and Investment Strategy ...... 42 (i) Sector Priorities ...... 42 (ii) Export Orientation and Liberalization ...... 43 (iii) Employment Creation ...... 43 (iv) Role of Foreign Investors ...... 44 (v) State Industrial Enterprises ...... 45 (vi) Small Scale Industrial Enterprises ...... 46

D. The Tools of Industrialization ...... 47 (i) Project Identification and Development ...... 47 (ii) Industrial Licensing and Incentives Framework . 49 (iii) Institutional Infrastructure ...... 50 (iv) Manpower, Productivity and Labor Relations .... 51 MAP No. 10003 Mining, Manufacturing, Power

ANNEX II: INDUSTRY

13: INDUSTRIAL DEVELOPMENT TRENDS

A. Review of 1961-1971

13.1 During the period 1961-1971, industrial production increased by 150 percent, corresponding to an average annual growth rate of 9.9 percent. There was a remarkable 20 percent further increase in 1972, bringing the average annual growth rate to 10.4 percent, due, in part, to a record year for the olive oil processing industry. A substantial part of the growth over the decade is due to the rapidly increasing production of petroleum. The growth for the manufacturing sector alone was about 8 percent, but apart from food processing, growth has been dynamic: about 15 percent per year. The mining industry has stagnated because of difficulties in the exploitation of rock phosphate, to be described later, as well as dwindling reserves of iron ore. Food processing, which accounted for about 50 percent of industrial output in 1961, has been held back by unstable agricultural production, and by the relatively slow growth in certain subsectors where a processing potential was thought to exist (sugar, canned fruits and vegetables, wine and essential oils). About 240,000 people are employed in industry, of whom about 170,000 are in manufacturing and 19,000 in mining; roughly one-third of these jobs were created during the 1960s, mostly in manufacturing.

Table 13.1: TRENDS IN INDUSTRIAL OUTPUT, 1961-1972 (Million Dinars at 1966 Prices)

Value Added Growth Rate /1 1961 1971 1972 1961-71 1961-72

Power and water 4.0 13.2 14.5 13.4 13.0 Petroleum -- 23.5 25.8 -- -- Mining 8.9 11.6 12.1 1.6 1.7 Manufacturing 32.2 61.6 79.6 7.9 8.8 of which: Food processing (22.3) (24.9) (34.2) (1.3) (3.2) Other manufacturing (9.9) (36.7) (45.4) (15.0) (14.8)

Total 45.1 109.9 132.0 9.9 10.4

/1 Least squares method. Source: Annex Table 2.7. - 2 -

13.2 The thrust of industrialization during miost of this period, except for the last three years,was supplied by large projects in the state sector. Tunisian industrialization has hitherto been focussed on a relatively small domestic market. Exports accounted for about one-quarter of manufacturing growth (other than food processing) in 1960-67 and for about only one-eighth of the increase in 1967-72. Industrial exports are represented mainly by phosphate fertilizers, esparto pulp, one-half of carpet production, one-third of canned vegetables production, and relatively minor exports of hides and essential oils with a low industrial processing component (Annex Table 8.4).

13.3 Table 13.2 reviews the progress during the past decade in greater detail. It shows the predominance of petroleum and phosphate rock in the mineral sector. In contrast, manufacturing expanded over a wide front. Petroleum refining, textiles and clothing and pulp and paper showed the highest rates of growth, but from a low initial production base. Further detail is provided in Annex Tables 2.7, 8.1 and 8.2. Some of the above manufactures are based upon imported raw materials (e.g. coking coal for the steel industry, cotton, tinplate for canning, and sulfur for the production of superphosphate). In the main, however, the products showing rapid growth are made from domestic materials, and thus have greater developmental impact. This is clearly true for pulp (esparto grass), canned goods (vegetable and fish), cement (limestone), and carpets (wool). In other raw material process- ing industries, domestic use has simply replaced exports. This is true for iron ore and hides, for example.

13.4 In this respect, the phosphate fertilizer industry is in an inter- mediate position. Tunisia encountered considerable difficulties in exporting phosphate rock in the 1960s. While some of them are likely to continue, it is at least conceivable that the rock will have a higher value when locally processed, and the Tunisian phosphoric acid plants can be specifically adapted to the character and quality of Tunisian rock. Furthermore, the rehabilita- tion and partial mechanization of some existing mines, the development of two new mines, one using highly mechanized methods, and the recent increased emphasis on reducing costs and increasing competitiveness, plus the recent rise in phosphate prices, should improve the financial position of this industry in the Fourth Plan period (1973-1976).

13.5 Until the late 1960s, the main poles of industrial growth were about a dozen major state manufacturing enterprises, private investment playing a relatively minor role. -3-

Table 13.2: INCREASES IN MINING AND MAiNUFACOTURING PRODUCTION, 1961-1?72

1 9 6 1 1972 Percentage Change Volume Value Volume Value th. tons D. mill. th. tons D. mill. Volume Value Mining

Crude oil - - 3,964 43.2 - - Phosphate rock 2,347 6.6 3,37c 15.3 44 132 Iron ore 861 L.1 896 3.0 4 -27 Lead concentrate 19 o.6 32 1.9 68 217 Zinc concentrate 8 0.2 1.2 163 500 Salt 401 o.6 385 1.4 -4 133 Fluorspar - - 121 1.5 - -

Total 12.1 67.5

Manufacturing Value Added at 1966 Prices

196' 1972 Increase D million D million D million

Food Processing 22.3 34.2 11.9 53 Textiles, clothing & leather 2.2 13.9 11.7 530 Wood, paper & misc. 1.4 7.2 5.8 L14 Construction materials 2.2 6.1 3.9 177 Chemical industries 2.1 7.8 5.7 271 Steel and Bhgineering and electrical industries 2.0 10.4 8.4 370

Total 32.2 79.6 47.4 147 Texcl. Food processing) 9.9 73 -3-57-

Manufactured Products Showing Major Growth

Production Value 1972 19i61 1972 (D. million)

Sugar, th. t. 12 84 8.3 Canned fruits & vegetables, th.t. 18 36 7.3 Yarn, th. t. 0.1 10.0 10.2 Fabricks, mill.m. o.6 49.5 25.1 Carpets, th.t. 0.3 1.1 5.0 Shoes, mill. 1._8 4.7 5.7 Steel, th.t. - 350 9.6 Cement, th.t. 350. 619 4.5 Triple superphosphate, th.t. 135 457 11.1 Esparto pulp, th.t. - 20 2.2 - 4 -

Table 13.3: INVESTMENTS IN MANUiVACTURING (Million Dinars at current prices)

Total Private Public

1961 6.3 0.6 5.7 1962 5.8 0.8 5.0 1963 7.2 1.7 5.5 1964 22.3 2.9 19.4 1965 26.2 0.1 26.1

1966 10.1 1.6 8.5 1967 12.9 3.3 9.6 1968 10.7 2.8 7.9 1969 15.5 4.8 10.7 1970 18.2 6.3 11.9

1971 21.6 6.8 14.b 1972 20.4

Source: M1inistere du Plan.

Public investment in industry started with a beet sugar factory cum sugar refinery and an esparto cellulose plant in 961-63, followed by the El Fouladh steel mill and big new textile mills in 1964-65. Subsequent state investments in manufacturing have generally been on a more modest scale, but have included a large new fertilizer plant, a paper mill located close to th-e pulp mill and, finally, expansion of cement production, motor vehicle assembly and handicrafts, the latter organized by the Office National de 1' Artisanat. The great bulk of these investments were outside Tunis, and reflected, to a substantial extent, deliberate regional. industrializatLon.

13.6 As the capital-output and capital-income ratios slhow, the indus- trialization strategy during the last ten years was relatively expensive. The incremental capital output ratio of mianufacturing was about 4.? for the period 1961-71 (with 1972 added in, it falls to 3.7), while the cost per new job created averaged D 4,000 (at constant 1?66 prices) (Statistical Ap)pendix, Table 5.9). If we exclude food processing, in which activity is governed largely by fluctuations in agricultural production, the incremental capital output ratio for 1961-71 is 3.8, which is st-ll highi. The relatively poor immediate investment return is traceable in large part to public-sector projects accounting for over 80 percent of total 1961-70 investment, and about 55 percent of 1971 value added, in manufacturing. The reason is the low output of these projects; it must be borne in mind, however, that the Government focussed on projects in relativelv capital-intensive basic industries which the private sector was not in a position to undertake. 13.7 The reasons for the relatively low investment return were the often inadequate technical and economic analysis, and the inexperience of management. The scarcity of skilled labor meant low productivity with high operations costs: the new industries had to train their own labor and create an industrial mentality. The strategy did at least create arn industrial base and a pool of know-how as a platform for future growth. However, a disproportionate share of resources was allocated to projects whichmnot only failed to yield-immediate economic,andlfinancial returns but have-only doubtful prospects..of.long7-run viability.. Inz%the light.of the strengths andcweaknesses Eof,-this _first ,phase. of industrialization, the Government,has2. devis,ed.a new-.str.at,egy-which 'puts:spr,imat.,yx,'emphasis on export industriesj; prTeferabtly.ylabAor-,i-nte-n-sl2 ye- in,-whic'hhth-eepr.ivate,sector will be assigned?a imajpor rolecanddto ouhi¢chhf eig nprui-va bein,vest-erjs,will;beencour- aged Lto. contrib.ute -financ,ej9kno.8- ho,w,wand expvr,t-m

B. Thec-,StructureeoffTunisi'annIn:duStEstry

13..., Intil 969 p,whennitheelast tiinduatriallcen-sus-swassta en 1i,there were abbutt-950 umanuf.ct-uri-ngges.tab.lishhments sinrlTulni,sia-.1 Souteo123. ofDJthese empl,oyedvimo,recthan-,1OG0Cwor,kerssanddacco.uned.-forXrab.oitt71 lprcen7tof -the totallvalueiadded'. AAsimilar.rnumb.er.-of! p.l1ants'emp~,oy)i'ngg5Q9-9r,workers accounted,:fo-rranotheri155pe,r-centt,. (Annex,xTdb1ee897)37. ExerisQme'oft these larger-.plantascondxictttheitioperations,sinnaasem i.-handt,xaftl:fashion;, the number oftuitr.ui.nuriaTlunits.sisstheref-ore.,qiltecsma.ll,,The,se include:

.-- ThiesE lF6uladh'hirit'egateddsteelim,ill ,prQduci:aggabout4 70,-000 tonssof fconcret-eereiktf4r,ci'nggrod.sp er,rygar -;

- TWoocementtplants sw-itwhhaacQmbLilneddpflodUctionnof fabout' 625,c-TQ0O0tonsL;;.,

- TheeBiAzer-tte pet-ral'umrrref-inery;with -aathrougup.,t-tof --one miAlli.on -tonsi;;,

A--g trowiiing(gt ext±ld eindlstry yddmi at.e ddb y y the,eSt atewoE ag edi SGOITEXRsvbuattnow,i%wi'thhpri'vat.e -textileefirmpI-offincreasing impo,rtance -E Severilcl-,thing,faetorigssareeunier--coastruction;

- - Ariiresparto:cpta15irmir.JIlanddaapA§er~r;m ll,,eachhwit1m ajcapacity of ab out] t24?]Q0O(J30t 0to3nsi;;

- A Anoitor, ivehi cE6easvmWaXyp-twlth-Rahna an ua§lol pj4 :0of about 1 ,5QO))Ccars'Eanddltht~tttrmbc19s,

- Fifv^eror six cfundr-ea,san4dmeagJlma-nuagguri.nggplang tsp with low capqclties:;

- A food-`processing(flndustry-vineludti g.someE v-able,units, such as a.brewery, two,or three out of-37,canneries, some flour mills and noodle factories, olive oil presses and vegetable oil re- fineries. In general, however, food processing units are small and their equipment outmoded and/or heavily worn. 13.9 Geographically, despite the Government's regionalization efforts, Tunisian industry 1/ is heavily concentrated in Tunis and the surrounding area (52 percent of industrial employment) and in the governorates of Sousse, Sfax, Gafsa, and Bizerte (each with 8-9 percent of the total, or altogether another 35 percent). The prominence of Gafsa is entirely due to its phosphate rock mines; Bizerte has steel, cement, oil refining, and shipbuilding; and Sfax and Sousse have a number of food processing and other consumer goods industries (textiles, shoes, furniture) as well as mechanical industries (including motor vehicle assembly) in Sousse and phosphate fertilizer plants at Sfax. Sugar is manufactured at Beja and paper-pulp at Kasserine. Kairouan is a special case because its traditional carpet-making is carried out mainly by handicraft rather than by industrial methods. Only Medenine in the South entirely lacks industry. An industrial complex is under construction at Gabes; the first unit, a phosphoric acid plant, was put into service in 1972.

C. Economics and Operation of State Enterprises -/

13.10 State enterprises were established in manufacturing for the following motives (in approximate order of importance):

- to start basic industries requiring investments far beyond the capacity of the private sector (steel, major textile complex, pulp and paper, sugar)

- to stimulate regional development (pulp and paper, sugar)

- to administer nationalized industries (phosphate and iron ore mining, phosphate fertilizers, cement)

- to launch pioneer projects (automobile assembly, canning, furniture making).

The State went somewhat beyond these objectives in a number of small ventures additional to the major projects. In 1969 it owned or held a majority in some 50 mining and manufacturing enterprises, employing about 32,000 persons representing over 80 percent of employment in "large enterprises" and 55 percent of employment in all manufacturing and mining establishments em- ploying more than 5 persons. State enterprise dominated all industries ex- cept food processing.

1/ The figures shown include mining energy, and transport. This distribu- tion, however, is quite representative also for the combined mining and manufacturing activities. 2/ The origins and objectives of state-owned enterprises in general, the institutional framework, financial structures, and operating results were studied by an IBRD Mission whose report was issued in August 1969 (EMA-13a). Much of the detailed information provided by this report is still relevant. 13.11 The establishment of state enterprises, in principle, required par- liamentary approval, as did increases in capital or advances from the state budget. Such control, however, did not extend to financing through the state- owned Societe Tunisienne de Banque (STB) or to foreign suppliers' credits. In principle, government administration and supervision ("tutelle") of state manufacturing enterprises was to be the joint responsibility of the Ministries of Industry and Finance, which would have imposed financial checks on state in- dustrial investments. However, during most of the 1960s, these two Ministries were combined. At the moment, the primary responsibility for state economic enterprises is vested in the Ministry of National Economy, subject however to budgeting and planning constraints exercised by the Ministries of Finance and Planning respectively. General policy and major investment decisions are matters for the whole cabinet. Within the Ministry of National Economy, six economic and financial comptrollers are responsible for supervising 5-8 state- owned enterprises, and attend their Board meetings.

13.12 The financial results for the state enterprises for the years 1970, 1971 and 1972 are detailed In Annex Table 8.10 and are summarized in the tol- lowing table.

Table 13.4: OPERATING PROFITS/LOSSES OF STATE ENTERPRISE, BY SECTOR (D '000)

No. of Net Operating Profit/Loss firms 1970 1971 1972

Mining 8 -4,073 -3,004 -4,658 Petroleum 3 18,632 24,800 25,561 Water, electricity 2 3,472 3,764 2,729 Manufacturing 47 1,294 -1,806 2,355 Food processing 7 1,543 1,280 2,177 Construction materials 15 246 154 514 Steel, engineering, electrical 12 -698 -2,058 446 Chemicals 6 856 1,239 1,183 Textiles, clothing 2 -467 -478 -463 Wood, furniture 2 12 156 102 Paper, printing 3 -198 -2,099 -1,604

Total 60 19,235 23,664 25,987

Total, excl. petroleum 57 693 -1,136 426

Source: Ministere du Plan (preliminary study).

Crude oil production has been very successful and profitable, and completely dominates the earnings picture. The situation in the other sectors is much less satisfactory, with phosphate, steel, textiles and paper, in particular, showing deficits. - 8 -

13.13 While important as indicating the financial trend of the enterprises of a given sector, these statements are hardly meaningful as regards economic performance. Some enterprises enjoyed prices or processing margins twice the world level, while others, like the Djerissa iron ore mines, had to compete in the world market despite the handicap of an increasingly unfavorable resource base. Increases in world commodity prices occurred in 1973 and 1974 are going now to change significantly the position and financial prospects of several enterprises. Because operations of leading state enterprises domi- nate or heavily influence the sub-sectors with which they are associated, and which are analyzed in Section II, only a brief summary of past performance and problems will be attempted here. The enterprises are dealt with in decreasing order of total fixed investments.

El Fouladh - Steel (1967): 1/ A fully integrated steel mill based upon an output of only 70,000 tons of bars is not viable, even at full capacity. In fact, until 1972 the domestic market absorbed only about one-half of the mill's production,and prices, until the recent world boom, were about twice those of equivalent imports. In order to make a reasonable profit in com- petition with impQrts, the company would have needed about 45 percent pro- tection in 1970. Financial reconstruction has not been completed and a viable long-term plan is needed.

Sogitex - Textiles and Clothing (1965): Operating six textile and clothing mills, this company was the first modern industrial installation in the textiles sector and, until recently, provided the bulk of the indus- try's output as well as much of the staff and skilled labor for the private mills which have subsequently been established. Within the past four years the company has started exporting (presently about one-quarter of sales), and is also entering into joint ventures for clothing exports with foreign part- ners. It operates a vocational school for the textile industry with state support. With original equipment of variable quality, its productivity in spinning is said to be about two-thirds of that of Western European mills. Although, by its published accounts, the company has approximately broken even during the last two years and has a promnising earnings potential, its financial position is weak.

Gafsa Company - Phosphate Rock Mining (1896, State controlled since 1966): The Tunisian phosphate mines account for about 4 percent of world production of crude phosphate. A substantial fertilizer industry is based on these mines, and includes three major producers, which absorb about one-third of the output of the mines. The mines, however, have made losses during the last 5 yeers. Until 1972, operations were characterized by very low produc- tivity, unsafe working conditions, high labor turnover, inadequate staffing, and a lack of reliable accounting records and planning. A promising effort

1/ Figures in parentheses show first year of operations after initial breaking-in period. - 9 - at financial and technical rehabilitation and redevelopment has been initiated. Moreover, the threefold increase in phosphate prices which occurred at the end of 1973 will substantially improve the financial performance of the phiosphate industry.

Ste. Nat. de Cellulose, and Sotupalfa - respectively Pulp and Paper (1966 and 1970): After the foreign suppliers of the pulp mill had failed to solve its operating problems, the Tunisian management recently brought the pulp mill close to nominal operating capacity, which has also been at- tained for the paper mill. The financial and economic results have been poor, however, raw material costs for pulp exceeding sales proceeds in 1971, and the paper mill producing at only two-thirds of capacity because of market constraints. The long-term outlook is clouded by expected supply constraints and high costs of the basic raw material (esparto grass), by the disappearance of a market premium for esparto paper and by the impracticality of the concept of meeting most of Tunisia's varied paper requirements from a small local mill. Nevertheless, the efforts and achievements of the staff and workers are im- pressive. Moreover, the general increase in pulp and paper prices is likely to contribute to improve the situation of this enterprise.

Ste. Nat. de Sucre - Sugar Beet Factory and Cane and Beet Sugar Refining (1963): Commercially, this pioneering venture is a profitable operat:ion (high sugar prices to the consumer and substantial profits from the refining of im- ported sugar), but the return on the beet sugar part of the operation has been low because of low yields from the beet fields, the high investment cost of the factory (mainly related to the small scale of operations), and a very short campaign leading to insufficient plant utilization (only 42 days on an aver- age). The recent increase in world market prices for sugar has reduced the margin between these prices and the Tunisian price.

Ste. Tun. d'Industrie Automobile (STIA) (1961): The French Renault company was originally associated with this venture, but sold out in 1968. This company assembles about 1,500 motor vehicles a year (Renault cars, Berliet trucks, trailers and buses), with a local component of 20-30 percent for cars and 40-50 percent for trucks and buses. It is essentially a sub- contractor for other vehicle manufacturers. The plant is generally well suited for its operations and well run. However, the overall operation is at present an economic loss since the rate of effective protection was about 133 percent of value added for cars and 80 percent for the operation as a whole in 1972. The reasons for the high costs are the low volume and great variety of models, insufficient capacity utilization and the high cost of local supplies and procurement in general. Local assembly of motor vehicles is hardly ever economic except as a brief transitory phase leading to inte- grated production. STIA is now trying to expand the assembly and coIIstruction of a well-designed bus for domestic production as an autonomous venture, with the proposed technical assistance of a leading bus manufacturer with success- ful experience in a similar situation.

13.14 In brief, some of major state enterprises lacked economic justifi- cation, the exceptions being textiles and phosphate mining. The finiancial weakness of several enterprises arose from excessive investment per unit of output, under-capitalization and continued losses in the past, but - 10 - prospects are now more favorable in several activities as a result of in- creases in world commodity prices. Only the sugar company and the automobile assembly plant have escaped this dilemma by being able to charge high prices. Ministerial supervision is often handicapped by shortage of staff with suf- ficient experience to supervise these enterprises and help to solve their difficult problems.

D. The Fourth Plan - A New Deal

13.15 Within the last two years, the Government has developed an industrial strategy which puts primary emphasis on export industries, assigns a major role in industrialization to the private Tunisian sector and looks to foreign private investors for contributions of finance, know-how and export markets. These foreign investments will also serve as catalysts. Cooperation with and emulation of foreign companies is expected to lift Tunisian industry from its present status to export competitiveness. By these means, it is hoped, production will be increased by 50 percent, with an appreciably lower capital- output ratio than during the last decade. About 40,000 new jobs would be directly created in manufacturing. The main growth points would be clothing and knitwear for export on the one hand and phosphate fertilizers on the other hand; these exports would reach D 39 million and D 18 million respect- ively by 1976. A summary of investments and projected growth in value added and employment, by major industrial sectors, is given in Annex Table 8.12.

13.16 Scheduled investments total about D 160 million. They include about a dozen large projects (D 3 million and over), mainly in the State sector, and another dozen fairly large projects (D 1-2 million), primarily for textile production (spinning mills, weaving mills, finishing plants). The bulk of the program, about D 100 million, would be for medium-sized new plants and expansion projects (below D I million), mainly in the private sector. This represents a substantial progressicn for manufacturing invest- ment: D 20 million a year, against D 6.3 million in 1970 and somewhat over D 6.9 million in 1971. Altogether, investments in manufacturing are expected to account for 13.4 percent of total Fourth Plan investment, compared with 11.9 percent in the Third Plan. Whereas private investments were responsible for 20 percent of the Third Plan total for manufacturing, their share in the Fourth Plan is planned to rise to over 50 percent.

13.17 Manufacturing activities provide about 12.5 percent of total employ- ment (counting all the small establishments). Yet the manufacturing sector has been given the task of creating 40,800 new jobs in 1973-76, i.e. more than 34 percenit of all new employment and more than the total employment created in manufacturing during the decade 1961-71. Table 13.5: EMPLOYMENT 1972 AND NEW JOBS 1973-76 (in thousands)

1972 1973-76

Organized sector 70 35 Artisans and other 100 6

170 41

/1 The organized sector includes firms with 5 or more employed covered by the Industrial Census. Another 35,000 are employed in artisan estab- lishments producing textiles, clothing and leather goods (particularly carpet-making)) and the remainder in even smaller production units, particularly in food processing, textiles, clothing and leather.

All but a small proportion of the new jobs would be in sectors other than food processing. This employment creation would be combined with a sharp increase in productivity (production rising by 17.5 percent per year, employment by about 8.2 percent). The number of investment projects approved in 1973 and early 1974, particularly under the law of April 1972 on incentives to export industries, suggests that these new industrial employment goals for the Plan period will be appreciably exceeded.

E. The Private Manufacturing Sector

13.18 In 1970 there were about 200 large and medium-sized manufacturing corporations supplying data on "Sources and Allocation of Funds" (Annex Table 8.11). The 40 largest were responsible for about 55 percent of the cash flow of the private manufacturing group. Individually, the latter had net cash flows (depreciation plus profits minus taxes and dividends) averaging about D 60,000; the highest single figure was D 166,000. These large firms were mainly in textiles, food, plastics, leather and shoes, and light metal manufactures. Though exact figures are lacking, there appears to be little foreign participation in Tunisian manufacturing enterprise. NPK phosphate fertilizers (with a Swedish company as the leading shareholder), Bata shoes and a textile firm (Grovo-Massanel) are important exceptions.

13.19 There has been a tendency towards multiplication of firms in the same line of business. This is attributable to the "imitation effect" and to the fact),apparently, that it was easier to obtain investment incentives for new firms than for the expansion of existing companies. Mergers between enterprises in the same branch have occurred, but they appear to be the exception. On the other hand, a few individuals and groups are emerging with holdings in more than one industry.

13.20 Data collected in connection with a study of SNI's operations indicate that capacity utilization is a major problem (e.g. in steel pipes, radiators, polyurethane foam, etc.), particularly when superimposed upon - 12 - excessive fragmentation. In several cases, domestic production has been initiated without adequate study of economic returns. Competing imports are often-prohibited, permitting a small number of domestic producers to survive, in an oligopolistic and protected market, with very low economic efficiency in converting imported raw materials into finished products. Infant industry protection is, of course, a normal instrument for getting industry started) and the Government is now seriously concerned to streamline these industries and take them out of the shelter of the nursery into the open arena of the European market.

13.21 A characteristic of Tunisian firms is their weak financial structure, with high short-term credit, as shown by the following summary (excluding food processing and construction materials).

Table 13.6: SOURCES AND ALLOCATION OF FUNDS, 1970 (Percent)

Large Cash Flows Medium Cash Flows and/ and/or Invest. or Investments 30 enterprises 120 enterprises

Sources of Funds Internal Savings 25.3 33.3 Capital Increase 11.5 7.2 Long and Medium Term Loans 19.9 9.4 Short-term Credit 43.1 50.1 100.0 100.0

Allocation of Funds Fixed Investments 51.9 38.3 Inventories 27.7 34.8 Participations, Receivables 3.5 1.0 Loan Repayment 17.4 22.0 Increase in Cash (0.7) 3.6 100.0 100.0

Source: Annex Table 8.11.

Neither firms with large cash flows and/or investments, nor the group with smaller resources and commitments, generated any substantial funds for new fixed investments after allowing for loan repayments. Moreover, most firms appear to be over-dependent on short-term credit for their permanent working capital. Financial 'rehabilitation, together with restructuring, remains the first priority for Tunisian industrialization, and calls for a more highly developed organization and greater initiative on the part of the banks. - 13 -

14. POSITION AND PROSPECTS IN KEY SECTORS -

A. Oil, Natural Gas, and Petroleum Refining

14.1. Petroleum prospecting in Tunisia is carried out entirely by for- eign companies, and permits have been issued for an area totalling 181,604 km2 . The small size of the petroleum sector, the advanced technology, the great risks and small expected returns on exploration are invoked by the authorities as reasons for relying entirely on foreign firms.

14.2 In 1961, Tunisia was entirely dependent on imports to meet its demand for liquid fuels. During the following decade, production rose to 4.8 million tons, or three times domestic requirements. Tunisia thus became a relatively important exporter of petroleum, petroleum proceeds being valued at $85 million equivalent in 1972 and $285 million in 1974. Virtually all of the production has come from a single find by the Italian ENI in 1964 on the Tunisian-Algerian border. UN intervention was necessary to settle the ownership question (70 percent of the reserve was attributed to Tunisia), and a common development program was then agreed by the two Governments. The Societe Italo-Tunisienne d'Exploitation Petroliere (SITEP), with 50 percent participation by the State and ENI, was created to exploit the field, which entered production in 1966, cumulative production by the end of 1972 exceeding 21 million tons. The El Borma crude is light and of very low sulfur content, which places it at/a considerable premium in European and American markets. As a result, most of the production has been exported. A factor facilitating the trans- port of the El Borma production was the existence of the Trapsa pipeline from the Southern Algerian fields to the Tunisian port of La Skirra, built in 1959, with a proven capacity of 15.6 million tons per year; El Borma was linked to the Trapsa line by another 114 km pipeline. Since El Borma crude contains large quantities of associated gas, a separate gas pipeline has recently been constructed. The output of El Borma, which has total recover- able reserves of 40-50 million tons, has reached its peak of 4.5 million tons, and is now expected to decline by 8 percent per year. Renewed

1/ The industrial groupings are similar to, though not always identical with, those used in the Fourth Plan. Thus petroleum refining is included with crude petroleum and phosphate fertilizers with phosphate rock production. Steel and motor vehicle assembly are broken out, for separate discussion, from the Plan category "Mechanical Industries", while "Chemicals", "Wood, paper and sundry industries" and "Food processing" are discussed only in terms of representative sub-industries, i.e. pulp and paper, phosphate fertilizers and sugar production. This restriction is not too important; it was obviously impossible to cover all industries. The most important omissions where, ideally, additional coverage would have been desirable, are probably fruit and vegetable canning, the leather processing industry, and handicrafts and carpet-making. - 14 - intensive exploratory efforts, combined with technological advances in off- shore activities, have identified four more fields. The first three are ex- pected to peak at a combined output somewhat below 0.5 million tons. 1/. The latest discovery, Ashtart, located off the shore in the Gulf of Gabes, is more important, with an expected production in the range of 1.0-1.5 metric tons. It is scheduled to enter production in 1974. The oil extracted from this field differs sharply from that of other Tuiiisian sources, being a heavy oil with a moderately high sulfur content (2-3 percent), and will probably have a higher value for domestic refining than for export.

14.3 Crude oil production is likely to remain around the present level for a number of years. Unless new discoveries of some importance are made in the next two or three years, however, a subsequent decline in production is inevitable. Prospects for such discoveries are essentially limited to off-shore oil, the mainland having been intensively explored. During the decade 1962-1971, D 94 million were invested in exploration and development whereas, since the discovery of the Ashtart field in 1971, investments have jumped to D 29 million for the single year of 1972 (D 16 million for explora- tion, D 8.5 million for the development of Ashtart, and D 4.5 million for other development).

Table 14.1: INVESTMENT IN PETROLEUM EXPLORATION AND DEVELOPMENT (millions of Dinars)

1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972

Total Tunisia 4.3 3.7 7.1 11.1 13.4 12.3 12.0 9.2 8.6 12.7 28.9

El Borma 1.0 0.9 2.8 6.0 8.8 5.1 4.3 4.7 5.2 5.4 2.2

Other 3.3 2.8 4.3 5.1 4.6 7.2 7.7 4.5 2.6 7.3 26.7

14.4 To date, two major sources of natural gas have been located. The Sidi Abderrahmane field in the Cap Bon was discovered in 1949. Since 1959 its production has been used to supply the Tunis area, where a small number of industrial plants and 220,000 households are linked to the SERENT system, taken over by STEG in 1971. Production from this field peaked at 9.5 million cubic meters in 1968 and has declined very rapidly since. It now provides less than 1 million cu.m. annually, necessitating additional production of gas from light fuels. As a potential source it has now been surpassed by

1/ The Douleb-Tamesmida field entered production in 1968 and is now reaching its peak output at 250,000 tons annually; this production is brought by separate pipeline to La Skirra. Two other fields located on the coast between Sousse and Sfax entered into production in 1973; their long-range production potential is projected at about 200,000 tons per year each. - 15 -

associated gas from El Borma oil fields, the production of which reached 1.2 million cu.m. in 1971. Flared in the past, this gas will now be tapped through a new pipeline to Gabes, with pressurization use limited to the an- nual throughput capacity of 300 million m3. 1/ There it will supply an elec- tricity generating complex as well as several other industries planned for the area. The three other oil fields are potential sources of relatively small amounts of gas. A large gas field was discovered at Sidi El AgarLab, but the gas will not burn in the open air.

14.5 The STIR refinery at Bizerte was completed in 1964. This refinery, Tunisia's first, was a joint venture of the Tunisian State and Italian petro- leum interests. With a nominal capacity of one million tons, it was well below the optimal size for even a simple refinery. Designed essentially to supply the domestic needs for refined products, the refinery operated below capacity through 1968, utilizing a mix of foreign crude oils with a yield approximating the consumption pattern of the domestic market. Higher oil prices resulting from the closure of the Suez Canal made marginal exports of refined products attractive; these exports have subsequently shrunk because of rising domestic requirements. Since 1968, the refinery has been operating at capacity.

Table 14.2: PRODUCTION AND CONSUMPTION OF REFINED PETROLEUM PRODUCTS 1964-1972

1964 1965 1966 1967 1968 1969 1970 1971 1972

Production (000 tons) 719 742 806 858 1037 1101 1163 1156 1093

Domestic consumption of locally refined products 569 638 723 722 769 833 936 976 941

The growth of domestic needs beyond refinery capacity and the transit of 13 million tons of crude oil through La Skirra (of which 4 million tons is Tunisian crude) have spurred plans for building a second refinery with a capacity of the order of 6-8 million tons. It should be possible to build this refinery with sufficient capacity to increase refined product exports and to locate it in the South rather than to extend the Bizerte facilities, since it would be closer there to the supply of crude from the Trapsa pipeline and the Ashtart field. Moreover, this refinery could be a basis to develop chemical industries in the region, which enjoy especially favorable prospects as a result of new petroleum prices.

14.6 Petroleum world prices have been multiplied by 3.5 in 1974 in com- parison to 1973. Even with the expected decrease in production in the coming years, the Tunisian economy will benefit substantially from the new prices. In 1973, crude oil and refined products exports came to 4.1 million tons and

1/ The size of the pipeline is determined mainly by the declining future availability of gas, allowing for reinjection of gas into the oil fields to maintain their pressure. - 16 -

imports to 0.8 million (Statistical Appendix, Table_ 9.6.1), net exports amount- ing to 3.3 million tons and representing D 34 million. In 1974, the volume of net exports will be only about 2.8 million tons as a result of a decrease in production and an increase in domestic consumption, but their value will be over D 100 million.

B. Phosphate Mining and Fertilizer Production

4.17 Phosphate mining and processing is a major economic activity in Tunisia. In recent years, phosphate rock production has been in the range of 3.0-3.4 million tons. Total exports of the phosphate sector were valued at D 23 million in 1972, of which D 10.3 million was phosphate rock and D 12.7 million phosphate fertilizers. Phosphate mining is of crucial im- portance to the poor region around Gafsa, employing about 11,000 people and providing the immediate livelihood for an estimated 50,000. In recent years, the industry has run into substantial difficulties. A drastic decline was avoided by converting a growing proportion of phosphate rock into phosphate fertilizers. According to the Fourth Plan, the conversion of rock into fertilizers would roughly double by 1976 to 2.1 million tons. At the same time, exports of phosphate rock would be maintained at the present level of about 2.3-2.4 million tons. The export value of pbosphate rock and phosphate fertilizers, at 1973 prices, would then attain D 38 million. The success of this strategy will depend upon Tunisian competitiveness in both the mining and the fertilizer ends of the business.

14.8 Up to 1973, world demand for phosphate fertilizers grew by about 7 percent per year; world phosphate rock production increased at about the same rate, from 40 million tons in 1960 to 85 million tons in 1971. Tunisia's production, on the other hand, after rising from 2.0 million tons in 1960 to 3.5 million tons in 1965, has since stagnated in the range of 3.0-3.4 million tons; in two abnormal years, due to floods, production even fell well below 3.0 million tons. Having reached a high of about 5 percent of world production in the mid-1960's, Tunisia's share has now fallen to about 3.7 percent.

14.9 Since the period of exceptionally high export prices in 1965 and 1966, and up until 1973, the mines generally operated at a loss, with losses averaging about D 2 million per year since 1968. These losses were due to both external and internal factors. The external factors include a severe drop in prices, compounded by a $3 per ton fall in world market dollar quotations and an eight percent devaluation of the dollar in relation to the Tunisian dinar. In real terms, i.e. taking into account also the fall in the value of money as measured by the Tunisian Consumer Price Index, proceeds from sales of phosphate rock in 1972 were only about two-thirds of their 1963 level.

14.10 Depressed prices were related to the vigorous expansion of the United States phosphate industry, which increased its export market share from 24 to 30 percent between 1965 and 1972, entering Tunisia's traditional markets in Western Europe. Tunisia's problem was accentuated by the low aver- age grade of its rock. In fact, 90 percent of Tunisian rock grades 65/68 percent BPL, whereas other major exporters market a significantly better average grade and, as the following table indicates, obtained far higher average prices. - 17 -

Table 14.3: AVERAGE GRADE OF WORLD PHOSPHATE ROCK DELIVERIES AND AVERAGE SELLING PRICES, 1972

Grade BPL Share in World Production List Prices Florida Rock % US$/ton FOB

Below 68 39 8.50 (aver. 64-66 and 66-68) 69-72 17 9.50 (estimate) 73-77 22 11.20 (aver. 72-73, 74-75 and 75-77) Total 100

The prices shown are only indicative of grade differences. In 1970-72, Tunisia 65/68 percent ore sold at $8.63 per ton. The situation has changed considerably since 1973 as a result of an increase in fertilizer demand caused by the return of land to wheat growing in the United States and, more generally, by a rise in the rate of world consumption of phosphate fertilizers. The price of phosphate has about tripled since the end of 1973 coming up to $36 per ton for the Tunisian phosphate quality.

14.11 In spite of its inferior quality, rock phosphate represents one of Tunisia's few natural resources. The infrastructure, some largely amortized production facilities and available labor)constitute additional resources which offer a challenge for their more efficient use in the future. Further- more, Tunisian phosphate fertilizers can be imported free of duty into the European Common Market, whereas fertilizers imported from the United States pay a six percent duty. Unfortunately, present mining operations are char- acterized by very low productivity, obsolete equipment, unsafe working con- ditions, high labor turnover, and inadequate staffing. 1/ A major effort will therefore be needed, both in investments and management, first to raise pro- duction to the Plan target of 4.5 million tons of saleable product by 1976 (including production of about 250,000 tons from the Kasserine area) and, second, to increase productivity. The program of modernization and develop- ment of the phosphate mines puts the necessarv investment at about D 60 million. Its implementation and success will be facilitated by the recent rise in prices.

14.12 The output of the Tunisian fertilizer industry has risen from a modest level in 1960 until it now absorbs nearly one-third of production of the mines. The potential advantage of such conversion is substantial: for every D 2.72 per ton of phosphate rock added in mining, another D 5.25 can be added in processing (figures for 1971). Three major producers and three smaller producers are now active in the fertilizer industry.

1/ Sfax-Gafsa employed 11,000 people to produce 3.15 million tons of saleable product (3.5 man-years per 1,000 tons) in 1972. OCP, Morocco, employed 13,000 people to produce about 14 million tons (0.93 man-years per 1,000 tons). - 18 -

Table 14.4: DOMESTIC PRODUCTION CAPACITY AND rMPLOYMENT, 1972

1972 Capacities Start of (th. tons) Total Employ- Company Ownership Operations Product Product Rock Equiv. Invest. ment $ mill.

SIAPE State (86%) 1952 TDP 260 455 14 650 NPK Foreign Private (83%) 1966 TSP 200 350 15 490 ICM State (55%) 1972 Phosph. 110 420 25 213 acid

14.13 Investments in the phosphate fertilizer industry are valued today at about D 23 million equivalent, of which about D 4 million is in SIAPE (net assets as of December 31, 1972), D 8.5 million in NPK (excluding accumulated losses) and D 10 million in ICM (Stage I). The first two produce triple super- phosphate (with phosphoric acid as an intermediate product). In contrast, since July 1972 ICM has been producing phosphoric acid for export. The earnings record of SIAPE was until recently unsatisfactory while NPK has yet to yield a profit. The reasons for poor earnings are manifold: insufficient capacity utilization (NPK), variations in the quality of phosphate received (the good qualities being reserved for export), mill maintenance problems, sensitivity to the fluctuating margin between raw phosphate prices and fertilizer prices. Present plans envisage the expansion of SIAPE and NPK production by about 50 percent by 1976 and a virtual doubling of ICM's capacity.

14.14 Fertilizer manufacture involves very heavy investments and has a high cost per job created. The planned investments are justified only if the industry enjoys adequate comparative advantages. Since 1973, phosphate and fertilizer prices have soared. In view of the likelihood of an increase in production in some countries and the appearance of new manufacturers, prices will probably decline over the next three or four years; however, they should stabilize at a level justifying such investments. Moreover, the advantages deriving from savings in transportation. processing and handling costs are assured, particularly in the case of triple superphosphate. Ilowever, the cost of capital will be of crucial importance in such capital-intensive investments, and the future competitiveness of an expanded fertilizer production in Tunisia will hinge very much upon the extent to which incremental costs are lower than average conversion costs in present plants.

C. Mining, Other Than Phosphate

14.15 The phosphate industry accounts for about 60 percent of the value of mineral production. Iron ore and lead-zinc concentrates each account for another 13-14 percent, while salt and fluorspar each account for about 5 per- cent. The total value of minerals production other than phosphates was about D 9 million in 1971. Production during the last five years has been declining, with prices for iron ore and lead-zinc concentrates generally unfavorable. Only in fluorspar has there been considerable expansion. Salt is recovered from salines along the coast. Production would have increased were it not for substantial damage caused by a flood in 1969. The industry overall at - 19 -

present employs about 8,000 workers plus an estimated 2,000 artisan miners, and is important to the economy of some regions otherwise lacking in devel- opment potential (particularly true for Djerissa iron mines). G.O.T. is the main shareholder in the Djerissa company and in Sotemi which operates the non-ferrous metals mines. The only exceptions to state operation are (a) the salt producer, which is a subsidiary of a French company and (b) the Pennaroya-Tunisia company, in which the Government and Pennaroya, France, hold equal shares. This company operates a lead smelter at Megrine which also processed imported ores and is developing a new zinc mine at Fedj Hassine.

14.16 The geological background is not favorable to substantial mining development; known reserves are limited and do not permit the expectation of more than 10 years additional activity in the iron, lead and zinc mines. Moreover, the grade of ore is low or, at best, medium. The economic potential has also been reduced by wasteful mining methods. Such methods are still extensively used among the artisan miners. In many cases, three-quarters or more of the ore which could have been mined by professional methods is left in the ground.

14.17 The situation in iron ore and lead-zinc mining is critical. The Djerissa ore, while grading only 55 percent Fe, is self-fluxing and therefore commands a reasonable price (about 15 cents per unit FOB in 1972). Un- fortunately, the reserves of the mined hematite were only 3.8 million tons as of January 1, 1973, corresponding to about 5-6 years of additional life. There are another 14 million tons of iron carbonate grading 40 percent Fe, which could supply 5.6 million tons of saleable concentrates grading 60 per- cent Fe if current studies demonstrate technical and economic feasibility.

14.18 About 30 lead and zinc mines are spread over Northern Tunisia. The grade of ore (about 5-11 percent combined lead and zinc) is barely eco- nomic. Equipment is obsolete, there are managerial deficiencies, an

14.19 Production of fluorspar 1/ (mainly acid-grade) started in 1965 and has been rising rapidly. Two beneficiation plants (producing 97 percent CaF2 and up concentrates from relatively low-grade 35-75 percent ores) are in operation and another is projected. Market prospects appear to be rea- sonably good and production is expected to reach 110,000 tons by 1976, com- pared with 50,000 tons in 1972. Reserves by the end of 1972 were estimated

1/ Fluorspar is used to produce hydrofluoric acid which (in the form of aluminum fluoride) is used in aluminum smelting and in the chemicals industry. CNEI has been working on a project to convert fluorspar into hydrofluoric acid and its derivatives (aluminum fluoride). - 20 - at 7.5 million tons (proven, probable and inferred) which would yield not quite 2 million tons of saleable concentrate. Additional reserves are likely to be located; major world aluminum producers have expressed interest in participating in exploration. A few years ago there was a world shortage of acid-grade fluorspar which has now been overcome, prices for concentrates having declined from $70-80 per ton to $50-60 per ton (FOB Tunisian port) in 1973. These prices were still remunerative and went up since then.

14.20 During the last decade about D 8.5 million was invested in the ex- ploration and production of ferrous and non-ferrous metals. It is expected that a similar sum will be spent in 1973-76. This includes exploration ex- penditure of D 3 million. Exploration is concentrated on about 60,000 sq. km. in Northern and Central Tunisia. The annual exploration expenditure represents about 10 percent of the value of mineral production, 1/ (most countries spend only 1-2 percent). This high rate is necessary to make up for past neglect, and is justified with a view to maintaining mining pro- duction at the present level, or, hopefully, permitting a slight increase. Employment is expected to fall by about 20 percent, mainly through the dis- appearance of artisan miners.

14.21 It is an extremely difficult task to inject new life into an in- dustry whose time is apparently running out, and the problem is exacerbated by surplus labor, since the States mines maintain people on the payroll to relieve unemployment. One cannot feel optimistic about the commercial ex- ploitation of carbonates at Djerissa (deeper 'Level mining, additional proc- essing). A feasibility study is expected by the end of 1973. By that time, the Tunisian Government will need to devise some combination of a subsidy to maintain jobs for miners (presently numbering 1,400) and supporting personnel in their present habitat with an orderly system for transferring personnel to other mines or otherwise retraining and resettling them. 2/ A similar situa- tion exists with respect to the mining of non-ferrous metals.

D. Sugar

14.22 The sugar economy of Tunisia may be shown by the following diagram (figures in tons):

1/ Excluding salt and phosphate production where no exploration is done.

2/ Such a gradual demobilization is taking place (under much more favorable circumstances) at the Tamera Mine near th'-e El Fouladh steel mill, where employment has been reduced from 848 in 1968 to 240 today, apparently with no great change in production. - 21 -

Domestic Beet Imported Raw Sugar Sugar (STS) (Office du Commerce) 3,000 49,000

Domestic Imported Granulated Sugar Granulated Sugar (STS) Office du Commerce 54,000 52,000 IMER 18,000

Sugar Consumption Agglomerated Sugar Granulated 90,000 (IMER) Agglomerated 15,000 32,000

Exports to Algeria (IMER) 17,000

The heart of the sugar industry is the STS (Societe Tunisienne du Sucre) with installation at Beja (the sugar refinery has a capacity only slightly higher than the present production of 52,000 tons 1/) and a raw sugar factory capable of processing 1,500 tons of beets (about 200 tons of beet sugar) per day. 2/ This complex was built in 1961/62 at an estimated cost (1961 prices) of about D 5.0 million.

14.23 The expectation that demand for sugar will grow from about 120,000 tons in 1972 to 145,000 tons in 1976 has prompted the Government to propose the construction of an additional refinery in a coastal town near the main market. 3/ Very preliminary calculations shown in the Plan put the cost of a 70,000 tons refinery at D 4.5 million, with an operating cost of about D 9 per ton. At 10 percent interest and a 15-year life, the financial charges (excluding interest on working capital) would add another D 8.30

1/ "Note relative a l'evolution des industries agricoles et alimentaires" (preliminary version), p. 3. A 1971 brochure issued by STS gives the refinery capacity as 350 tld which at, say, 330 days would provide easily 120,000 t/yr. However, the plant operates only during September- March, which explains the lower stated capacity.

2/ The annual capacity is given as 80,000 tons of beets. ("Note relative a l'evolution des industries agricoles et alimentaires", 19 February 1973, p. 4).

3/ Location of the original refinery at Beja together with the raw sugar factory caused additional transportation charges of D 1.50 per ton of imported raw sugar. - 22 -

per ton. The margin between imported refined sugar and imported crude sugar (D 20 in 1973) is enough to make a new refinery an attractive investment. 1/ Agglomerated sugar sells at a further premium of D 20 above granulated sugar.

E. Textiles, Clothing, Leather and Shoes

14.24 The textiles (spinning, weaving and finishing) and clothing (in- cluding shoes and leather) sectors accounted for about 30 percent of the industrial value added outside food processing in 1972, and over 50 percent of the employment. The percentage breakdown, by activities, is slhown below:

Table 14.5: TEXTILES AND CLOTHING: DISTRIBUTION OF VALUE ADDED AND EMPLOYMENT BY SUB-SECTORS, 1972

Percentages Value Ratio Added Employment Col. 1/Col. 2

Spinning, weaving, finishing 43.2 13.5 3.2 Clothing and knitwear 23.6 16.8 1.4 Carpets 19.3 64.5 0.3 Leather and shoes 13.9 5.2 2.7

100.0 100.0 1.0

The output of the sector as a whole has grown by 20 percent per year over the last decade. The production of cotton yarn and fabrics has grown from negligible quantities to about 10,000 tons of yarn and 38,500 tons of fabrics. The Office National de l'Artisanat invested about D 4 million in carpet produc- tion during the last decade, and production is estimated to have increased 2-1/2 times. Figures in Table 14.5 Column 3 indicate the striking employment potential of the clothing and knitwear sector and, particularly, carpet making. The high ratio of employment to value added in the latter sector does, however, also reflect a low rate of remuneration.

14.25 Until recently the textile sector was dominated by the state enter- prise Sogitex, which operates six textile and clothing mills with a capacity of nearly 6,000 tons of cotton yarn, 27 million meters of woven goods (cotton, artificial and synthetic), Tunisia's main textiles finishing plant (with ca- pacity for treating 25 million meters of fabrics), and one factory making jeans, shirts, and working garments entirely for export.

14.26 Nevertheless, the private sector has been expanding. Whereas, in the beginning, Sogitex was responsible for 80 percent of the Tunisian produc- tion of woven fabrics, today the proportion is less than one-half. The next

1/ The present price difference between raw and refined beet sugar in the European Common Market countries lies in a range of roughly D14-18 per ton. - 23 -

largest enterprise is the Djilani group, which operates a cotton weaving plant at Sfax, and will be constructing a spinning plant with an initial capacity of about 1,500 tons at the same location. The same group is also initiating the manufacture of clothing and knitwear for export, the latter on a large scale, in association with the leading French textile manufacturer. Other leading manufacturers, for the most part, have entered certain specialized corners of the market, where they have substituted for imports with varying efficiency (jute cordage and sacks, knitwear, terry cloth, woolen blankets, etc.). The rest of the industry is small and fragmented. Certain imbalances of structure are apparent: Sogitex, which used to have a surplus of cotton yarn, is now importing such yarn. There is a special scarcity of combed yarn, though such yarns will be produced increasingly by both Sogitex and the Djilani group. The Sogitex finishing mill (the largest in Tunisia) has modern equipment, but has certain operating problems; custom finishing for other producers represents only 10-20 percent of its total business.

14.27 The Plan sets the following targets:

Table 14.6: TEXTILES AND CLOTHING: FOURTH-PLAN TARGETS (Dinars Million)

1972 1976

Exports Clothing and knitwear 2.6 39.0 (Clothing 30.3; knitwear 8.7) Cotton fabrics 1.2 4.5 Carpets 2.3 3.5 Other (e.g. shoes) 1.2 1.3

Total 7.3 48.3

Employment (Thousands) 50.2 75.8

Investments, 1973-76 39.6

Spinning, weaving, finishing 21.0 Clothing and knitwear 16.8

This 'program is heavily dependent on clothing and knitwear exports. One- half of these exports are already covered by factories under construction with the benefit of the export promotion law of April 1972. There is a virtually unlimited market in Western Europe, particularly for clothing, and Tunisian exports would represent only 4 Dercent of the imports projected by the Six. Moreover, in foreign or mixed Tulnisian-foreign ventures, the foreign investor will contribute a built-in market. Finally, Tunisian com- petitiveness in items like standard shirts and blue jeans is very great: because of the low wages, the manpower cost per unit produced, in spite of low productivity, is only about 60 percent of the corresponding cost in Western Europe, and this far outweighs higher depreciation and financial charges. Eventually, it should also be possible to raise the output per man-hour on existing installations by 50-100 percent, thus reducing both - 24 -

capital and labor charges. There is a shortage of foreman and maintenance mechanics, but it is planned to relieve this shortage through appropriate action. The most serious problem is the upgrading of the mass of semi- skilled labor, mainly raw recruits from agricultural areas, unused to in- dustrial discipline, and with a high rate of turnover. Tunisian managers of both textile and clothing mills expect productivity to rise considerably over the next few years. A realistic study of what is likely to happen to productivity and wages, on reasonable assumptions with respect to emigration, would be of great value for industrial planning and to entrepreneurs, both foreign and domestic.

14.28 Working within a financial constraint, leading companies clearly see their main comparative advantage in the clothing end, which is therefore being pushed at the expense of spinning, weaving, and finishing. The Plan itself adopts the pessimistic hypothesis that all exports of clothing and knitwear will be based on imported fabrics. Export processing firms will have complete freedom of procurement, turning to Tunisian supplies only where these would be competitive in terms of price, delivery periods, and above all quality.

14.29 The question has been raised to what extent Tunisia is really ready to join the textile export business (as distinguished from clothing and knit- wear) and, if the answer is in the affirmative, at what rate and for what products. A subsidiary question is how hard it should aim at supplying its own export processing industries in clothing and knitwear, or whether it should seek a more general market orientation. Investment in the spinning of cotton for export would mean competition with yarn flowing to European weaving mills in a constant stream from factories in cotton-producing coun- tries (Turkey, Nigeria, Ivory Coast, Congo), and production and marketing skills in woolen and worsted weaving, not yet available in Tunisia. But if these fields are difficult, gradual entry into the custom spinning of arti- ficial and synthetic fibers and the weaving of cotton-type fibers should be feasible. Both in weaving and finishing, the first priority is to use exist- ing capacities more effectively. Since finishing capacity could be doubled with only a 30 percent increase in the original investment, the main invest- ment should presumably be in weaving.

14.30 The next 3-4 years will be crucial for the private textile sector. The domestic market is extremely small, with its import substitution poten- tial largely exhausted, and it will come under increasing pressure from new firms established in the customs-free zone which could well dump on the Tunisian market (after payment of import duty) certain lots which, for quality or other reasons, had not been deliverable abroad. It is therefore necessary that small Tunisian mills turn increasingly towards exports (including sales to clothing and knitwear manufacturers-exporters established under the Law of April 1972). Regroupings and mergers will be necessary for economies in ex- port marketing, research and development, manpower training. Speed is essen- tial, since many other countries are vying for a place in the European market. - 25 -

14.31 Sogitex's problem is different. It is an established producer of reasonable size. It has an investment program totalling D 4.5 million, but only one-half, covering the most urgent needs, has been sanctioned for the next 4 years. This is because the program has been tailored to the expected availability of self-financing. The company's financial structure is excep- tionally weak. In 1972, the gross cash flow of D 2 million was absorbed al- most entirely by loan repayments. Nevertheless, the long-term outlook is sound if good management can be maintained. Financial restructuring should therefore be pushed more vigorously. A restructured Sogitex could, in theory, initiate a more ambitious investment program. At the same time (and this seems to be the present intention), Sogitex might give off certain units which would then form the nuclei of viable new firms. Sogitex and these nuclei could then provide a lease on life to small firms through subcontracting.

14.32 The current Tunisian production of shoes of all types is about seven million pairs, predominantly for the domestic market. About one- quarter are produced on an industrial scale by Bata and SICA, the rest being furnished by some 20 medium and small establishments and by artisans. This includes a high and rising proportion of textile shoes. In contrast, plastic shoes are not allowed to be manufactured in Tunisia. While both sole leather and leather for uppers are produced ,(there is one tannery for cattle hides and two smaller tanneries for sheep and goat skins), the sup- ply of hides and skins is a major problem, and 60 percent of the cattle hides are imported. Only about one-third of the gross supply of sheepskins and goatskins are industrially tanned (Tanneries Modernes de la Manouba), another third are treated by small tanners and artisans (some of these are pickled and exported) and the remainder are either sold with the wool to tourists (about 200,000 skins) or lost. 1/

14.33 There is a very considerable export market for shoes in Western Europe, as may be seen e.g. from the following summary of imports by the expanded Common Market in 1971 (million pairs):

Footwear with leather uppers 19.5 Slippers and other house shoes 21.5 Footwear made primarily from textiles 59.4 Rubber footwear 22.6 Footwear made of plastic materials 29.8 152.8

Though these imports have nearly trebled since 1973, they still represent only about 15 percent of total Western Europe consumption. In addition, there are major export opportunities for skin and leather garments, gloves, and ladies handbags. Western European manufacturers are looking for oppor- tunities to establish processing plants in the Mediterranean area, partic- ularly in countrieb which will be associated with the Common Market. The

The proportions just indicated are highly uncertain; statistics and information on this subject are vague and contradictory. It is possi- ble that a far higher proportion of the sheepskins are not exported with the wool. - 26 - main reason is an acute labor shortage, which has led to the closing of plants in Germany and has thwarted shoe industry expansion in Austria. The Tunisian shoe industry can enter this market initially with shoes in the lower and medium price ranges where quality requirements are not severe.

14.34 The Plan foresees only relatively minor investments totalling D 1.3 million in the shoe industry and only a 25 percent increase in produc- tion and employment, i.e. no major change in productivity. Perhaps these goals are realistic, but to an outsider they seem too modest. Shoes, gloves and leather goods is a sector where Tunisia could incontestably attain a com- parative advantage. Three related and carefully phased types of action may be envisaged: a development plan for these industries to be prepared by consultants, the active canvassing of foreign investors interested in this particular industry, and the support of SNI and other banks for the restruc- turing of small industries and artisan shops.

F. Pulp and Paper

14.35 The production of pulp and paper merits special attention because: (a) it is the largest industry in the suib-sector "Wood, Paper, Printing and Sundry Industries", (b) it represents a pioneering effort to extend Tunisia's industrial potential while at the same time providing employment opportuni- ties for an under-developed region, (c) pulp and paper production has en- countered so many problems that there are serious doubts about even the short-term viability of this industry, which directly employs about 3,500 in the Kasserine region, if the harvesting of esparto grass is induced.

14.36 The SNTC (Societe Nationale de Cellulose) was created in 1963 to produce pulp from esparto grass at Kasserine, in the center of the region where this grass grows wild, and possessing river water and a large supply of under-employed labor. The mill was to have a capacity of 80 tons per day (an estimated 24,000 tons per year). The foreign suppliers withdrew after two years when the mill had attained a maximum output of only 45 tons per day; with technical assistance from other sources, the rate has now been brought up to 76 tons per day. The total investment as of the end of 1972 was D 7.5 million equivalent; the accumulated losses as of the end of 1970 nearly D 3 million. An additional D 8 million has been invested in infra- structure (houses, schools, hotels, etc.).

14.37 The pulp mill was originally intended for export production. How- ever, it was decided to provide paper-making facilities at the same location. The paper making company, Sotupalfa (under joint management with SNTC) was created in 1964, and a mill with nominal capacity very similar to that of the pulp mill started operating in 1970. The paper mill has produced at, or even above rated capacity, but because of market constraints, annual pro- duction in 1972 was only 15,000 tons.

14.38 The pulp mill had a marginal economic justification (its justifica- tion conceivable only in terms of employment and other developmental bene- fits). While the technical problems have now been solved, the economic and financial problems are becoming critical: - 27 -

(a) Traditionally, there was a market for esparto grass in the United Kingdom, France and Spain; the resulting relatively short-fibered pulp was used in special grades of printing and writing papers. Today, however, papermakers can obtain similar qualities through the beating, blending and refining of wood pulp.

(b) Esparto grass is becoming increasingly costly. It takes 2.4 tons of esparto grass (at D 12.50, say D 30 per ton, delivered at the mill) to produce one ton of pulp. Moreover, the grass can be harvested only during November-March, which gives rise to substantial storage costs, and operations cannot be mechanized.

The total production of esparto pulp is only 60,000 tons/year, and previously existing plants in Algeria, Spain and France have either closed, or face great difficulties in staying alive. 1/ But the most vital threat t:o the Tunisian plant is that, because of the rural exodus, the source of manpower for harvesting is drying up. Even though exports of esparto have been pro- hibited, the situation is expected to become critical during the 1974/75 campaign. Possibilities of forest planting (e.g. eucalyptus) as a substi- tute pulping material are discussed in the chaptei on Agriculture.

14.39 One major idea behind the creation of the paper company was to find a local market for the pulp. Another was to achieve certain economies in investment and production costs by integrating pulp and paper production. These objectives, however, were offset by several drawbacks:

(a) The total Tunisian market for paper is less than 40,000 tons, of which about one-third is for kraft paper, and another third for special grades which cannot be made by Sotupalfa, leaving only about 12-13,000 tons as the present local market. Hence, roughly one-half of the production has to be exported. Yet export prices barely covered raw material costs.

(b) In 1971, the company produced 40 different types of paper (without considering variations in thickness and weight), with the result that the idle time of the machines roughly equalled their production time. In 1972, the number of types manufactured was cut drastically to 5, which could hardly satisfy the needs of the market, increasing the pressure for paper imports.

(c) Even with increased product specialization, Sotupalfa used only about 50 percent esparto pulp. The rest was imported in the form of long-fibered pulp ane. was burdened with ad- ditional transportation from port to mill. A further im- plication was, of course, that only about one-quarter of the esparto pulp was absorbed domestically.

1/ Nevertheless, a new Algerian plant with a capacity of 36,000 tons/year is scheduled to start operations in about 3 years. - 28 -

For all these reasons, it is clear that there can be no viability based upon the Tunisian market. Better economics can only be obtained through special- ization (utilizing whatever advantages esparto pulp may still possess for certain uses). One way of achieving this would be to interest an interna- tional paper company in becoming a partner and assuming the responsibility for export marketing.

G. Construction Materials (particularly cement)

14.40 The construction materials sub-sector, with a 1972 value added of D 7.0 million at current prices, accounted for about 8 percent of industrial production but less than 6 percent of industrial employment. A substantial number of people are employed in brick and tile making and in cement products, essentially for the home market. Value-wise, and particularly in terms of total investments, cement production is the most important activity. At a planned expenditure of D 21 million, it accounts for three-quarters of the projected investments 1973-1976. Another important activity is the produc- tion of glass containers (Sotuver). Sotuver's expansion plans are essentially geared to the domestic market for glass containers. The Tunisian market is too small for the economic production of window glass.

14.41 Tunisia's two cement mills have a combined capacity of 630-730,000 tons. The larger one, CAT, near Tunis, produced 430,000 tons in 1972, the smaller, CPB, near Bizerte, produced 196,000 tons. Both mills are in the state sector, as are most of the other enterprises in the construction ma- terials industry. Much of the cement mill equipment is old and severely worn. Production has fallen behind the country's rapidly expanding needs, and 1973 imports are projected at 250-300,000 tons. Demand is expected to rise above 1 million tons by 1976. Capacity will be increased by building a new cement plant at Gabes with two kilns and by adding another kiln at Bizerte, each new kiln having a capacity of 1,000 tons per day, say 330,000 tons a year. In addition, a regional project is currently being studied with Algeria.

H. Steel

14.42 Studies for a steel mill were begun in 1959, and orders for a plant to be located at Menzel Bourguiba placed in 1963. The mill was com- missioned by the end of 1965 with the following major units: blast furnace (300 t/d), two oxygen steel converters of 12 tons each, a two-strand con- tinuous caster with a capacity of 300 t/d of billets, and a combination merchant bar and wire rod mill with a capacity of 12 t/h. The total in- vestment was D 25.5 million. The company would use ore from Djerissa, as well as from a small deposit close to the mill, together with imported coke.

14.43 The scheduled annual production was 100,000 tons of pig iron (of which part would be exported), and 70,000 tons of finished steel. Actual production and sales have grown as follows: - 29 -

Table 14.7: STEEL INDUWSTRY: PRODUCTION, SALES AND EMPLOYMENT

1967 1968 1969 1970 1971 1972 Proj. 1973

Production

Pig iron, th.t 102 128 131 125 98 143 150 Billets, th.t 46 82 101 100 87 132 140 Finished steel, th.t 50 71 86 79 69 102 105

Sales (finished prod.) th.t 46 68 91 ? 62 110 124

Home market 15 38 42 34 70 73 Export 31 30 49 28 40 .51 of which wire products - - - (4) (11) (20)

Employment 1,723 1,653 1,638 1,488 1,595 1,650 1,670

Productivity, tons/man /1 29 43 52.3 53 43 62 63

/1 The installation of a wire mill for the conversion of rods into wire partly explains the fall in productivity between 1970 and 1971.

As seen from the above statistics, the company quite quickly attained or exceeded nominal capacity. The present estimated annual capacities are 180,000 tons for the blast furnace, 100,000 tons for the converters, and approximately 100,000 tons for the rolling mill. In 1971, a wire-drawing mill with a capacity of 15,000 tons was added.

14.44 Output could be doubled by installing a third converter plus an additional oxygen plant, a third billet caster, and a second rolling mill. Such expansion is impeded by both financial and market constraints. The company has had to sell a substantial portion of its output for export and, notwithstanding high domestic prices, operations have not been profitable and the company's financial structure is weak.

14.45 The following parameters will determine the economic feasibility of continued (expanded) operations at El Fouladh:

(a) the likely future level of imports and export prices;

(b) the reduction of long-run variable costs as production expands. - 30 -

With respect to the first parameter, a reference price of $135 per ton CIF Tunis may be assumed. 1/

14.46 The second question concerns the long-run variable costs of steel production at El Fouladh. The preliminary version of the Fourth Plan in- dicates an investment of D 7.1 million for a doubling of the present output, i.e. an increase by about 100,000 tons of finished steel. In connection with this increase in output, the cash flow per ton of steel would increase from D 10.50 to D 18.50, or globally by about D 2.1 million per year, which would permit these new investments to be amortized very quickly and yield an incremental investment return over 30 percent. Since in that particular calculation (perhaps illustrative only) the increase in production was as- sumed to be entirely for export, the financial return would also be repre- sentative of the incremental economic return.

14.47 The total cash flow for 1976 is projected at D 3.5 million to which might be added D 0.4 million in earned interest on old debt for a total of D 3.9 million. But this result is predicated upon (a) an implicit sub- sidy of over D 4 million arising from the projected difference between do- mestic and CIF import prices (D 91 vs. D 60 per ton), and (b) continuation of the present export subsidy (to the extent of D 1.0 million). Without these subsidies, the cash flow would be negative. Even if one could justify some degree of protection of steel production in Tunisia, the long-run economic viability of the present operations is clearly in doubt. These doubts are reinforced by the fact that, although in resDect of incremental capacity, the new investment, at $161 per ton crude steel equivalent, is not particularly low. According to a recent study, a "mini-mill" consisting of an electric furnace, a continuous caster, and rolling facilities for a narrow band of non-flat prod- ucts can be constructed at about $100 per ton of capacity in industrialized areas.

14.48 Yet El Fouladh is by far the largest manufacturing enterprise in Tunisia, with an importance transcending the purely economic plan. The country would clearly be willing to pay a moderate annual cash subsidy to keep the mill operating. Every effort needs to be made, therefore, to find a constructive solution, which might include the following elements:

(a) Study of the reasons for the high input costs and of economic alternatives to blast furnace production (presumably electric furnace scrap smelting).

(t) Quick implementation of the expansion program once the pro- jected results have been verified by the same experts who would undertake the long-run viability study.

1/ By the end of 1968, ferro-concrete rounds were quoted at a price of $80 FOB Antwerp. Today, under exceptional boom conditions, they are quoted at $180. - 31 -

(c) Gradual reduction of selling prices to a level of, say, 10-15 percent above the projected equivalent price of imported steel; present high steel prices lead to distorted resource allocation, in particular a non-desired increase in construction costs and possibly a lowering of investment activity.

(d) Writing down of the company's fixed assets in line with its future earnings capacity and a corresponding adjustment of its capital structure.

I. Metal Manufacturing, Mechanical and Electrical Industries

14.49 In 1972, the output of this group of industries had a value of more than D 26 million, 1/ with a value added in excess of D 8 million. The major lines of manufacture and producers are the following (figures in D million; state enterprises marked with an asterisk):

Table 14.8: METAL, MECHANICAL AND ELECTRICAL INDUSTRIES: VALUE OF OUTPUT

Value of Output (1972) D. Million Lead smelting (Penaroya*) 4.2 Foundries 1.8 SOFOMECA* (1.0) Fonderies Reunies (0.7) Steel structures, boilers, tubes, radiators 3.3 SGI and others (2.6) SIMET (tubes, radiators) (0.7) Aluminum and other non-ferrous metal products 1.3 Sewing machines 0.4 Various steel manufactures 8.2 A.M.S.* (hand tools) (1.6) Rectif (job shop) (0.4) SOTUMO (reconditioning engines) (0.7) Can-making (e.g. STUMETAL*) (4.0) Other (1.5) Electrical products 6.4 Chakira (enamelled wire) 1.1 El Athir (electronic equipment) (2.0) Battery production (0.7) Other (e.g. radio and TV assembly, spark plugs, light bulbs) (2.6) Shipbuilding 0.6 SOCOMENA* (0.3) SCIN (0.3)

1/ Excluding steel and motor vehicle assembly, which are included under the same Tunisian classification but which we have treated as separate sub-sectors. El Fouladh's wire drawing department technically belongs to this subsector; its inclusion would have added D 1.5 million to the total production value. - 32 -

14.50 Renewals and other approved projects under the Fourth Plan total about D 3 million, from which the expected increase in production would be D 13 million and in value added D 4.5 million. The low incremental capital- output ratio reflects the nature of the work done (much of it assembly). Several additional projects are under study: tractor assembly, refrigerator assembly, radio and TV assembly, cast-iron radiators, wood-working machinery, and railway wagons.

14.51 In trying to enter this industry, Tunisia was faced with several major problems:

(a) The insignificance of the domestic market;

(b) The lack of tradition in an industry requiring substantial technical and managerial know-how and a skilled work force;

(c) The great cyclical fluctuations characteristic of many metal- working activities, which puts a premium on a world-wide sales effort, a stable domestic market to fall back upon, and finan- cial strength;

(d) The importance of external economies (i.e. access to specialized suppliers of certain types of casting, forging, or machinery).

Some branches of the engineering industries are traditionally regarded as labor-intensive in industrialized countries. Yet this depends upon an in- ternal organization and external environment permitting a rapid flow of materials and components through the plant and good utilization of spe- cialized equipment. This is equally true for both series production and job work. In series production, additionally, large orders for a given item are essential to permit amortization of tools, molds and patterns. Labor-intensity in many cases implies the intensive use of skilled labor. The relatively higher premium which has to be paid for such labor in de- veloping countries dilutes their comparative advantage. Finally, there has to be strict adherence to quality and delivery periods, and this is very difficult for a new industry.

14.52 Against this background, Tunisia's entry into the metal-working trades has some favorable points. It emphasizes hand tools (truly labor- intensive), castings (great shortage of foundry labor in Western Europe) and ship repair and shipbuilding (to utilize the extensive French naval facilities at Bizerte; this also is an area of labor shortage in Western Europe). Motor vehicle assembly is perhaps less attractive; the same ef- fort might have yielded better economic results in the assembly of elec- tronic components., This latter type of work is particularly suitable for female labor.

14.53 In practice, Tunisia's first thrust into metal-fabricating activ- ities was rather disappointing. The biggest venture -- the Ateliers Mecaniques du Sahel -- for the production of hand tools, resulted in financial failure, variously blamed on poor equipment (of Polish origin), weak financial struc- ture, weak management and unsuitable regional labor. Sofomeca, a foundry - 33 - which started operating in 1965, was conceived for a production in series (equipment furnished by Rheinstahl) of about 1,500 tons of steel castings and 3,000 tons of iron castings. By 1969 it was producing only about 1,000 tons of steel castings and 1,500 tons of iron castings at a low level of pro- ductivity. A consultant study of June 1970 concluded that production could be doubled if a few supplementary investments were undertaken; this would, however, necessitate an export orientation. This has apparently been achieved, with preliminary Plan documents indicating a present production rate of 1,500 tons of steel castings and 2,700 tons of iron castings. Socomena has not yet been able to base any viable production on the old naval facilities at Bizerte. There is some production of fishing vessels for Tunisia's fishing fleet that could perhaps eventually develop into something more important.

14.54 In conclusion, there is a need for a new blueprint for metal- manufacturing to make the best use of the facilities installed and the skilled manpower created, for example in motor-vehicle assembly. The objectives would include: (a) the identification of those lines of production in which Tunisia would be most likely to succeed; (b) required changes in the organization of the industry (e.g. financial reconstruction, mergers., injection of foreign entrepreneurship with ties to the European market, etc.); (c) a series of project studies for individual projects; (d) a series of recommendations in specific areas like quality control, manpower training, supply of technical information, finance, subcontracting, etc.

J. Motor Vehicle Assembly

14.55 STIA, Tunisia's first motor vehicle assembly plant, was established in March 1961 through an agreement between the Tunisian Government and the French group Renault-Saviem. At first, only trucks and trailers were as- sembled; in 1965 passenger cars were added to the program. The original shares were held by Renault-Saviem (40 percent), the Tunisian State (33 per- cent) and SNI (27 percent). Renault sold out in 1968, and at present the Tunisian State holds 49.5 percent and SNI 49.1 percent of the shares.

14.56 The development of STIA's business can be seen most easily through the following summary of investments in fixed assets and stocks, the latter consisting mainly in C.K.D. kits and vehicles under assembly:

Table 14.9: INVESTMENTS OF STIA (million dinars)

Fixed Assets Incr. in Stocks Total

1961-64 0.06 0.28 0.35 1965-68 0.97 0.67 1.64 1969-71 0.95 1.59 2.54

Apart from the original equity of D 0.06 million, financing through 1966 was mainly in the form of supplier's credits. From 1967 on, fixed assets - 34 - were financed through plowed-back earnings, while stocks were built up through continued reliance upon supplier's credits on terms which were easy but clearly related to the price for C.K.D. kits.

14.57 The company's sales and market shares have grown as follows:

Table 14.10: SALES AND MARKET SHARES OF STIA (NUMBER OF UNITS)

1962 1964 1966 1968 1970 1971 1972

Sales

Imports 4,917 541 2,333 3,451 4,726/2 10,387/2 STIA 200/1 99/1 520 731 810 1,011 STIA share 4% 15% 18% 17% 15% 9%

Value of Sales /3 (th. dinars)

Production by Types

Cars 586 499 452 338 788 Trucks & Vans 6 275) 2,569 Trailers 6 14) 506 538 220 Buses 10 59 37 139 1 479

Total 608 84Z 995 1015 5,056

/1 Production. /2 Imports in 1970 and 1971 include 1993 and 7516 respectively second- hand vehicles (both cars and trucks) which were purchased by worker- emigrants imported without paying the 36 percent consumption tax on cars. /3 Net of taxes.

The choice of vehicles for assembly is based on international bidding and results in 2-4 year agreements. Vehicles assembled in 1972 included four models of passenger cars, five trucks and vans, and four bus models. An- other passenger car model was added in 1973.

14.58 In 1972 the local value added (expressed as the ratio of the cost of local parts and labor to the ex-works cost price of the vehicle) was 20 percent for passenger cars, 43 percent for trucks :ind 50 percent for buses. Local parts include certain castings, pressed steel parts, tires, batteries, - 35 -

upholstery and paints. The present prices, excluding taxes, of the vehicles assembled by STIA are appreciably higher than the CIF prices of the same vehi- cles imported; they thus need high protection. This protection is applied both through Customs duties and through restrictions on the importation of finished vehicles. Motor vehicle assembly thus lacks adequate competitive- ness, though it offers certain clear, if modest, advantages in the form of the pull effect on other engineering industries supplying spare parts. The reasons for this lack of competitiveness are:

(a) low total volume of output coupled with the great variety of car makes;

(b) inadequate capacity utilization; it is estimated that pro- duction could be doubled within the present plant;

(c) high turnover of qualified personnel;

(d) high cost of local supplies, i.e. twice the CIF cost of im- ports for batteries, and two-thirds more for tires. This is in contradiction to the government target that local components should be added only if costs would not exceed that of equivalent imports by more than 20 percent.

More fundamentally, this lack of competitiveness is due to the fact that the local assembly of motor vehicles is hardly economical except as a transitory phase preliminary to integrated production, for which the Tunisian market is far too small. In the past, STIA has explored various avenues towards im- proved economic results, including the assembly of bicycles and motorcycles, so far without success. Thanks to STIA, Sofomeca, a modern, well-equipped foundry and Rectif, a machinery workshop, have received export orders from Berliet, France; in the case of Sofomeca, by the fall of 1972 deliveries had risen to about 60 tons per month. They are compensated by exports of Berliet trucks to Tunisia for a similar value.

14.59 Now that investments have been made both in automobile assembly and in the manufacture of certain parts, a viable solution must be found quickly. Two lines of action deserve to be explored and pushed:

(a) The assembly and construction of bus bodies. According to STIA, touring buses with a sales price of about $30,000 could be assembled in Tunisia with approximately a 50 per- cent domestic component and incorporating 2,000 hours of labor according to West European standards.

(b) The experience of Berliet's subcontracting of castings must be fully examined by a recognized international expert who would specify under what conditions this precarious beginning could, by orderly stages of evolution, lead to a real entry into the European castings market. - 36 -

In seeking a contract for bus assembly, STIA is now in a position to offer the services of a going organization, a supply of trained labor, and the fi- nancial advantages accruing to foreign companies which make Tunisia an export base.

K. Electric Power

14.60 Tunisia's energy resources comprise limited quantities of oil and natural gas, referred to earlier, some 380 MW of hydro-electric potential and some poor quality and uneconomic lignite beds in the north. Of the hydro-electric potential, 32 MW have been developed, and it is unlikely that the growing needs for water for domestic consumption, irrigation and industry will permit further use for electricity generation.

14.61 The power sector is represented principally by STEG, which had in 1972 a total generating capacity of 291 MW and supplied 85 percent of all electric energy consumed in the country. The only other power sources are about 43 MW of captive plants serving particular industrial or mining entities which will increasingly turn to STEG for their additional power requirements. The principal users of electricity are the industrial, mining and tourist sectors in which some 1,400 consumers in 1972 consumed 480 GWh out of total sales of 700 GWh. The remaining 220 GlWh was sold to 328,000 domestic and small-farmer customers who had a relatively low annual consumption of 670 kWh per customer.

14.62 STEG, a government-owned corporation, is responsible for the pro- duction, transmission and distribution of electricity and gas for public consumption for the entire country. Its principal activity is the sale of electricity, while gas sales account for less than 6 percent of its total revenues. STEG was created by decree law 62-8 in April 1962 to take over the operations of seven private utility companies. During its early years, STEG's efforts were concentrated on physically integrating the seven separate systems and on filling the gaps in supervisory and skilled manpower created when the expatriate personnel left Tunisia. During the past three years STEG has been able to start on a systematic expansion of the integrated national system and turn its attention to matters of organization, management and finance.

14.63 STEG's system consists of the following:

(i) At La Goulette I power plant in Tunis, 4 steam -generating units ranging from 10 MW to 17.5 MW in size and totalling 57.5 MW of nameplate capacity which were installed from 1931 to 1954. Most of this plant is no longer reliable, and will be gradually retired as new generating plant is built.

(ii) At La Goulette II power plant in Tunis, 4 steam generating units of 27.5 MW each, totalling 110 MW of nameplate capac- ity; two of which were installed in 1966 and two in 1968. - 37 -

All units are operating satisfactorily and constitute STEG's principal power source today.

(iii) 3 small hydro-plants in the north-western part of the coun- try totalling about 32 MW nameplate capacity which are avail- able for peaking only and are associated with reservoirs for potable water and irrigation. Tunisia unfortunately does not have any hydro power sites of significance.

(iv) A gas turbine (15 MW) from Menzer Bourguiba was reinstalled in 1972 at Rhennouch and is connected to the interconnected system.

(v) 3 principal diesel plants at Sfax (9.8 MW); at Sousse (5.5 MW) and Djerba (4.5 MW) and more than 25 smaller diesel units totalling about 7 MW are located throughout the country to serve isolated localities still not connected to the interconnected system.

(vi) 60 MW of steam power plant at Rhennouct in two 30 MW units brought into service in October 1972, to be fueled by the El Borma - Rhennouch gas pipeline.

(vii) A 150 kV main transmission ring in the center of the country with secondary branches at 90 kV.

14.64 . During the early years of its existence, STEG concentrated its efforts on rationalizing and integrating the operations of the companies it took over. At the same time it had to plan the development of the elec- trical system to meet the rapid increase in demand expected from the new industrial enterprises created during the period 1962-1965. The investment figures for this period attest to reorganization followed by a rapid build up, first in production and transmission, and then in distribution. Total investment figures rose from D 1.0 million in 1962 to D 7.5 million in 1965. During this period the rate of increase of consumption rose from 3.5 percent per annum in 1962, a little below the average for 1956-1961, to 10.5 percent in 1963 and 17.3 percent in 1964. 1/ The rate of increase remained high in 1965 and 1966 - 13.8 percent and 16.0 percent respectively - then remained in the range of 8-11 percent through 1972. This rate of in- crease called for several investments in generating capacity. A 55 MW oil fired steam turbine was-added in 1965 at La Goulette, and a second similar unit in 1968. Early in 1972, a gas turbine initially installed at Menzel Bourguiba was relocated at Rhennouch and later that year two 30 MW gas fired thermal units were installed, using gas piped from El Borma.

14.65 In transmission, the goals for the first development decade were more than met. A national grid was completed by 1966, linked into the East Algerian system. Supply voltages have also been standardized and a uniform system of tariffs with zonal increments is now in force. More recently, 150

1/ The power statistics are assembled in Annex Tables 9.6.3 through 9.6.7. - 38 - kV high tension lines have been built between Djerba -ad Meknassy with some reduction of transmission losses. The location of che Rhennouch plant will also help to reduce transmission losses. The system now covers 1233 km, com- pared with 426 km in 1962. However, as more units are brought into operation, it will become necessary to build additional lines. A medium term program, part of which is being financed by the World Bank, has been devised by STEG to double up certain lines and build new lines to increase the coverage of the grid.

14.66 Distribution policy has been dynamic and governed in large part by the economic viability of operating lines. A much larger segment of the population is now connected to the STEG network, although the result is far from a general rural electrification program. The costs of installing new lines are normally shared by STEG and the local communities served. The availability of STEG funds limits the rate of expansion as the company would be willing to supply further areas where the demand is sufficient to make the lines profitable. Growth averaging 6 percent per annum in low tension consumption has been below the overall average, although increases have been more rapid in recent years: 13 percent in 1970 and 10 percent in 1971. Part of this increase is due to a more rapid rate of new connection, but part also to agricultural pumping, heating and small scale ,artisanal uses.

14.67 STEG's principal load center is the Tunis region where almost half of the total public power consumption takes place. The next area of rapidly growing importance is along the coast south of Tunis, in the region of Sousse, where hotel construction has developed rapidly.

14.68 In making its forecast of sales through 1976, STEG extrapolated the demand for its low voltage customers on the basis of past trends, which showed an average annual growth rate of about 7.8 percent, and known recent changes to give a forecast average annual growth rate of about 8 percent. STEG then interviewed its industrial customers individually to ascertain their plans for expansion and applied a factor to take care of delays and projects which might not materialize. The result gave an average annual industrial growth rate of about 10 percent for the period. Finally, in view of the large tourism developments underway, sales which would be created by this activity were examined. These forecasts gave an annual average growth rate of total energy requirements of 8.8 percent during the period through 1976.

14.69 Investment plans for the future have already been completed for the production and distribution of electricity on the basis of probable growth rates for demand in a 9-11 percent range, implying an accelerated rhythm of plant construction and high voltage transmission lines for which D 10.6 and 8.6 million have been reserved respectively. At Rhennouch two World Bank-financed 20-MW gas turbine units are being installed. Two more will probably follow, entering production in 1974 and 1976 respectively. Plans are being made for meeting additional demand after 1977 by the con- struction of two 60 MW oil fired steam plants at La Goulette on the site of the old plant, which is being taken out of production. For all these proj- ects, except the second 60 MW steam plant, foreign partners have been found - 39 -

to finance part of the investment on favorable terms. Of the investments in electricity transmission, the major part will be for connecting Rhennouch to La Goulette by a 225 kV line, and building 150 kV lines to the tourist areas of Djerba and Hammamet/Hammam Sousse. To rationalize and direct further ef- forts, it is planned to prepare a master plan for electricity distribution.

14.70 The area in which options are still poorly defined is the regional distribution of electric power. STEG has traditionally tried to maintain a favorable balance between internally generated funds and borrowings, and for this reason limits the extent of its investments. As a result electrification has proceeded at a moderate pace but has by-passed large segments of the rural population. If this is to be corrected, and if planned regional development is to be achieved, a re-examination of the nature and direction of distribu- tion policy is required. In particular, a government policy on subsidies for line construction and operating losses would be desirable. In the mean- while, STEG is planning on spending D 18.8 million, or just under half its total investment budget, in the distribution sector.

Table 14.11: ELECTRICITY SECTOR INVESTMENTS (1000 Dinars)

1962 - 1972

1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972

Investments

Production 317 752 2731 2815 1385 3825 1914 604 1099 2720 6626

Transmission 256 579 1449 2606 763 1819 2136 747 201 1152 447

Distribution 411 112 1434 2083 3655 4339 923 3042 3597 2050 3494

Gas /1 40 42 52 117 112 142 90 377 670 4590 3883

Other - - 20 135 126 336 138 208 1299 440 1298

TOTAL 1024 1485 5686 7756 6041 10461 5201 4978 6866 10952 15748

/1 Including D 0.23, 4.38, 2.3 millions for El Borma gas pipeline in 1970, 1971 and 1972 respectively. - 40 -

Table 14.12: INVESTMENTS BY STEG, 1973-1976 (D 1,000)

Total 1972 1973 1974 1975 1976 1973-1976

Electricity

Production 6000 3260 700 2400 4200 10560 Transport 447 2218 2645 2517 1207 8587 Distribution 3494 5294 5020 4500 4000 18814

Gas 2643 1048 180 190 200 1618

Miscellaneous 1298 922 1233 1310 1400 4865

13882 12742 9778 10917 11007 44444 - 41 -

15. AN INDUSTRIAL DEVELOPMENT STRATEGY

A. Introduction

15.1 The Government's industrial development objectives are: (a) to develop export industries taking advantage of Tunisia's low labor costs and easy access to the European market; (b) to give the private sector a major role; (c) to increase the efficiency and competitiveness of private and public enterprises; and, (d) to attract foreign private investors. If the private sector is to assume a dominant role in industrial development, it will need not only to receive technical and financial assistance and suitable incentives, but also to be largely freed from the existing controls and regula- tions, which are incompatible with an increase in productivity and competi- tiveness.

15.2 It is moreover essential that, in drawing up its industrial strategy, Tunisia should look beyond the Fourth Plan period so as to prepare for diver- sification of its industry, to identify an adequate number of projects and to foster the emergence of a new generation of experienced entrepreneurs. The Plan's proposals for industry, although reasonable as far as they go, have to be reinforced for what is necessary to diversify production, to prepare the way for the development into new fields, and to assure the participation of foreign private entrepreneurs.

B. The Proposals of the Fourth Plan

15.3 Chapter 13 concluded that the industrial investment and employment targets of the Fourth Plan were ambitious, given the state of project pre- paration and institutional development. The Government sees the crucial factor as being the identification, preparation and management of projects. A distinction is made between public and private enterprise. The public authorities are to concentrate on the preparation of large-scale public sector projects, and for this purpose the National Center for Industrial Studies and the planning sections of the ministries are to be strengthened by additional qualified staff. Responsibility for the evaluation of private sector pro- jects will be transferred as far as possible to promoters and banks. In this connection, while a number of extremely constructive measures have been taken to stimulate private investment -- a new Investment Code, the Export Industries Law of 1972, and the creation of FOPRODI (Fund for the promotion and decentralization of industry) and of the Agence Fonciere pour l'Industrie (real estate agency for industry) -- action remains to be taken to organize assistance to the private sector in undertaking sector and market studies and, more generally, project preparation, for which it possesses neither the means nor the experience.

15.4 The real estate agency for industry, established at the same time as those for tourism and housing, will constitute an extension of the work of the Investment Promotion Agency created under the 1972 law, in ensuring the availa- bility of industrial sites and the creation and infrastructure development of - 42 -

industrial zones. FOPRODI is to tackle the problems of the shortage of proj- ects and entrepreneurs, and the lack of an active capital market, and for this purpose will try to encourage and support initiatives of entrepreneurs capable of identifying, carrying out and managing industrial ventures. FOPRODI would provide financial assistance to competent entrepreneurs. It would assist in the decentralization of industry by arranging for the allocation of long-term credits, interest subsidies, and other incentives to entrepreneurs, with spe- cial emphasis on small- and medium-scale industry.

15.5 A new Investment Code for the private sector was prepared in 1973. Its provisions are reviewed in Chapter 7. The new industrial investment approval procedures are expected to increase competition, enlarge markets, and reduce prices. To facilitate the utilization of existing industrial capacity and to increase competitivity, it is proposed gradually to extend the liberalization of imports to further products and eliminate the remaining quantitative restrictions and quotas, replacing them by a more flexible system of customs duties. A new Customs tariff has been put into effect, with provi- sion for adjusting the rates to meet the needs of industry by simple adminis- trative decision. The Government also attaches importance to proposals to modify the cost-plus system of price determination by extending the system of "controlled freedom", at the same time, however, reinforcing the price control services so as to make their intervention, when necessary, more efficient. It is planned moreover to introduce a tax on value added. A study is to be made with a view to revising public transport tariffs and redefining the role and functions of private transport enterprises. It is hoped that this study will lead to a reduction in industrial transport costs and thus to an enlargement of markets. The Plan emphasizes the need for an improvement of the product- ivity and competitiveness of public enterprises. However, while the limita- tions of purely financial reorganization are recognized, few concrete or specific proposals to improve their technical and managerial efficiency have yet been made.

C. Some Elements of a Production and Investment Strategy

(i) Sector Priorities

15.6 The Plan does not offer a sufficient answer to the key question of which industries Tunisia should develop. Project development, despite sub- stantial UNIDO assistance, remains the central bottleneck. The Ministries of Plan and National Economy and the CNEI still lack suitable structures and suffic4ent technically qualified staff. The dilemma which faces the Govern- ment in pursuing its industrial development strategy stems from the fact that private initiative has failed to develop in the past. For this reason, the Government cannot for some years to come rely entirely on domestic and foreign private enterprise for the establishment of new industries. It must, therefore, establish as rapidly as possible a program of market and sector studies and project preparation.

15.7 In spite of the substantial achievements during the decade, Tunisia today has a limited industrial base, which is an inadequate foundation on - 43 - which to build a diversified export-oriented manufacturing industry. The major shortcoming is in the engineering industry, on which industrial enter- prises rely for many essential services. Major opportunities exist for the development of exports based on metal manufacturing, a branch of industry where important external economies can be realized if firms are able t:o sub- contract for such products as castings and forgings, vehicle components, and for consumer hardware components and complete units. The possibility of the development of efficient domestic vehicle assembly or manufacture will also hinge on developments in this subsector. The first stage should be an expert technical evaluation of the limited number of existing enterprises in this field, and the identification of the key additional plants needed to provide a basis for the further growth of the metal manufacturing industry.

15.8 In the textile sector, which is considerably more developed and already possesses the capacity to compete effectively in the export market, a similar approach should be adopted, but with special emphasis on the iden- tification of market prospects. Other possibilities exist in the furniture and wood manufacturing industries, shoe manufacturing, electronics, chemicals, plastics, and petrochemicals. Chemicals and petrochemicals in particular can offer substantial advantages in the new situation of the oil market.

(ii) Export Orientation and Liberalization

15.9 The choice between import substitution and exports is easier in Tunisia than in many countries. The market is small. Western Europe is geographically close and open to Tunisian exports. Surplus labor at low wages creates a clear competitive advantage in labor-intensive industries. Moreover, Tunisia has nowhere else to turn since import substitution has already been carried as far as possible. The Government rightly emphasizes that the aim of industrialization must be the winning of foreign markets.

15.10 An export-oriented industry has a better chance to thrive in an open market. To achieve export competitiveness it is necessary to abolish the system of controls and administrative intervention so far as possible, and to allow the market forces free play gradually to assert themselves. The policy of liberalization needs to be pursued and applied in a coordinated manner in all fields (e.g. investment criteria, tariff protection, existing state enterprises, prices policy, and manpower policy). This strategy will present a challenge to the private sector which, focussed up to now on import substi- tution in a small and protected market, is ill prepared - materially and psychologically - to become the major vehicle for growth. Clearly, in a new competitive climate there will be some casualties. To mobilize the creative energies of the private sector the Government will need to make an effort to guide and support the private sector in the right directions, with suitable incentives and direct assistance services.

(iii) Employment Creation

15.11 More complete utilization of the country's manpower is Tunisia's major economic and social problem. As we have seen in Chapter 3, during - 44 - the Fourth Plan, the degree of unemployment and underemployment will be at best stabilized. Prima facie, the production and employment targets for the manufacturing sector seem reasonable, in view of the shortage of entrepreneurs and projects. Yet it is necessary to consider whether they are ambitious enough, in view of (a) the poor prospects for employment creation of investment along traditional lines; (b) the capital-intensive bias of investment in Tunisia; and, (c) the fact that, by design, the present plan is growth-oriented, the number of new jobs being simply the employment content of the production targets. The objective of employment creation must be built into strategy and incentives and into the institutional framework if medium and small enter- prises, which are generally more labor-intensive, are to be given adequate encouragement. In this connection, the new Investment Code, which gears the benefits to the number of jobs created, is an important step forward.

(iv) Role of Foreign Investors

15.12 Foreign direct investment is indispensable in obtaining access to new markets and technology. The law of 1972 has created the legal and in- stitutional basis for attracting foreign capital. The task of the Industrial Promotion Agency is to convince investors that Tunisia is an advantageous industrial location, to help them to launch their ventures without unnecessary red tape, and to help them to find sites and the necessary manpower. The Fourth Plan rightly assigns a key role to foreign direct investment in indus- try. Past experience teaches that more is needed than just the creation of an environment, however favorable. Foreign investors will need assistance in the practical problems of installing themselves. To mobilize available manpower will depend on a program for the training of staff and labor in cooperation with foreign industrialists but with a wider focus on Tunisian needs in general. Thirdly, access to local finance is highly important. A foreign investor normally seeks some reasonable limitation of financial ex- posure and exchange risk and local finance at reasonable cost may well outweigh many long-term fiscal benefits. The provision of this finance would not re- duce the amount of foreign exchange provided by investors; in the long run, better results will be obtained if investors are not under pressure to extend their stake beyond their own concept of prudent business practice. On the other hand, there is no need to compromise with the requirement that a foreign entrepreneur should put up a normal equity stake.

15.13 The number of projects submitted by foreign investors in association with Tunisian entrepreneurs since the 1972 Law went into effect is already encouragi!ig, but it is desirable to achieve maximum Tunisian participation, although there are as yet few potential partners in the Tunisian private sector. The State and the banks must do their best to bring together Tunisian and foreign entrepreneurs for the purpose of organizing joint ventures. The potential advantages of a joint venture (i.e. technical and managerial know- how, markets) are particularly great for some of the existing state enter- prises (e.g. steel, paper). - 45 -

(v) State Industrial Enterprises

15.14 The Tunisian Government's position on the expansion of state manu- facturing enterprise is clear: new state initiatives should only be considered after a search for private participation has proved fruitless. Opportunities for State intervention need to be analyzed on the assumption that if private investors show little or no interest in a project, there are good reasons not to undertake it. The argument that the State should forestall private monopoly is unsound; there are other ways of ensuring competition, such as recourse to competition imports by lowering protection. In general the emphasis should be on the consolidation and reorganization of existing state enteprises rather than their expansion.

15.15 The Government will need to take a hard look at the industries it created during the 1960's, determine how much is worth saving, and write down the additional investment to a value which would yield a reasonable rate of return. Viability, in most cases, is likely to depend on export possibilities6 More generally, the test for a given operation or unit, such as, for example, *the blast furnace at Menzel Bourguiba or the Kasserine paper mill, should be whether operating deficits can be eliminated and a reasonable return earned on additional investments in upkeep, modernization, and, eventually, expansion.

15.16 A policy for state enterprise might then be inspired by the follow- ing principles:

(a) Diagnosis of the true economic, commercial, and financial state of each enterprise. In this area, the bulk of the work still remains to be done. The financial reconstructions ("assainissements") accomplished for a dozen enterprises can at best be regarded as provisional, until the technical diagnoses are completed. The urgency and complexity of this task must not be under-estimated; even competent work done by some reorganization committees is largely at an adminis- trative ievel and can, and frequently does, overlook impor- tant constraints or opportunities, and underestimate the technical problems.

(b) Minimum Economic Returns. Before new investments for ex- pansion are authorized, the prospect of a minimum economic return should be regarded as essential. This requires agreement on how economic returns should be evaluated, and on the assignment of values for certain economic parameters. It also calls for the laying out of a uniform scheme for calculating these economic returns. This can be done through a restatement, with certain adjustments, of the financial return calculation, for which a uniform frame already exists in Tunisia.

(c) Autonomy. The Government proposes to allow public enterprises maximum freedom of action. At the moment, unfortunately, because of their poor financial situation, most enterprises are not in a position to enjoy reasonable autonomy, but this - 46 -

can be achieved once the prospects for each enterprise have been clarified and a sound financial and technical structure devised.

(d) Accountability and Publicity. The establishment - and publication - of economic and financial criteria for investment would take some of the mystique out of industrialization and make it more difficult for people to use non-economic criteria to influence investment decisions. At the same time, it would provide an objective standard against which performance could be measured. In the total system of checks and balances, much more than a token role should be assigned to the auditors. The auditing profession could be given a strong and independent standing; there appears to be no good reason why the same firms should not audit both state and private companies, i.e. special state auditors would no longer be needed for the state industrial corporations.

(vi) Small-Scale Industrial Enterprises

15.17 The development of small-scale industrial enterprises could greatly help to expand output and employment. Small-scale units can offer such advantages as the better utilization of entrepreneurial skills; a wider dis- persal of industry throughout the country; the division of labor whereby larger units subcontract to smaller units the production of intermediate goods, spares and components while the latter process materials supplied by the far- mer. Small-scale industry is in general labor intensive; can meet limited needs for specialized items; trains managers and workers; and makes possible closer and more harmonious contact between management and labor.

15.18 Although the distinction is difficult to make statistically, the dividing line between small- and medium-scale industry on the one hand and large-scale industry on the other may be taken as an investment of the order of D 100,000 in land, buildings and machinery. On a still smaller scale, cottage industries can be defined as carried on wholly or mainly by the whole or part-time labor of members of a family, usually without motive power. A possible estimate of the size of these two subsectors at present would be that there are some 800 small-scale units employing about 12,000 workers, and perhaps 30,000 cottage units with about 100,000 workers, i.e. about 8 percent of the adult male labor force. In practice, little is known about the size of cottage industry, and its output is only partly included in the national accounts. These two groups - small-scale and cottage industries - need a different approach, and could not easily be served by the same insti- tution.

15.19 One of the reasons for the slow growth of small-scale industry has been the commitment of investment policy to large-scale operations, and the absence of vigorous stimulation of the private sector. This situation has led to a shortage of capital, especially foreign exchange, and has made access to imported machinery and equipment difficult, in addition to the basic limitations of a lack of technical, managerial, and marketing know-how. - 47 -

FOPRODI was created to organize the financing of and provide direct assistance to these categories of industries. To accomplish these objectives it is essen- tial that FOPRODI, rather than merely an administrative and financial inter- mediary, should be given a staff possessing the requisite technical qualifica- tions.

15.20 The situation seems to call for a specialized agency with its own small economic planning staff, an operational lending staff, a program of 4-5 industrial zones, a small number of technical training and services centers (which might be established under the technical control of OFPE), a few pilot projects and a small industries advisory service with an appraisal and supervisory function. The Government and external aid funds should not be the only sources of capital, and there should be access to the commercial banks for medium-term loans. The contribution of commercial banks would make it possible to alleviate quite soon the problems and delays that the need to rehabilitate and regroup the Regional Investment Companies (SRIs) will pose.

D. The Tools of Industrialization

(i) Project Identification and Development

15.21 The private sector, as a rule, is not yet capable of developing industrial projects which call for experience, funds and willingness to accept risks. In Tunisia, wealth has traditionally originated in agriculture or commerce, and Tunisian businessmen, the number of whom is still small, have been reluctant to undertake the more risky industrial ventures. Until recently, it has been the role of the Government and, to a less extent, the banks to identify and promote projects, and it will probably remain so until the private sector has accumulated more capital and experience. The main public agencies for project studies are the Centre National des Etudes Indus- trielles (CNEI), which is assisted by UNIDO, which -employs about 50 profess- ionals, and the Institut de Productivite Industrielle (management counselling, professional training, and project studies) which has about ten professionals. STB has for many years had a promotion department, producing sector and re- gional surveys and feasibility studies; this department also serves as a center of assistance and information for Tunisian and foreign investors. SNI has created a small department for project and feasibility studies. This department hopes to pick up some of the project ideas emerging from CNEI's exploratory sector and preinvestment studies and, with the aid of consultants and would-be industrial partners, proceed to full feasibility studies. The main problem in both institutions is the shortage of qualified staff.

15.22 Project identification and preparation in an ever-changing industrial scene is a highly complex and expensive undertaking where speed is important and where there is no substitute for profess.onal expertise. These have to be married, however, to some understanding of the wider economic framework and trends (e.g. of such questions as under what conditions would foreign entrepreneurs in a given branch of industry select Tunisia as a base for assembly or production activities) and, in particular, thorough knowledge of local conditions, opportunities, and constraints. - 48 -

15.23 Project identification and project preparation might be organized as follows:

(a) Industrial Sector Studies. Sector studies of medium depth might be prepared by the staffs immediately responsible for each sector within the Ministrv of National Economy, 1/ and published. Sector studies, in the strict sense of the term, 2/ could be contracted to qualified technical consultants at critical stages of each industry's development (such studies are now clearly needed for steel, pulp and paper, light engineer- ing industries, textiles).

(b) Preinvestment Studies. The flesh and bone of sector plan- ning would be provided by preinvestment studies covering both individual projects and prototypes. This applies particularly to studies which are not as yet closely identified with an individual project sponsor, and which would therefore have to be financed by a public agency or, in some cases, a bank. In the past, CNEI and the Institut de Productivite Industrielle have been active in this area, although with unequal results. In the future, a program of studies might be organized along the following lines. The identification of needs and approximate terms of reference, and coordination of the studies, would be the task of the divisions of the Ministry of National Economy responsible

1/ The scheme presented is simply illustrative. It is based on the idea of a Ministry of National Economy with a team of highly qualified industry specialists who would permanently monitor and guide the growth and development of their respective sectors. In contrast, the Ministry of Planning would have another highly qualified team of economists and planners (including one or two topflight indus- trial experts) who would be responsible for developing (a) a con- sistent framework of planning and sectoral priorities, and (b) uni- form investment criteria, project appraisal techniques and economic parameters for project appraisal (e.g. assumptions with respect to exchange rate, shadow prices for capital and labor, treatment of external economies).

2/ According to the strict definition used by the IBRD, the object of the sector study is the preparation of a coordinated investment program and the selection of the projects in that program. This coincides with the objectives of the industrial sector programs of the Tunisian Fourth Plan. In any case, in the earliest stage, sector studies are frequently a general and tentative frame of reference, and the substance is subsequently provided by prein- vestment and feasibility studies. At that stage, the sector study, therefore, would be much more focussed on an analysis of the develop- ment, structure, and problems of the industry than on a coordinated investment program. - 49 -

for the development of each subsector. To facilitate adminis- tration and contracts with consultants, it might be appropriate to put a senior civil servant in charge of these studies who would either have his own staff or rely upon the specialized divisions. Secondly, wherever possible, rather than under- take studies on its own responsibility, the Government could subsidize or co-sponsor studies undertaken by the entrepreneur (or group of industrialists) interested in the eventual invest- ment. Experience shows that the return on preinvestment studies is higher where such interest is present.

(c) Feasibility Studies. SNI and the banks, as financial partners, can play a major role in feasibility studies. In the initial stage, much of the work could be contracted abroad; subsequently, more and more use would be made of Tunisian experts of the Institut de Productivite Industrielle, and the CNEI, once their staff had been strengthened, and the creation would be fostered of new independent Tunisian consultants, possibly in association with foreign consultants.

(ii) Industrial Licensing and Incentives Framework

15.24 Until recently, the two main legislative provisions affecting indus- trial investments in Tunisia were (a) the 1969 Investment Code, whose incentives apply equally to Tunisian and foreign-owned enterprise, and (b) the prevailing system of import licensing and Customs duties. Since then, an Export Indus- tries Incentives Law (April 1972), a new Investment Code (end of 1973) and a new Customs Tariff (September 1973) have been introduced. In addition, the legislation governing imports has been revised in the direction of gradual liberalization. These various measures are reviewed in Chapter 7.

15.25 Tunisian industry has up to now been heavily protected. The aims of the recently introduced tariff reform were to reduce duties, to make the structure more rational and consistent (e.g. to lower import duties on raw materials, inputs and key consumibles) and to turn the tariff into a flexible instrument for support of infant industries while stimulating competitivity by deliberate competition with imports. The new Customs tariff seems to have been designed to meet these requirements, although the average rate of protec- tion has not been appreciably reduced. There now remains to be carried out a systematic coordination between import control (licenses and quotas), where this still exists, the system of setting industrial prices, and internal taxa- tion reform (creation of a value added tax). Protection of industry, where it is needed, should be based on adjustment of Customs duties, and the present system of industrial price setting should be replaced by a progressive adjust- ment of domestic prices to the prices of equivalent imported products.

15.26 The main reason for redesigning the system of protection is the fact that many Tunisian prices, especially of goods in which Tunisia lacks compara- tive advantage, e.g. steel, paper, sugar, motor vehicles, were seriously out- of-line with the world level. Prices are also high, though apparently less so, - 50 -

in some potentially competitive industries, e.g. te,_ciles, whereas prices for e.g. cement, brick, fertilizers appear competitive. Increases in world com- modity prices, which occurred in 1973-74, can help to revise protection policy. Protection might be shaped as follows:

(a) The reduction of duties (and selling prices) for key commodities, e.g. steel and paper, after financial restructuring had reduced the burden of fixed financial charges of the enterprises.

(b) A staged reduction in import duties and elimination of import quotas for other products, notably textiles, with their elimination over, say, a seven-year period. This should apply slow pressure to inefficient producers and wipe out monopoly profits.

15.27 The three essential features of a system of incentives suited to the new industrial strategy are priority to highly labor-intensive industries, priority to export-oriented industries, and automatic entitlement to the benefits so as to ensure equality of access by all private enterprise. The new Investment Code implements these principles and also provides for special incentives to regionalization.

15.28 The fact remains that a correct industrial orientation presumes a proper relationship between the prices of capital and labor. In Tunisia, the price of capital is abnormally low, while industrial wages are probably above the equilibrium level, considering the low productivity, owing to the possibility of emigration to Western Europe and the competition of the tourist trades. This situation should be kept in mind in the selection of incentives under the Investment Code and the 1972 Export Industries Law, some of the benefits of which are proportionate to the amount of the investment, and also in the definition of an interest rates structure. Similarly, the possibility could be considered of linking the interest concessions, to some extent, to the number of jobs created. 15.29 As the tax system is shifted towards a value added tax it should be possible to switch from incentives which are in the nature of a capital cost subsidy to incentives which subsidize the value added, which would be neutral in terms of resource allocation and harmonize with the Common Market structure.

(iii) Institutional Infrastructure

15.30 The establishment of industrial zones is essential in order to facilitate the installation of new companies and reduce their infrastructure costs by leasing developed industrial sites and/or buildings. They also facilitate the establishment of export processing activities by foreign investors, as well as geographical decentralization. In this connection, the creation of the Agence Fonciere Industrielle is a most important step.

15.31 Another important condition, however, for the successful develop- ment of industry, in view of the private sector's lack of experience, is the provision of industrial extension services. Such services can, in part - 51 - at least, be located in the industrial zones. Industrial advisory and exten- sion services covering management and marketing consulting, technical assis- tance, manpower-training, and the provision of common business services, should be readily available at low cost, and, if necessary, with government subsidies. This system could be organized within the context of industrial zone manage- ment companies.

15.32 In view of the limited resources of potential Tunisian investors, the mobilization of financial resources, the organization of financing of industry, and strengthening of the banking system and enlargement of its responsibilities are essential preconditions for industrial development. This subject was examined in Chapter 6.

(iv) Manpower, Productivity and Labor Relations

15.33 The supply of skills will become a major constraint in the coming years. The Tunisian Government is aware of this need, however, and of the related need to adapt the educational and training systems more deliberately and efficiently to industrial requirements. The training of workers and of technicians should be undertaken on a larger scale. On this point, the arrival of foreign investors will bring new technology that could be spread to Tunisian workers through suitable training programs.

15.34 The development of a Tunisian competitive industry cannot occur without the active support of the workers in two important respects:

(a) In both the public and the private sector, special attention is needed at the factory level to associate workers with the productivity drive (the only feasible road to increased real wages), and to get at the root of those problems, social and cultural in nature, which are behind the wide productivity differences between plants and the very high labor turnover in many plants.

(b) In state industrial enterprises, reorganization and improved management will lead to some lay-offs, followed by reconver- sions, and greater demands upon the workers in terms of productivity, and successful implementation will depend on close cooperation between workers and management.

In a more general way, the problems of vocational training are linked to the adaptation of the entire education system to the real needs of the economy. These problems are analyzed in the chapter on Education.

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